Hydro power, traditionally the preserve of the public sector, is fast turning to be an area where only private players can survive. Unable to face stiff competition from private companies who snatch away projects from them by offering better deals to the state governments, hydro PSUs like NHPC and SJVN are looking at diversification into solar & wind power and geothermal energy to stay afloat.
The problem is primarily a policy hurdle: central PSUs are not allowed to offer ?extra free power? and upfront premium when they bid for projects, besides being barred from selling a portion of the electricity generated as merchant power in the free market. Private players are not constrained by such policies and the state government which allocates hydro projects, often finds their terms attractive.
States are asserting their right over how they want to harness their hydro resources and are increasingly allocating projects based on criteria like upfront premium and extra free power in a bid to optimise their revenues. Hydro PSUs like NHPC, SJVN and Tehri Hydro Development Corporation are constrained by policy guidelines against offering such terms. As a result, they are losing projects to private players.
Under the National Hydro Power Policy, host states are entitled to 12% free power from hydroelectric projects. However, private players are offering upfront premium and extra free electricity while competing with PSUs for hydro power projects. PSUs constrained by rules cannot match them.
?States are allocating hydro power projects to private players offering terms like upfront premium and extra free power. That prompts us to diversify into new business areas,? said HK Sharma, chairman, SJVN.
NHPC was recently asked by the Arunachal Pradesh government to prepare detailed project reports (DPRs) for Subanshiri Middle and Subanshiri hydro electric projects in the state. The central utility agreed to undertake preparation of DPRs on the understanding that it would be allocated these projects. But subsequently, the state government allocated these projects to private developers. NHPC sought power ministry?s intervention to persuade the state to return these projects to it, but to no avail.
SJVN had offered 17% free power while bidding for the Arun-III hydroelectric project in Nepal recently. But it had to increase the quantum of free power to 22% to match the terms offered by a private player for the allocation of the project. In India, however, it would not have been able to do so.
However, Kuljit Singh, an energy expert with global consultancy firm Ernst & Young does not think that this trend of states offering hydro power projects to private developers on the basis of upfront premium and extra free power will last long.
?This is just a matter of time before states realise that it is better to allocate project to a developer who might offer poorer terms but will develop the project rather than to a player who might offer more lucrative terms but could fail to implement the project,? he said. It remains to be seen if the power ministry?s purported move to initiate policy changes to allow PSUs the flexibility to pay upfront premium and additional free power would change the scenario. As of now, what is being witnessed is sagging confidence of hydro PSUs.
Although the central government has the mandate to formulate policy to advise states on how hydro resources should be harnessed, it does not have any control over this state subject. Now, states are increasingly asserting their right over how they want to utilise their hydro resources. The existing policy regime allows hydro power project developers to sell 40% of generated electricity as merchant power in the free market. There is scope for the developer to earn hefty profits by selling power in the free market where price is determined by prevailing demand-supply gap unlike power purchase agreements where tariffs are determined by electricity regulatory commissions.
While private players benefit from this provision, power projects developed by PSUs are still selling electricity under long-term PPAs, as it is the power ministry that decides on allocation of power from these projects and not the developers.
Apprehensive that they might not add capacity fast enough to grow according to their potential, hydro PSUs are increasingly looking at options to diversify their business portfolio. For example, SJVN is seriously considering tapping potential of solar and wind power besides power trading business to keep its revenue growing in the future. Similarly, NHPC is planning to harness geothermal energy.