New hydro policy to slash prices, offer VGFs for green projects

The government plans to give fresh impetus to construction of hydro power plants in the country by announcing a comprehensive policy next month.

This policy will support green projects through offer of viability gap funding (VGF) for projects, compulsory hydropower purchase obligations for distribution companies and other good practices to be adopted by states.

The new policy will also allow hydro project developers to spread depreciation provisioning over a 30-year period thereby allowing projects reduce their annual fixed cost component and offer power at lower levellised tariff of say Rs 2 per unit for the life of a plant.

India has so far realised only 45,000 mw out of 1,45,000 mw of hydro potential in the country. Delay is land acquisition and green clearance has been one of the biggest bottlenecks for such projects apart from higher realisable tariff in the initial few years. Sources said that the policy was in final stages of drafting and would be taken up for inter-ministerial consultation later this month. It would then be placed before the cabinet for approval later next month.

“The main guiding principles of the policy is to make hydro power generation attractive through offer of lowest tariff to consumers. Though the tariff from hydro projects comes down to almost Rs 0.80 per unit after few years of operations, high construction and land acquisition cost ensures that tariff remains high at Rs 6 per unit or more during the recovery period. The policy will ensure that cost of hydro project is divided across its lifecycle so that consumers get lower tariff,” said an official in the power ministry not willing to be named. What has been suggested to lower tariff is to spread the depreciation period for a project to 30-35 years from the present 12 years.
As tariff is linked to depreciation extension of cost, the recovery period will help bring down the tariff levels to as low as Rs 2 per unit.       

Moreover, about Rs 16,000 crore of incentives has also been lined for power projects that will further bring the project cost and lower capital risks for developers encouraging them to take up green projects.

The incentive could be given in the form of VGF support that would augment equity and enable faster development of hydro plants.

Sources said that the policy would also call upon states to offer additional financial incentives and support in the form of faster statutory clearances.

The new hydropower policy will further lower the cost for projects by separating the irrigation component from power plant.

For construction of irrigation facilities, separate funding and subsidy would be available from the ministry of water resources while project developers would focus on capital investment for building the power project.

The new policy is also likely to bring a whole host of new incentives for hydro projects by bring all such projects under the definition of renewable power project.

At present hydro projects up to 25 mw capacity is considered renewable while other higher capacity projects come under the conventional category.

After the new policy, even a 1000 mw hydro project would qualify under the renewable category, thereby becoming eligible for preferential treatment by the state discom, who have to comply with minimum renewable purchase obligation (RPO).

Moreover, new renewable tag for hydro will also get it exemption from inter-state transmission charges as per existing tariff policy.

The new policy allowing projects to discover levellised tariff for lifecycle of projects would also pave the way for introduction of competitive bidding in the sector that could further help consumers to get power at one of the lowest available tariff across categories.  

Subhash Narayan