Hydro resources are like any other natural resource and the states have every right to optimise their revenues from it. So, the proposal by some hydropower-focused states for charging upfront premium on top of 12% free power for allocation of projects cannot be faulted.

The central government should not come in their way by insisting on tariff-based bidding for the allocation of hydropower projects. Instead, it should allow public sector enterprises like NHPC and Satluj Jal Vidyut Nigam Ltd the flexibility to pay premium for the allocation of hydropower projects and sell merchant power in the free market so that they could compete with private sector players on an equal footing.

If the payable premium gets capitalised for the determination of tariff, why should the Centre have any issue with that? At least that will help expedite hydro-based power capacity addition in the country, which has been rather slow.

The Centre?s argument that premium payment will raise electricity tariff is also flawed. Coal-producing states are already getting royalty on coal produced from their areas. This adds to power generation cost for coal-based power plants, but the government has no issue with that. So, why should it adopt a different yardstick for hydro resources?

Market price of electricity cannot be fairly determined unless cost of all inputs used in its generation is duly considered. For example, the price of electricity generated by a power plant using APM gas cannot be taken as the benchmark tariff for a gas-based power plant for the simple reason that gas is subsidised.

There is no fuel cost for hydropower plants. However, you need to harness hydro resources of a river for generating hydel power. Since hydro resources belong to states, they need to be compensated for that. That is how market-based tariff can be determined for electricity generated by a hydropower plant.

India has huge potential to generate electricity from hydro resources. However, the bulk of the potential remains unexploited. For example, the country can add 2,50,000 mw power generation capacity based on hydro resources. However, it has harnessed only 15% of the potential. India is unable to expedite capacity addition in hydropower generation.

Given that hydropower plants are a key source for meeting peak power requirements, the ideal hydro-thermal mix should be in the ratio of 40:60. However, the country?s energy mix has been distorted because of the slow pace of capacity addition in hydropower generation. The share of hydro power was 44% in 1970. But since then, it has declined to 23%.

Expediting the pace of capacity addition in hydel power remains a challenging task because hydro power projects involve much higher risks compared to thermal power plants. They are vulnerable to unpredictable factors like geological surprises which often lead to long delays and huge cost escalation. Implementation of hydro projects often poses serious challenges of rehabilitation. Besides, power evacuation from hydropower projects is also challenging given that most of these plants are located in remote areas.

Private players may be enthusiastic about investing in thermal power projects. However, they have only a limited appetite for bearing risks involved in the development of hydropower projects. Hence, the government cannot depend on the private sector to expedite capacity addition in hydropower generation. This job can be handled by public sector companies only.

As a recent practice, states are allocating hydropower projects on the basis of upfront premium. Private players have bagged most of hydel projects allocated by states in recent years. PSUs are unable to compete with private players for allocation of hydro projects because they are not allowed to pay such premium.

Instead of amending its policy to allow PSUs to pay premium and compete with private players for allocation of hydropower projects, the power ministry is trying to persuade states to comply with its tariff-based competitive guidelines. However, most of the states remain defiant.

The government needs to unshackle hydro PSUs from policy constraints if it wants to expedite capacity addition in hydropower generation. It should allow PSUs to pay upfront premium and compete with private players for the allocation of hydropower projects. Besides, the power ministry should amend policy to allow PSUs to sell 40% power as merchant capacity on par with private hydropower projects.

Significantly, most of the states with sizeable hydropower generation potential are economically underdeveloped. They need financial resources to expedite development work on their own. So there is nothing wrong if they earn some revenues by allocating hydropower projects.