A Case Study on Hydro Power Projects in
India
Abstract
Although
India has 1,50,000 MW Hydro Potential, but hardly 30,000 MW has been developed
so far. Initially Government of India has been funding the development of Hydro
Project from their budgetary support only. In 90s Government of India offered
the various hydro sites for development for Private Sector. Although 20 years
have been passed but there is a not significant addition in Hydro development took
place in India. Over the years hydro power projects have proven that it is the
most cost-effective power projects for commercial scale hydro power generation
in country like India. However, the question must be asked why such a slow
growth has taken place in the development of hydro power projects inspite of
enormous potential available in India. So far Hydro Power Projects of 37367 Mw
as on December 2010 have been installed with an investment of Rs.1500 billion
in debt and equity financing. Investors and bankers who make these investments
are the real clients for hydro power projects. They are not interested in hydro
power project efficiencies, but in risk, return on investments and coverage
ratios. This paper will take a look at hydro power projects from the project
financier’s perspective. The challenge in moving forward is to attract private
investors, commercial lenders, and international development agencies and to
find innovative solutions to the difficult issues that investment in Indian
power market poses for hydro power projects.
Keywords: Hydro Projects, Project Financing,
Private Investors, Commercial lenders
For
any growing economy, power is a vital input needed to fuel the engine of
economic growth and to fulfill the basic needs of the entire population of a
country. Energy differentiates a least developed or developing economy from a
developed economy. Empirical evidence suggests that lack of energy can whittle
down the pace of economic development while its abundance can stimulate the
development. As per some research data, an average an American consumes
approximately 40 percent more energy than an Indian does. This stark gap in
consumption levels may safely be attributed to the government’s failure to
maintain an appropriate ratio of Hydel and Thermal power and not properly
harnessing hydro power which is possible only through the construction of large
river valley projects. Apart from storing water, river valley projects not only
produce electricity but also ensure cleanliness of the air in the process.
Hydropower
currently accounts for nearly one-quarter of the world's electricity
production, with a total some 777,000 megawatts (MW)2
installed as on 2010. It is not only a significant contributor in terms of the
overall global energy balance, but is arguably the only renewable energy
resource that is commercially exploitable on a large scale at present levels of
technology.
Despite
the obvious advantages that hydropower offers to a world that is becoming
increasingly conscious of the problems of sustainability, and global warming in
particular, there are serious challenges facing the industry. These arise
primarily from the worldwide trend toward deregulation of the power sector,
which means that the development and ownership of new power stations has passed
into the hands of the private investors whose commercial priorities tend to
favor other forms of generation. A secondary, but still important, factor is
the environmental concerns that are tending to cast a negative image over hydro
as a whole, although these are primarily triggered by projects with large
storage reservoirs.
Prior
to 19913 the provision of electric power in
India was the responsibility of the public sector, and where this was not the
case the task was undertaken by closely regulated private utilities. In either
situation the funding of new projects was based on the financial strength of
the utility or the creditworthiness of the government that lay behind it. With
the deregulation of the power industry
there has been a
fundamental shift in the way projects are financed. The devolution of the
industry into smaller competing units meant that it was no longer possible to
rely upon traditional utility-based financing. The trend has been toward the
funding of individual projects on a limited-recourse basis where the lender
relies for debt servicing on the revenue stream of the project in question,
with little or no security being provided by the sponsoring organizations.
Under such conditions it is inevitable that financiers become much more closely
concerned about the viability of the project itself, rather than the strength
of the sponsors to whom they would have little recourse if things go wrong.
As a
consequence of these trends the hydro industry finds itself at a crossroads.
The past has been dominated by projects financed in the public sector, usually
under concessional arrangements. The future will be driven by private finance,
and projects will have to stand on their individual merits in a world that is
geared toward quick commercial returns. Under this scenario the record to date
shows that hydro is finding it difficult to hold its position.
This
deterioration in the apparent attractiveness of hydropower is not as a result
of any change in its underlying economics. Hydro still remains a sound
long-term investment whose shelf life is almost indefinite compared with the
15- to 20-year life cycle of a typical thermal power station. But what have
changed are the criteria by which projects are selected for development, with
the emphasis now being on the ability to finance a project from private
sources. In consequence the bias has been toward low-cost thermal projects,
particularly gas-fired plants, which are relatively easy and risk-free to
construct, and whose limited life span comfortably matches the short tenor of
most commercial lending.
Indian Power Sector Scenario
The
Indian Power Sector is undergoing a rapid growth phase with a vision to provide
reliable, affordable and quality power for all by 2012. The demand for power is
growing exponentially in accordance with the high level of developments on both
infrastructure and social fronts. In the infrastructure sector the focus is on
the progress in telecommunication, roads, airports and ports. On the social
front the aim of providing reliable power has emerged as the main reason for
increased focus on the power sector.
India
is the 5th largest power producer in the world
with an achievement of increasing installed power capacity from 1362 MW at the
time of independence to 1,81,558.12 MW4 as
on July 2011. In spite of this growth, the power sector is plagued by a large
gap in the demand and supply.The electricity sector in India supplies the
world's 6th largest energy consumer, accounting for 3.4% of global energy
consumption by more than 17% of global population. the Energy policy of India
is predominantly controlled by the Government of India's, Ministry of Power,
Ministry of Coal and Ministry of New Renewable Energy and administered locally
by Public Sector Undertakings (PSUs).
About
65.22% of the electricity consumed in India is generated by thermal power
plants, 21.04% by hydroelectric power plants,
11.10% by Renewable Energy Sources and 2.63% by nuclear power plants. More than
50% of India's commercial energy demand is met through the country's vast coal
reserves. The country has also invested heavily in recent years in renewable
energy utilization, especially wind energy.
The
power sector has registered significant progress since the process of planned
development of the economy began in 1950. Hydro -power and coal based thermal
power have been the main sources of generating electricity. Nuclear power
development is at slower pace, which was introduced, in late sixties. The
concept of operating power systems on a regional basis crossing the political
boundaries of states was introduced in the early sixties. In spite of the
overall development that has taken place, the power supply industry has been
under constant pressure to bridge the gap between supply and demand. Indian
Power sector has grown in terms of installed generation capacity from 1713 MW
in 1950 to 1,81,558.12 MW as on July 2011. The per
capita electricity consumption has also increased from 18.17 kWh in 1950 to
1032.25 kWh in 2011.
India
is expected to add up to 113 GW of installed capacity by 2017. Further,
renewable capacity might increase from 15.5 GW to 36.0 GW. In the private
sector, major capacity additions are planned in Reliance Power (35 GW), Adani
Power (20 GW), TATA Power (12 GW) and CESC (7 GW).
|
Fuel
|
MW
|
% share
|
|
Thermal (Coal)
|
99,503.38
|
54.81%
|
|
Thermal (Gas)
|
17,706.35
|
9.75%
|
|
Thermal (Oil)
|
1,199.75
|
0.66%
|
|
Hydro
|
38,206.40
|
21.04%
|
|
Nuclear
|
4,780.00
|
2.63%
|
|
Renewable Energy Sources
|
20,162.24
|
11.10%
|
|
Total
|
1,81,558.12
|
100.00%
|
Indian Power Sector Funding Requirement
Considering
Hugh demand supply gap and 12th Five
year plan target, there is a wide gap between demand and supply of power in the
country. Serious efforts are required to finance projects to meet this wide
gap. There has also been difference between public generation targets and
achievements, which has seen many ups and downs. Only in the seventh plan there
was a shortfall of 4 percent which was also the lowest among all 11 five year
plans so far. But in the very next plan i.e. eighth plan the shortfall shot up
dramatically.
Five Year Plan
|
Target Capacity
|
Installed Capacity
|
Percentage
|
(in KW)
|
(in KW)
|
shortfall
|
|
1st Plan
|
1,300
|
1,100
|
15
|
2nd Plan
|
3,500
|
2,300
|
36
|
3rd Plan
|
7,000
|
4,500
|
36
|
4th Plan
|
9,300
|
4,600
|
50
|
5th Plan
|
13,200
|
8,600
|
35
|
6th Plan
|
19,670
|
14,230
|
28
|
7th Plan
|
22,250
|
21,500
|
4
|
8th Plan
|
30,540
|
16,420
|
46
|
9th Plan
|
40,245
|
19,119
|
47.5
|
10th Plan
|
41,110
|
21,180
|
51.5
|
11th Plan
|
78,530
|
47,178*
|
60
|
12th Plan
|
82200**
|
**
|
* Projects under construction and likely to be commissioned
** Preliminary studies have been conducted on identified projects and work would be started on these projects for adding capacity of 82,200 MW
As
per the estimates of Planning Commission, the total capacity addition in 10th plan was only around 21,180 Mw against 41,110 Mw. The main reason for shortfall
was Government's withdrawal of budgetary support for power projects in the
anticipation that Independent Power Projects (IPP) would come up with the
required investment. In fact, a large number of projects were selected by the
Government and several "Memorandum of Understanding" (MOUs) were
signed for power generation. Ironically State governments have not done much
besides showing interest in such projects. A lot needs to be done on issues
relating to environmental clearance, availability of land etc.
The
working group report on power envisages a capacity addition of 78,530 Mw during
the 11th Plan. The Planning commission, on the
other hand, estimated that the installed capacity requirement in the year 2011
would be 1,82,660 Mw. The installed generation capacity (as on December 2010)
was 1, 69,749 Mw. This way capacity addition required during in the remaining
part of 11th Plan (Year 2011-2012) would
be 31,352 Mw. In addition the Planning Commission considered all sanctioned,
ongoing and pipeline projects and arrived at the conclusion that a capacity
addition of the order of about 82,200 Mw would be possible during the 12th Plan
Period. The envisaged composition is:
Central: 13,914 Mw (17 %), State: 17,350 Mw
(21%), Private: 50,936 Mw (62%)
The whole exercise does not seem to be
feasible on account of three reasons:
The
state sector has neither the financial resources nor managerial capacity to add
17,350 Mw in 12th five year plan. The
capacity addition of 50,936 Mw by private sector is too mammoth target
considering worsening economic situation and fiscal imbalance situation in
India.
Given the
Government's expectations of a high investment from private players, the
prospects
of
capacity addition in the 12th Plan look bleak looking at the past record of private investment. The private
sector power policy was introduced in 1992 but it has failed to attract
desirable level of investment.
Therefore,
one of the major issues in the power sector is, “raising of funds for carrying
out the operations” to meet the demand & supply gap. The companies in the
power sector finance their outlay through both the internal as well as external
sources. They plough back own profits to finance their outlay. They also enter
into agreements with various multilateral agencies for financial support. A
look at the following table would give us the idea of the size and dimension of
funds requirements in Indian Economy.
Table
2: Estimated Phasing of Funding Requirement for Generation during 12th Plan
Type of Power Projects
|
2012- 2013
|
2013- 2014
|
2014- 2015
|
2015- 2016
|
2016- 2017
|
Total Fund Requirement for Generation
|
Hydro
|
218.57
|
236.9
|
250.6
|
271.4
|
289.04
|
1266.49
|
Thermal
|
763.67
|
669.1
|
627
|
618.7
|
628.28
|
3306.68
|
Nuclear
|
57.53
|
69.55
|
74.43
|
82.55
|
93.6
|
377.66
|
Total
|
1039.8
|
975.5
|
952
|
972.6
|
1010.9
|
4950.83
|
(All figures in Billion Rupees)
Note: The calculation assumes a US
$ to Rupee conversion rate of Rs.45 and average price of $ 1 million per MW
of generation capacity added.
Source:
Overview
of Power Sector - 12th Plan and Beyond,
Central Electricity Authority
Table 3: Estimated Total Fund Requirement for Generation & Transmission during 12th Plan
|
Generation
|
4950.83
|
|
Transmission
|
2400
|
|
Distribution
|
4000
|
|
Total Fund Requirement
|
11350.8
|
(All figures in Billion Rupees)
Note: The calculation
assumes a US $ to Rupee conversion rate of Rs.45
Source:
Overview
of Power Sector - 12th Plan and Beyond,
Central Electricity Authority
Background: India’s critical need for power
Severe
power shortage is one of the greatest obstacles to India’s development. Over 40
percent of the country’s people most living in the rural areas do not have
access to electricity and one-third of Indian businesses cite expensive and
unreliable power as one of their main business constraints.
India’s
energy shortfall of 10 percent (rising to 13.5 percent at peak demand) also
works to keep the poor entrenched in poverty. Power shortages and disruptions
prevent farmers from improving their agricultural incomes, deprive children of
opportunities to study, and adversely affect the health of families in India’s
tropical climate.
Poor
electricity supply thus stifles economic growth by increasing the costs of
doing business in India, reducing productivity, and hampering the development
of industry and commerce which are the major creators of employment in the
country.
Hydropower Scenario in India
According
to India’s Central Electricity Authority (CEA), India has a hypothetical
hydropower potential of 148,700 MW. Actual capacity stood at 508 MW at
independence, and at 38,206.40 MW in July 2011. At times,
hydro had a share of more than 50% both in generating capacity and actual
generation. This has since gone down to less than 21%. As India’s main problem
is a lack in peaking power, the authorities would like to increase the hydro
share within the power mix to 40%.
India’s
Northern region accounts for 36% of existing hydropower capacity, and the
Southern region, for 34%. Expansion is primarily planned in the North-Eastern
region (the Brahmaputra-Barak basin, with 48% of the country’s hypothetical
hydropower potential), and the Northern region (the Ganga basin, with 36% of
the undeveloped potential). Of the 98 projects which CEA identified as the
first priority for further development in 2001, 52 are located in the
Brahmaputra and 20 in the Ganga basin.
Hydro Projects Proposal as per current 11th Five year Plan:
The status of Hydro projects totaling to
16,553 MW included in the 11th Five Year Plan is as under:
·
1,537 MW (9.5%) have been accorded
concurrence by CEA/State Government and are awaiting investment decision/work
award;
·
585
MW (3.5%) the DPR is ready and concurrence of CEA/State Government is awaited.
·
Besides capacity addition, a strong
inter-state and inter-regional transmission system has also been planned not
only to evacuate the planned generation capacity but also to provide open
access for transfer of power from surplus to deficit areas.
Availability of Financial Market Instruments
in Indian Hydro Project Financing
India
Financial Market helps in promoting the savings of the economy - helping to
adopt an effective channel to transmit various financial policies. The Indian
financial sector is well-developed, competitive, efficient and integrated to
face all shocks. In the India financial market there are various types of
financial products whose prices are determined by the numerous buyers and
sellers in the market. The other determinant factor of the prices of the financial
products is the market forces of demand and supply. The various other types of
Indian markets help in the functioning of the wide India financial sector.
Features
of Indian Financial Markets
o
India Financial Indices - BSE 30 Index,
various sector indexes, stock quotes, Sensex charts, bond prices, foreign
exchange, Rupee & Dollar Chart
o Indian
Financial market news
o Stock News - Bombay Stock Exchange, BSE
Sensex 30 index, S&P CNX-Nifty, company information, issues on market
capitalization, corporate earnings statements
o
Fixed Income - Corporate Bond Prices,
Corporate Debt details, Debt trading activities, Interest Rates, Money Market,
Government Securities, Public Sector Debt, External Debt Service
o
Foreign Investment - Foreign Debt Database
composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad
o
Global Equity Indexes - Dow Jones Global
indexes, Morgan Stanley Equity Indexes Currency Indexes - FX & Gold Chart
Plotter, J. P. Morgan Currency Indexes
o
National and Global Market Relations Mutual
Funds
·
Forex
and Bullion
Role of Multinationals in Indian Hydro
Project Financing
It will be evident from the
reading of the case studies that the role of the multilateral development banks
has, in most cases, been essential for the success of the projects.
Furthermore, that the assistance that such banks provide can come in a number
of forms. Their potential role in assisting the financing of private hydropower
projects can be through the use of loans, equity investments and/or guarantee
instruments, which are described below in the following ascending order of
dependence on public sector support:
1.
Loans/equity
investments to the private partner,
2.
Partial
Risk Guarantees (covering government undertakings),
3.
Partial
Credit Guarantees (to extend the maturity of debt financing), and
4.
Loans
to governments and other public entities.
To
boost economic growth and human development, one of the Government of India’s
top priorities is to provide all its citizens with reliable access to
electricity by 2012. To ensure that the uncovered 40 percent of Indian homes
get electricity by 2012, and to serve rising demand from those already being
served by the power grid, the government estimates that the country will need
to install an additional 100,000 Mega Watts (MW) of generating capacity by
2012, expanding grid-based generation to about 225,000 MW. Given that India
added about 23,000 MW during the last 10th
Five Year Plan of 2002-2007, this will be quite a quantum jump.
The
Government of India has decided to acquire an increasing portion of this
additional power from the country’s vast untapped hydropower resources, only 23
percent of which has been harnessed so far. India’s energy portfolio today
depends heavily on coal-based thermal energy, with hydropower accounting for
only 21 percent of total power generation. The Government of India has set the
target for India’s optimum power system mix at 40 percent from hydropower and
60 percent from other sources.
The main features of the Government of India
policy on hydro power development are as follows:
i.
Additional budgetary financial support for
ongoing and new hydro projects under Central Public Sector Undertakings.
ii.
Basin-wise development of hydro potential –
comprehensive Ranking studies for 399 schemes.
iii.
Advance action for capacity addition – 10
year ahead of execution Emphasis on quality of survey & investigations
iv.
Resolution of inter-state issues on sharing
of water and power. Renovation, Modernization & Uprating of existing hydro
stations
v.
Promoting small and mini hydel projects – 25
MW and below now fall into category of “non conventional” qualifying for
benefits.
vi.
Simplified procedures for clearances by
Central Electricity Authority; Electricity Act 2003 further liberalises this.
2.
Rationalization
of hydro tariff by allowing premium on sale rate during peak period
i.
Realistic estimates of completion cost
considering new development on geological front during execution.
3.
Promoting
hydel projects in joint venture
i.
Govt. support for land acquisition,
resettlement and rehabilitation, catchment area development, etc.
ii.
Some of the measures announced by; Govt. of
India have already been introduced which include simplified procedures for
transfer of techno-economic clearances, streamlining of clearance process and
introduction of three-stage clearance approach for development of hydro
projects in Central Sector/Joint Ventures, etc.
iii.
The Central Electricity Regulatory Commission
has approved 5% hydro development surcharge on annual fixed charges for central
hydro power generation
Funding Scenario of Hydro Power Projects in
India
Hydro
Project financing in India, as in many other countries of the Asian region, has
not been an easy task. However, following the new initiative taken by the
Indian Government to help create an additional 50,000MW installed hydro
capacity by the year 2012, things have started to look up. At present, power projects
(including hydropower schemes) in India are supposed to be funded from the
following sources:
Through NHPC and other central utilities, the
government provides the equity capital of central sector power projects. The
government also offers a range of other incentives to promote the development
of power projects
State governments and utilities contribute
the equity capital of state sector projects. They conclude power purchase
agreements with IPPs, and offer escrow accounts and other guarantees as
securities.
Investors from India and abroad are supposed
to provide the equity of private sector projects. In central, state sector or
private projects, equity usually needs to cover 30% of project costs.
Once the equity has been secured, PFC and
Indian development finance institutions extend rupee loans for the
debt-financing of central, state sector and private power projects.
Increasingly, Indian commercial banks and other financial institutions also
provide debt funding to power utilities and individual projects. Domestic
lenders usually cover about 40% of the project cost. In some cases, they also
extend foreign currency loans. Export credit agencies, some
bilateral institutions and numerous international commercial banks extend loans
(or guarantees) to cover the foreign currency debt of power projects, which
usually amounts to about 30% of project cost.
Apart from direct funding, the central
government has started to offer a series of incentives to encourage the
development of power projects:
- The government exempts bonds for the infrastructure sector, particularly PFC bonds, from taxes.
- In 1995, the government granted tax holidays of ten years and an exemption from import tariffs for so-called mega-projects of more than 1,000 MW (in the thermal sector) or 500 MW (in the hydro sector). It also extended guarantees to seven private hydropower projects.
- In 1997, the government started to provide an interest subsidy of 4% for PFC loans for priority projects (including the completion of power projects, missing transmission links etc.) under the Accelerated Generation & Supply Programme. The Power Ministry believes that this programme has been effective in helping states to complete projects, and would like it to be funded also under the Tenth Plan.
- Under the Accelerated Power Development Programme, the government contributes grants and loans for the renovation and modernization of existing power plants and distribution networks.
- Host state governments receive a free share of 12% of the power produced by central hydropower projects in their territory.
Project financing Issues in Indian Hydro
Power Projects
The
key issues in the financing of private hydropower projects are bankability and
affordability. Although the operating costs of hydro are minimal and the
project life almost infinite, there are multiple cost-related factors that make
hydro difficult to finance on a private basis, particularly when compared to
equivalent thermal projects. These include the following:
High Capital Costs. The specific cost of
a hydro power station (Rs. In Billion /MW) is typically
0.06 to 0.07 compared to 0.04 to 0.05 for a
thermal power station, depending upon the site characteristics and the type of
thermal plant. This gap widens when private financiers require
fixed price EPC contracts, because the contingency that
has to be priced in for hydro is much higher than for thermal power projects.
Furthermore private development invariably implies higher equity returns and
higher interest costs so that the capital-intensive nature of hydro is
magnified relative to its thermal competitor. For thermal projects capital
charges may constitute less than half of the tariff. Therefore the consequences
of using private capital are diluted; but for hydropower, where capital charges
dominate annual costs, the impact of higher capital charges is much more
pronounced.
High
Front-End Costs. All private projects have to internalize
their front-end costs. These include transaction expenses for legal,
financial and due diligence services; they also include engineering costs,
technical and environmental consulting fees, environmental mitigation and the
developer's own expenses. These "soft costs" are generally much
higher for hydro than for thermal plants (it is generally 45 percent compared
with 25 to 30 percent for a typical thermal project) because of the longer time
that hydro takes to prepare for private financing and its greater complexity.
Long
Construction Period. Most hydro projects of any size will take
four to five years to construct. This is to be compared to less than two
years for a gas-fired power station, or three to four years for other types of
thermal power station. The longer construction period increases the interest
and equity returns during construction (considered above as a component of
"soft" costs). However, the late start to the revenue stream also
adds to the perception of project risk, and in turn increases the risk premium
in the financing charges.
Limited
Availability of Export Credit Financing. The high civil work
content of most hydro schemes severely limits the availability of export
credits. Generally the ECA (Export Credit Agency) element will be no more than
one-third of the direct project costs, which may be only 20 percent of the
total funding requirement. In contrast the majority of the finance for thermal
power stations is in the form of ECA credits. The low proportion of ECA funding
for hydro not only increases the financing gap, but it also makes it more
difficult to raise commercial funds, which are usually piggybacked onto ECA
loans. Where commercial loans are available they are often expensive and of
short tenor-unless extended by Partial Guarantees.
Mismatch
of Loan Tenor and Asset Life. For both thermal and
hydropower projects the tenor of available ECA credits and commercial
loans is considerably less than the asset life. For thermal projects, loans may
extend for up to 12 years from the commissioning date, compared to an asset
life of perhaps 20 years. The accelerated repayment required is reflected in
higher initial tariffs than would be the case if the project were publicly
financed. For hydropower projects, the effect is
exacerbated, since loan tenors are the same while asset life is conventionally
assumed to be 50 years or longer.
Peak
and Base-load Plant. Most hydro plants are intended to operate in
the medium to upper range of the load curve, while many thermal IPPs are
operated at high capacity factor near base-load. In practice this makes it
misleading to compare energy costs without recognizing that the value of
mid-range and peak energy is usually significantly higher than baseload
generation. Tariff comparisons should always be on the basis of the quality of
the energy supplied, which is reflected by the position it occupies in the
load-duration curve and the ancillary support services it provides.
Risk and Funding Opportunities in Indian
Hydro Power Projects
Local
financing of infrastructure projects has been very limited in many developing
countries because of the immature state of the domestic financial markets.
Where such financing is available, interest rates are usually too high to make
projects affordable. For these reasons it is likely that for the foreseeable
future most private hydropower projects will continue to be financed using
offshore funds, as in the case studies.
While
the international banks traditionally provide the major share of offshore
project debt under an ECA umbrella with maturities of up to 14 years,
commercial bank loan maturities for developing country projects can be very
short (3-7 years) without multilateral cover. In addition, lending banks
normally expect loan principal amortization to start soon after completion of
the project with equal semiannual installments. Such repayment terms, aggravated
by short maturity periods, result in high debt service requirements in the
initial years of operation.
The
use of international capital markets to access long-term institutional funds
has been explored by private power companies, and project finance bonds have
been used, principally in refinancing situations. However, compared to
commercial banks, familiarity with nonrecourse project finance debt is still
limited among bond investors, and their appetite has been seriously blunted by
the recent financial turmoil in parts of the developing world. In consequence
capital markets remain wary of infrastructure project financing in emerging
economies. Official support mechanisms, such as export credit insurance and
multilateral guarantees, are available to reduce these problems. Their main
advantage is to reduce project risks and therefore lower the required interest
rate, and to reschedule
and extend the tenor of commercial debt beyond what would
be available under purely commercial arrangements. This can be particularly
valuable in the case of hydropower projects where the terms of the debt impact
particularly heavily on tariff levels. The effect that improvement in the debt
terms, through longer maturities and lower interest rates, has on required
tariff levels.
Required
returns on equity are closely linked to the perception of risks. Where the
project is structured in a manner that passes most of risks outside the control
of the sponsor to the utility or the host government, and where the legal,
regulatory and institutional environment ensure the contractual rights of
project financiers, the sponsor will accept lower equity returns, possibly as
low as 15 percent a year. In contrast, a high risk project would probably not
attract equity investors at all, or the investors will demand returns higher
than 25 percent a year. Among the candidate projects, the actual returns on
equity lie between these two extremes, generally averaging around 20 percent a
year. There is no established pattern for risk allocation in private hydro
projects and the accepted norms are still emerging, driven largely by what is
required to achieve financing. However Table 10 gives a summary of the main
risks and an indication of the way that they are tending to be allocated in a
number of countries as the market develops.
The
arrangements shown reflect the level of risk assumption that generally needs to
be assumed by the public sector to make a project bankable. It will be seen
that the public sector increasingly has to bear many of the risks that they did
under the traditional utility-led implementation arrangements, and this is
likely to remain a feature of most medium-to-large privately financed hydro
developments for the foreseeable future. This obviously raises some fundamental
questions regarding the rationale behind the practice of developing new
hydropower stations in the private sector if the public sector still carries
much of the risk
Table
4: Normal Risk Sharing Arrangements for Hydro Projects in India
Type of Risk
|
Risk Taker
|
Hydrology Risk
|
|
temporary deficits
|
Usually PC, but
sometimes access to GV funds.
Insurable
|
long-term deficits
|
GVIUT increasingly
assuming this risk. Not insurable
|
flood damage
(construction)
|
Generally CO risk
unless force majeure, or insurance
|
flood damage
(permanent works)
|
risk. Insurable
|
Construction Risk
|
|
changes in
quantities/cost overruns
|
Depends on reason.
Either CO, PC or shared
|
unforeseen ground
conditions
|
Increasingly borne by
the UT or shared.
|
Partly insurable
|
|
delayed completion
|
Normally CO risk, but
some exposure by PC
|
Performance Risk
|
|
equipment
|
Plant supplier or
turnkey contractor
|
project performance
|
CO, and possibly PC
|
transmission
|
Usually the
responsibility of the UT
|
Environmental Aspects
Risk
|
|
permitting land
acquisition/resettlement
|
PC or, by preference,
UT GV/UT
|
Market Risk
|
|
market risk
|
Usually UT through
take-or-pay
|
dispatch
|
Obligation and right
of the UT
|
Force Majeure Risk
|
|
continued debt
servicing
|
Generally obligation
on the UT to maintain payments
|
rehabilitation costs
|
Principal exposure on
the UT (increased tariff) and insurers
|
Political Risk
|
|
obligations of utility
|
GV obligation often
backed by political risk insurance
|
changes in law
|
GV obligation often
backed by political risk insurance
|
changes in tax
|
GV obligation often
backed by political risk insurance
|
Financial Risk
|
|
increase financing
costs
|
Generally passed to UT
in the tariff, or absorbed by PC
|
exchange rate
|
Generally passed to
UT, backed by GV
|
cost escalation
|
Usually reflected in
tariff during construction and by limited tariff escalation thereafter
|
Indian Government Initiatives in Funding
Hydro Power Projects5
Indian
Government has taken a number of measures in recent years to accelerate
hydropower development (of special relevance to private developers are the
preparation of a shelf of well investigated projects, which could substantially
reduce risk perceptions), streamlining of the clearance procedures, the
provisions of open access and trading as per Electricity Act 2003, etc. Efforts
are also being made to make long-term debt available. As mentioned in Section
V, PFC is now giving loans to private sector hydropower projects for up to 70%
of the project cost with a maximum repayment period of 20 years with a
moratorium for construction period plus 6 months.23 In January 2004, MOP
constituted an inter-institutional group (IIG) of FIs with an objective to
expedite the financial closure of private sector power generation projects and
to address last-minute issues impeding project development and financing. The
members of IIG are the State Bank of India (SBI), Industrial Credit and
Investment Corporation of India Limited (ICICI), Industrial Development Bank of
India (IDBI), Life Insurance Corporation (LIC), PFC and Infrastructure
Development Finance Company (IDFC). Since its formation, 11 projects with an
aggregate capacity of 4,001.8 MW have achieved financial closure. Currently,
six projects with an aggregate capacity of about 7,532 MW are under IIG’s
consideration.
State-level Initiatives
The
hydro-rich states like Uttaranchal, Himachal Pradesh and Sikkim have taken a number
of initiatives in recent years to promote a balanced growth of public and
private sector projects These are briefly discussed below.
Uttarakhand: The key features of the
government of uttarakhand’s policy are (a) potential hydro projects
identified by the government of Uttaranchal are advertised for international
competitive bids;
(b)
bids are invited over a minimum premium, payable upfront to the government of
uttarakhand, at the rate of Rs.5 crores per project; (c) projects are allocated
to bidders making the highest bid over and above the upfront minimum premium;
(d) projects are allocated for an initial period of 45 years on a
build-own-operate-and-transfer basis; (e) the developers of the project have
the right to sell the power outside the state; no agency of the state will
guarantee purchase of power; and (f) 12% of electricity generated is to be made
available free of cost to the state during entire life of the project.
Himachal
Pradesh: The key features of the policy of Himachal Pradesh are (a)
selection of developer on MOU route for projects up to 100 MW and based
on international competitive bidding route for projects above 100 MW; (b) no
clearances from CEA for projects selected on competitive bidding route for
projects costing up to Rs2,500 crores; (c) secondary energy rate to be at par
with primary energy, (d) premium on peak power, and (e) 100% foreign equity
permitted on the automatic approval route provided it does exceed Rs1,500
crores. Also for projects above 100 MW installed capacity, the government has
reserved the right of equity participation up to 49% on a selective basis.
Sikkim:
In
order to expedite hydropower development through private sector participation
in the State, the government of Sikkim has formed the Sikkim Power Development
Corporation Ltd (SPDCL), to facilitate joint venture projects between a private
power developer and the government. For SPDCL-promoted projects and as per the
MOU signed between the Sikkim government and a private power developer, 12%
free power would be made available to the State and the private power developer
would be permitted to sell its entire balance power directly to needy states or
through power trading agencies, whichever way they would like to sell. In all
SPDCL-promoted joint venture projects, the government’s equity participation
ranges from a minimum of 10% to a maximum of 49%.
Investment Incentives for Investors in Hydro
Power Projects
Below is a summary of the incentive package
for both domestic and foreign investors:
All
companies will be allowed a debt-equity ratio of 4-to-1.
- The companies will be allowed to raise a 20 percent minimum of the outlay through public issues.
- The promoter`s contribution should be at least 11 percent of the total outlay, with a ceiling of 40 percent from Indian public financial institutions. To ensure that the private entrepreneurs bring in additional sector resources, they must obtain 60 percent of their contribution from sources other than public financial institutions.
- For both licensee and generating companies, up to 100 percent foreign equity participation will be permitted for projects set up by foreign private investors.
- The import of equipment for power projects by foreign investors will be permitted in cases where foreign suppliers extend concessional credit.
- To safeguard return on investment against a possible power demand shortage, private generating companies will be allowed to sell power under a two-part tariff structure. This will be based on operational norms and optimal plant load factor (PLF)--an important indicator of the plants` operational efficiency. The PLF will be prescribed by the Central Electricity Authority (CEA), the central government`s advisor to the Department of Power on technical and economic matters.
- The rate of depreciation will be periodically announced by the central government.
The specific incentives for the licensees
are:
- A license duration of 30 years in the first instance and subsequent renewal for 20 years, instead of 20 and 10 years, respectively, prior to the amendment;
- a 5 percent return rate in place of the previous 2 percent above the RBI (Reserve Bank of India) rate;
- capitalization of interest at actual cost during construction instead of the previous 1 percent above RBI rate; and
- Special grants to meet debt redemption obligations.
Indian
Power System has not been developed in a required manner and need hydropower
potential development on fast track basis. The exorbitant fund requirement to
meet the gigantic challenge cannot be met with the budgetary support of
Centre/State Governments. A co-operation between government and private sector
is essentially required to develop projects in a time bound manner. To
facilitate smooth execution of the project it is necessary that government
policy should be such that the private sector finds easy approach in handling
development of hydro sites since for individual developers, tackling various
agencies for seeking clearances/information would be difficult.
Need
has been recognized for accelerated hydropower development in India. 80% of the
existing hydro potential is still unharnessed. Hydro Power Projects are still
in a state of evolution, with the process proving to be slow and expensive.
Small projects will continue to be developed, but there is a danger that
interest will falter in the larger projects if prospective developers continue
to be faced with high upfront costs and long gestation periods, with only
limited prospects of success.
Following
points can be summersied as concluding comments on Scenario of Hydro Power
Project financing in India
- India’s power generation capacity has expanded rapidly since independence. Even so, the growth of generation could not keep up with demand. The country has a power shortage of 8% on average, and of 11% at peak times. Power supply is unreliable and of poor quality, and many rural communities have no access to electricity.
- . India’s per capita electricity consumption of 750 kWh per year is very low by international standards. Even at this level, the lack of generating capacity is not the main problem. Power in India is produced, transmitted, distributed and consumed inefficiently.
- Encouragement of the further development and use of financing mechanisms that will facilitate the flow of private capital into hydro.
- A large amount of investment capital is created in India. Traditionally, it has been the role of the country’s development finance institutions to make such capital available to industry and infrastructure utilities in the form of long-term loans.
- Due to fundamental problems and environmental & regulatory hurdles financial institutions seem to go through a certain cycle of hope and disillusionment regarding power, and particularly hydropower, projects in India.
- The multilateral development banks have completely withdrawn from directly funding hydropower projects in India due to problem of fungibility.
- Only Multilateral agencies like World Bank (WB), Asian Development Bank (ADB) and Pension funds; which are called as a long term investors, are willing to finance Hydro projects having GOI guarantees.
- Encourage the availability of longer-term finance at low cost from international sources, including ECAs, and through the use of credit enhancement mechanisms such as the World Bank Partial Risk and Partial Credit Guarantees;
- Foster a regulatory framework that is responsive to the needs of hydro, which includes a willingness on the part of governments to assume certain project risks that cannot easily be accommodated by the private sector;
- Ensure that the deregulation process recognizes that most hydro can only be financed on the basis of a long-term PPA signed with a credible offtaker and backed by a sovereign or similar guarantee;. It will be necessary to develop Hydro Power Project structures that involve a risk-sharing formula that is both bankable and cost-effective in terms of minimizing construction costs and the resulting tariffs.
- Coordination of financial support (loans/guarantees) by the various multilateral/bilateral development banks and ECAs concerned with private hydro developments
In
conclusion, Hydro Power Project sector is currently fragmented and without a
clear sense of direction needs a better-coordinated approach to what is
inevitably a major exercise in public-private partnership. The role of the
multilateral and bilateral development banks is changing. It may have
diminished in the context of thermal power generation, but it remains as
crucial as ever in the hydro sector if the challenge of attracting required
finance is to be adequately met.
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