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Hydro capacity addition in India has remained sluggish historically, with the significant execution challenges as also seen in the incremental capacity addition of about 22 GW between 2000 and 2021, representing CAGR growth of mere 3% in the hydro segment. Further, the share of hydro in the overall power generation capacity has declined considerably over the period, with a significant rise in thermal capacity addition seen in CY2005 till CY2015 and thereafter in the renewable energy segment.
With improved tariff competitiveness of solar & wind energy and strong policy focus by Government of India (GoI), share of renewables (solar & wind segment) is estimated to grow considerably in the energy generation mix, going forward. However, the hydro energy segment also remains systemically important from the grid perspective so as to meet the flexibility requirements / peaking power supply.
In this context and to further the growth of the hydro energy segment, the GoI has outlined policy measures over the last two-year period to promote the investments in the hydro segment through notification of hydro power purchase obligation (HPO) norms, long term trajectory for HPO as well as tariff rationalization measures. Hydro
power purchase obligation is set at 0.18% for FY2022 which in turn is set to increase upto 2.82% by FY2030 at national level, as notified by Ministry of Power, GoI.
Commenting further, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said, “Based on the notified hydro purchase obligation norms & trajectory available till 2030, incremental hydro power capacity requirement is estimated to remain significant i.e. at about 18 GW, which corresponds to about 39% increase over the existing installed hydro power capacity in the country. It is however observed that HPO norms have been subsequently notified by SERCs in few states only, in line with policy targets as of now. Hence, timeliness as well as consistency in the notification of HPO norms by SERCs in other states as well as subsequent implementation of the same by the obligated entities too remain a key monitorable”.
The hydro energy segment faces many other challenges like elongated construction schedule, significant resettlement & rehabilitation and land acquisition issues, delays in clearances and geological/ topological risks which have led to significant time & cost over-run for hydro projects. This is also reflected from the fact that average project cost for the commissioned hydro project capacity by CPSUs during FY 2017-2021 remained at about Rs. 13- 14 Cr./MW.
Given the high level of capital intensity for hydro projects, tariff competitiveness of hydro energy too remains modest from the ultimate off-takers’ perspective. On the contrary, tariff competitiveness for solar and wind energy has significantly improved with the bid tariffs remaining well below Rs. 3/unit for last 3 to 4-year period as against the average power purchase cost for majority of the state discoms remaining in the range of Rs.4 to-5/unit, depending on the mix of sources in power purchased.
Mr. Siddhartha Kaushik, Assistant Vice President – Corporate Ratings, ICRA, adds, “Tariff rationalization measures such as backloading of tariff with 2% escalation and provision for budgetary support at Rs. 1 Cr./MW for hydro projects of > 200 MW capacity, is expected to alleviate the concern on tariff competitiveness considerably, in the initial years (5 years post CoD wherein the tariff is expected to remain below Rs. 4/unit, for a project with a capital cost Rs. 10 Cr./MW). The levellised tariff however is estimated at Rs. 4.6/unit over the 40-year useful economic life.”
While tariff rationalisation measures have been outlined by the Ministry of Power in March 2019, the same are yet to be incorporated by CERC in its tariff regulations applicable for hydro projects. Further, the policy clarity in terms of support measures especially for pumped hydro storage capacity remains a key monitorable too.