Why Small Hydro ?

1. Workshop on Small Hydropower PricingOctober 21, 2007Kandy, SrilankaSmall Hydropower Pricing Issues – Indian Developer’s PerspectiveByArun GuptaB.E., MFM, IRS (Retd.)Chairman & Managing Director Him Urja (P) Ltd., Delhi, Indiamgarun@vsnl.com HIM URJA (P) LTD.

2. Why Small Hydro ? • Low Investment • Short gestation period • Negligible Impact on environment & ecology • Creates small nodes of development • Lower Transmission cost. • Helps in stabilizing the local Grid. • Large potential of Small Hydropower in India. HIM URJA (P) LTD.

3. SHP Different from Large Hydro • The scale of construction and operation is entirely different. • Works on shoe string budgets. • Difficult to attract quality manpower due to low cost and small scale of operation. • Mostly water conductor system is channel which is prone to land slides. HIM URJA (P) LTD.

4. Historical Background • Electricity Sector opened to Private sector in 1991 • Guidelines for determination of tariff of large hydro notified in 1991 • Small hydro was separately covered by benchmark tariff based on avoided cost in 1993 • Electricity Regulatory Regime ushered in 1998 HIM URJA (P) LTD.

5. Historical Background Contd- • Electricity Act 2003 came in force • National Tariff Policy and National Electricity Policy declared in 2005-06. • The Act as well as the policies mandated promotion of renewable energy and made provisions for providing incentives and protection to the RE sector. HIM URJA (P) LTD.

6. Historical Background Contd- • The Regulation of tariff for large hydro notified which were almost identical as the 1991 Tariff Notifications of Government of India • No separate regulations are framed for small hydro by the Central Regulatory Commission which is nodal commission HIM URJA (P) LTD.

7. Historical Background Contd- • State Commissions notified regulation for small hydro which were at great variance with each other with the result developers in some states were benefited and others were starved. • Many State Commissions made discriminatory regulations depriving small hydro even to what is being allowed to large Hydro HIM URJA (P) LTD.

8. Large Hydro Tariff Principles • Tariff is two part. • First part consists of the Annual Fixed Charge (AFC) recoverable on design energy • Second part consist of payment of incentive, secondary energy charges and taxes HIM URJA (P) LTD.

9. Large Hydro Tariff Principles • AFC consists of following items with normative ceiling • O&M Charges @1.5% of the capital cost • Interest of term loan of 70% of capital cost • Depreciation and advance against depreciation to the extent of 1/10 of the loan amount • Return on Equity @ 14% • Interest on working capital HIM URJA (P) LTD.

10. Large Hydro Tariff Principles • The AFC so calculated is spread over design energy and denominated as monthly charges. • Design Energy has been defined as energy generated on 95% availability of machines in 90% dependable year hydrology. HIM URJA (P) LTD.

11. Large Hydro Tariff Principles • Energy generated over and above design energy has been defined as secondary energy and it is paid @ minimum variable charges of the thermal power projects of the region. • Incentive is paid for generation above 90% Declared Annual Capacity Index as per formula • The incentive is linked with AFC • Income Tax payable is pass thru HIM URJA (P) LTD.

12. Tariff Principles -Small Hydro as Adopted by State Commissions • Many State Commissions have applied the principle of large hydro to small hydro with minor variations and most of which are detrimental and discriminatory in nature. • Many State Commissions have allowed O & M Charges varying from 1.5% to 3% of the capital cost. HIM URJA (P) LTD.

13. Tariff Principles Small Hydro as Adopted by State Commissions • Pegged recovery of AFC on 45% PLF. • For generation above 45% PLF nominal rate of US Cent 0.5 per unit has been allowed which has been termed as incentive. • No payment of secondary energy has been considered which is allowed to large hydro @ US Cent 2.0 at the present rate and increases yearly as the variable cost thermal power project increases . HIM URJA (P) LTD.

14. Tariff Principles Small Hydro as Adopted by State Commissions • The Commissions came to conclusion that the rate of return allowed to small hydro is 20% in the best circumstances which is fair, ignoring the fact that the rate of return of large hydro is 26% under the average conditions dependent upon secondary energy and efficiency HIM URJA (P) LTD.

15. Tariff Principles Small Hydro as Adopted by State Commissions • Some of the Commissions have even regulated that benefits such as • the cash subsidy granted by central government • 12% free energy exemption granted by state governments • the carbon credit shall not be available to the small hydro. HIM URJA (P) LTD.

16. Issues to be considered • Whether the promotional framework for small hydropower development is retained as mandated by law? • Whether small hydro should be discriminated or differentiated from large hydro? • Whether small hydro should be considered for tariff based on benchmark cost? HIM URJA (P) LTD.

17. Issues to be considered • The O&M Charges • Impact and calculation of Design Energy and consequential secondary energy and correlation with Plant Load Factor • Payment of secondary energy to small hydro HIM URJA (P) LTD.

18. Issues to be considered • Calculation of annual capacity index for payment of incentive • Incentives • Case for better incentives and deal to small hydro • The small hydro constitutes 2% of the gross generation capacity in India • Payment of remunerative rate to green power shall burden the consumer not even 0.1% HIM URJA (P) LTD.

19. Design Energy - Unrealistic to Decide • Discharge Data not available for more than 5 years. • Unreliability of discharge data available. • Longer measurement of discharge data not feasible. • Working of 90% dependable year unrealistic based on 5-10 years discharge data. In working out 90% probable data the data should have at least one repetition. HIM URJA (P) LTD.

20. As a result of which... • Design Energy as a starting point for calculation of tariff itself becomes questionable. • Annual Capacity charge may be underestimated • Small hydro is underpaid in terms of primary energy, secondary energy and incentives. HIM URJA (P) LTD.

21. Issue of O&M Charges Status: • Presently O&M charges are allowed at 1.5% of capital cost for small as well as large hydropower projects. • There are no studies available on O&M Charges of the small hydro in himalayan region as there are very few operational plants. HIM URJA (P) LTD.

22. Issue of O&M Charges Status: • Some studies have been conducted on the Government owned small hydro but such studies do not reflect all expenses as these units are owned by state corporations who are operating large hydro also. • Standard O&M Charges 1.5% of project cost is irrelevant since small hydro power project cannot be compared with large hydro . HIM URJA (P) LTD.

23. Issue of O&M Charges Status: • A study conducted in US on hydro power projects of various sizes have shown that O&M cost of small projects of 5 MW could be as high as 6 times the cost of O&M of 200MW project. (As reported in Guthrie Brown) HIM URJA (P) LTD.

24. Issue of O&M Charges HIM URJA (P) LTD.

25. Issue of O&M Charges Status • SHPs in hilly areas are subjected to vagaries of nature. Hence major repair costs and loss of generation. • Power Channel is prone to damage. • The weir design & construction is not as elaborate as large hydro due to cost considerations. HIM URJA (P) LTD.

26. Comparison of O&M Cost of SHP And Large Hydro HIM URJA (P) LTD.

27. Comparison of O&M Cost of SHP And Large Hydro HIM URJA (P) LTD.

28. Comparison Manpower SHP And Large Hydro HIM URJA (P) LTD.

29. Comparison Manpower SHP And Large Hydro • Many studies have shown that the manpower cost is about 40 to 50% of the total O & M Cost. • Thus small hydro has a case for much higher percentage of the capital cost as O & M Charges HIM URJA (P) LTD.

30. Return on Investment • At present 14% ROE is allowed • Besides this incentive is allowed • In the best scenario 20% ROE is allowed • The Equity of the promoter is invested for two and half years before commissioning of the project and no income is earned . HIM URJA (P) LTD.

31. Return on Investment • Reasonability of return has to be assessed which is low • The cost of the risks associated with development, construction and running have to be assessed and built in the ROE HIM URJA (P) LTD.

32. Suggestions • Remunerative tariff may be given to SHP to attract large number of IPPs to distribute development nodes in a state. • The tariff for Small Hydropower Projects should be decided as benchmark tariff without recourse to two part tariff. HIM URJA (P) LTD.

33. Suggestions • The policy for Small Hydropower should be consistent in all the states with minor geographical variations. • For the purposes of arriving at the benchmark tariff the following deviations from the large hydro should be considered on normative basis i.e. without correlation to actual expenses incurred: HIM URJA (P) LTD.

34. Suggestions • O & M Charges at a rate of 8%. • Return on Equity at the rate of 18% to provide incentive to the small hydro. • 30% Energy above 45% PLF should be treated as secondary energy and may be considered at the rate of US Cent 2.0 per unit. • The taxes payable. HIM URJA (P) LTD.

35. Suggestions • The incentives at the rate of US Cent 0.5 per unit on the energy generated above 45% • The tariff so arrived at may be treated as benchmark tariff for small hydro. • The capital or interest subsidies wherever applicable may be allowed to the small hydro. HIM URJA (P) LTD.

36. Suggestions • Risk cost of water spillage due to reasons beyond control of IPP like floods, landslides, Earthquake, Major breakdown and hydrological risk should be built in the tariff itself. • SHP may be exempted from declaring daily capacity, filing of annual application etc. HIM URJA (P) LTD.