What Renewable Status For Large Hydropower Projects Means

India’s renewable energy status for large hydel projects will help them avail cheaper credit and increase demand from distribution companies for cleaner energy as Asia’s third-largest economy aims to reduce its reliance on fossil fuels to curb emissions.

The Cabinet Committee on Economic Affairs on March 7 approved a decade-long demand to recognise hydropower projects with a capacity of more than 25 megawatt as a renewable source of energy. Earlier, projects up to 25 MW capacity got the status that makes them eligible for financial assistance and loans at lower interest rates.

India has 45.40 gigawatts of hydel power capacity, according to the Central Electricity Authority, contributing about 13 percent to the electricity generation. A parliamentary committee report said the total potential is 241 GW. But state discoms were reluctant to purchase power from such projects because of higher tariffs, according to a government statement, especially in the initial years. Bringing them on a par with solar and wind projects is expected to lower costs. The push comes when the nation, with a renewable energy target of 175 GW by 2022, wants to meet emission targets under the Paris agreement.

“State distribution companies will be obliged to purchase a certain percentage of hydropower—similar to renewable purchase obligations,” Girish Kadam, vice president, sector head (corporate ratings) at ICRA, told BloombergQuint over the phone. “This will create a market for hydropower, making the sector competitive.”

For the financial year that ends this month, power distribution companies have to purchase 17 percent of their total procurement from wind and solar farms under the the obligations. This will increase to 17.5 percent for the year starting April. The minimum quota for hydel power is yet to be notified.

The new policy will impact the existing as well as 42 under-construction hydel projects with a capacity of 12,000 megawatts. Of the ones in the works, private projects comprise 7.5 percent, central government plants account for 33.1 percent and states contribute 59.4 percent, according to the Standing Committee on Energy report tabled in Lok Sabha.

Incentives

The projects will get fiscal incentives to build roads and bridges, case-by-case, and for flood moderation, the government statement said. This will be limited to Rs 1.5 crore a megawatt for up to 200-MW projects and Rs 1 crore a MW for more than 200-MW capacity projects.

“Projects in remote areas will definitely get budgetary support for infrastructure,” AK Bhalla, secretary, Ministry of Power, said in a media conference in New Delhi.

RK Singh, minister for power and new and renewable energy, told reporters after the cabinet meeting that water-driven units will also be able to access “green finance”. Domestic financiers Power Finance Corporation Ltd. and REC Ltd. raised about $850 million in green bonds in the last two years to fund clean-energy projects.

Lower Tariff

The new policy is aimed at lowering tariffs of hydel projects. To ensure that, the government increased debt repayment period for setting up a plant to 18-20 years from 12 years.

“One of the reasons for higher cost of hydropower was that the tenure of loan was 12 years. The tariff was higher when the hydropower project is set up during the loan period. It fell when the loan period was over as the operational cost of a hydel project is negligible,” the power minister said. “We have discussed with banks that we will increase the tenure of the loans to 20 years, and this period can flexible.”

Sabyasachi Majumdar, group head (corporate ratings) at ICRA, said the measures will improve tariff competitiveness and lower cost of generation for a 100-MW hydel project by around 35 paise a unit.

Not everyone agrees. Awadh B Giri, Chairman of CII committee on hydropower, said the tenure of debt repayment should have been 30-35 years. “Tariff in the earlier years goes beyond acceptable levels because you have to repay the loan in the first 12 years whereas the asset life is 35 years. This means that the cost of generation in initial years is artificially pushed up.”

The financing policy doesn’t recognise the character of hydropower, Giri said. “It’s necessary that the repayment and servicing of the loan be allowed for a longer period.”

Land Hurdle

Hydel projects face challenges such as land acquisition, rehabilitation and resettlement, and environmental clearances. These still remain.

“A deeper look into why hydropower projects aren’t coming up is due to local resistance and ambivalence of the state governments because water is a state subject,” Anil Razdan, former secretary at Ministry of Power, told BloombergQuint over the phone. “You have to build a policy in which local stakeholders are made partners. Unless they see benefits in these projects, you might not see early execution.”