SHP costs divorced from reality

Small Hydro Power is witnessing a curious case of opposing perceptions. While the Central Electricity Regulatory Commission (CERC) thinks there is no need to revise the price estimates set three years ago, the independent power producers feel the pinch of escalating costs and squeezing margins, writes Keshav Chaturvedi.

Small Hydro Power (SHP), a key component in remote area electrification as well as business development, is facing  a unique problem of stagnant cost estimation by Central Electricity Regulatory Authority (CERC). While inflation has resulted in cost escalation, the per megawatt cost of production set by CERC has remained same for the last three years and there is a move to fix the rate for the next one year too.

SHP promoters and Independent Power Producers (IPPs) feel the existing rates are already low as compared to the market realities and if they are maintained at the same level for another year, it would make the task of setting up a SHP plant even more difficult.

Present scenario

 When the Government of India decided to promote the renewable energy, it envisaged that the prices offered were normative or they offered returns attractive enough to enthuse IPPs to enter into the field. However, in practice, the issue of deciding the cost of production is beset with varying perceptions. While the private producers as well as financiers are dealing with the ever changing ground realities, they allege that the CERC has based its calculations on an outdated source of information.

Harnessing power: Turbine at a SHP plant in Uttarakhand

Today as per the regulation of CERC, per megawatt cost of construction is set at `6.30 crore per MW whereas actual cost is in the range of `8.0 to 9.0 crore per MW. However, Arun Gupta, one of the pioneer IPP to have set a SHP plant in Uttarakhand, says, “Every SHP project is unique and as such it is counterproductive to have a fixed cost criteria for this sector.”

Source of the problem

The problem lies in the source that CERC has used to base the cost. It has banked on the analysis of the data submitted by the developers to United Nations Framework Convention on Climate Change (UNFCCC) for registration of the projects for Clean Development Mechanism (CDM) benefits.

The IPPs are of opinion that the CERC overlooked the fact that the data submitted by the developers was as per the DPRs (Detailed Project Reports) which were prepared long time ago when the decision to implement the project was taken. The actual commissioning of the project, however, takes place after five years. The DPR may have been prepared much before the plan actually took off the ground. This data is not revised as UNFCCC is concerned with the cost of project on the date of taking the decision to implement the project. Arun Gupta says, “Clean Development Mechanism (CDM) benefits are calculated using the baseline scenario. The CDM Executive Board is only concerned about the initial calculations made in the DPR as it serves as the basis for all CDM calculations. However, same can’t apply for an Independent Power Producer (IPP) as his investment climate keeps changing everyday due to many factors. These circumstances should be factored in any fixation of per MW cost.”

There are a total of 249 small hydropower projects commissioned in India as on December 2010, as per the report of the Standing Committee of the Parliament. Out of these 249 projects, 176 projects have been financed by IREDA at some stage. It means about 70 per cent of the projects have been financed by IREDA. Even that data is not taken into account by CERC. As per analysis of the projects financed by IREDA, the average cost of the projects financed by it and commissioned in 2009-10 is `8.73 crore per MW. In Ladakh where the Ministry of New and Renewable Energy (MNRE) has undertaken an ambitious renewable energy project, the cost of some of the SHP projects is estimated to be more than `13 crore per MW.

Taming the river: Sluice gate at SHP plant

No such cap on large hydro

While there is a cap on the cost of SHP, there is no such cap on large hydro projects. CERC has itself approved higher cost for large projects citing degree of difficulty and the magnitude of the project.

It is argued that if the large hydro has no cap on per MW cost and varies depending upon the degree of difficulty, the same should be done with SHP. The IPPs say that SHP is a renewable energy and needs to be promoted. Disincentives like cap on per MW cost will hamper the growth of the sector. Arun Gupta says, “Even when the SHP project looks small as compared to the big hydro power project, it has to incur costs that are disproportionate to its percentage of returns. Also, it is generally promoted by people with relatively tighter purse strings than a typically big promoter.  So consideration should be made to structure the per MW cost calculation flexible.”

Canal & ROR projects show cost escalation

A look at the cost and construction time taken for the canal and runof- the-river projects also makes the picture clear about the economic odds loaded against the sector and stresses the need for reassessment of the cost estimation process.

The canal-based small hydro power plants would cost `3.2 to 3.5 crore per MW two decades ago. However, the cost of setting up a plant has been on the rise, barring great fluctuation between the years 2007-2008 due to economic slowdown. The cost reached its zenith in 2003-04 and was close to `7 crore per MW. From 2009 onwards the price of installation has again crept up to that level. Theoretically, a SHP project should be set up in a 24-month time window.

However, a close look at the construction time taken by canalbased projects reveal that only 17 per cent of the projects could be completed within time frame. The rest overshot their stipulated time limits due to various reasons like delay in obtaining clearances and acquisition of land. While 35 per cent of the projects took on an average 12 months more, another 17 per cent took more than 60 months to be commissioned.

It means for every project that met its deadline, one was delayed way beyond the permissible mark. This ground reality has been summarily overlooked by regulators while calculating the cost of the canalbased project.

Meanwhile in the run-of-the-river projects (ROR) the story is starker. While the cost of constructing a project was `1.5 crore in the year 1992-93, it rose to more than `7 crore by 2010.

As compared to canal-based projects, the cost escalation in last two decades has been much higher in ROR projects. This escalation can be attributed to the difficult terrain and lack of infrastructure and transmission facility. Even in setting up a ROR plant, the story is far from rosy. While only 17 per cent of canalbased projects took 60 or more months, a whopping 46 per cent of RORs fell in the same category.

Apart from this, 38 per cent took 36 to 60 months to be completed and only 4 per cent were set up within the stipulated 24-month period. It shows that a project being set up within time frame is an exception rather than a rule for both the canal-based as well as ROR projects, but is more pronounced in ROR where the real potential exists.

As the data of last 20 years reveal, the delays in majority of cases prove that the odds are loaded against the SHP and these delays lead to cost escalation, and are never factored in the estimations by CERC, financial institutions or policy makers.

SHP: A business hub

Even the subsidy granted by MNRE & CDM benefits are not allowed to remain with the developer. Small hydropower has to be seen as nodal agencies for development of the state in the remote areas where no other industry can operate.

Various incentives are stipulated to the industries to promote development of the states like Uttarakhand, Himachal Pradesh and North-East states by providing low electricity tariffs, concession in the form of exemption from excise duty, income tax and other taxes.

All these incentives are being given for development in plain areas of the state which are easily accessible and working conditions are much simpler than being encountered by hydropower projects. The small hydropower project brings development in the interior regions of the state where no other industry can operate.

Financial institutions’ perspective

Globally 75 institutions have accepted to follow E4 or Equator Principle while funding an infrastructure project, especially those that include a cost of more than $40 million. It takes into account energy generation, impact on ecology and environment, equity (Social cost and inclusive growth) and last but most important, economics.

Its sub-clause on review and categorisation classifies projects into three categories. First are those projects which will result in financial disaster and are deemed as “don’t touch”; second are those that are economically so viable that they fall under “jump to execute” category; and the third are those that fall under more cautious category where there are certain risks involved but if they are mitigated then they can be profitable. They are called “move with precaution” projects.

Powerhouse: Power station and transformer at the foothill near the SHP plant in Uttarakhand

The SHP projects fall into third category, AA Khatana Chief General Manager (Technical Services), Indian Renewable Energy Development Agency (IREDA) says, “SHPs can be broadly classified into two categories keeping the geography in mind – those in plain areas and those in hilly regions. While plains will have better access, the hydrology and head would be weak. In hilly hydro projects, if the head and hydrology are ok, access would be an issue. However, on the balance we find that hilly hydro would be more expensive due to access issues. Another issue is varying height of the head and the length of the water channels. All these factors have to be taken into account to calculate the per MW cost of a project.”

Financial institutions and IPPs suggest that a better way to go about SHP project would be to calculate the viability of the project, its capacity utilisation and the how quickly an IPP can repay his loan. This would be a better perspective and give the per MW cost calculation of SHP projects more flexibility to accommodate regional, geographical and other variations.