Why the policy push on hydro power could short-circuit thermal energy

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Shishir Asthana Moneycontrol Research

Piyush Goyal as the power minister has been in a firefighting mode ever since the time he has taken up the job. After tackling coal supply related issues in thermal power plants, the minister set his eyes on launching UDAY (Ujwal Discom Assurance Yojana) and bringing state governments on board. Making use of low-cost LED as a mission statement, his ministry focussed on reducing power consumption. He can be credited with putting India on the renewable power map, though there is still a lot of work to be done as far as wind power is concerned. Now, he is eyeing the hydel power sector.

Reports say that the Power Ministry has finalized the hydropower policy which has been sent to the Finance Ministry for vetting before cabinet gets to approve it. The policy aims to provide Rs 16,709 crore support to revive 40 stalled hydel power projects which can add 11,639 megawatt (MW) capacity.

The key change in the policy is that the incentives that were accorded to smaller hydro power plants of less than 25 MW will be available to bigger projects. Post clearance of the policy the distinction between large and small hydro plants would disappear.

Presently, smaller hydro power plants are classified as renewable energy which entitles them to various incentives. The bigger plants, which are stuck, will now be entitled to these benefits.

The policy entails that the government provides interest subvention of 4 percent during construction for up to 7 years and for 3 years after the start of commercial operation to all hydro power projects. The policy also asks for the Power Ministry to engage with bankers and financial institutions for modifying lending terms and conditions for hydro power projects.

Reviving stuck projects, which have already been delayed and have cost overruns would result in generation of high-cost power.

However, while the monitory aspect of hydel power has been tackled in the policy, there are operational hurdles that need to be addressed to make the sector vibrant once again.

Recently, big corporate names have walked out of hydel power projects in the state of Himachal Pradesh as there was no infrastructural help given by the state government for construction of these projects as well as evacuation of power.

Such delays result in higher cost of power generation which makes the entire project unviable. Take the case of L&T’s 2 projects on the Chenab basin in Himachal Pradesh. As per the working of the company, its cost of power is working out to Rs 9.90 per unit. The company is naturally not interested in starting the project unless the state government signs a power purchase agreement (PPA). It would be difficult for the state government to sign such a PPA as it is presently buying power at the rate of Rs 2.50-3.

Further, as per the policy, commissioning of hydel power will come at the cost of thermal power. The policy proposes to impose a coal cess which will help capitalise the Hydro Power Fund under the Power Ministry for providing funds to the projects under the policy. The policy also provides for Hydro Purchase Obligation (HPO) for hydro projects of over 25 MW capacity, under which discoms would be required to buy a proportion of power from these plants. Compulsory purchase of hydel power will, however, come at the cost of thermal power which has to bear the brunt.

While thermal power plants are still running at low capacity utilisations, the good part about these hydel power projects is that they would still take between 5-7 years to be complete. By then one hopes that the demand for power shoots up to accommodate the excess capacity, else thermal power will have to take the fall despite subsidising the commissioning.