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Hydro Policy Amended in Himachal Pradesh to Improve Cash Flows for Developers

Capital Market 

The Himachal Pradesh (HP) Government's recently announced amendment in the Hydro Power Policy 2006, will ease the procedural formalities and is likely to result in higher cash flows in the initial years for projects in the Chenab basin in the state, says India Ratings and Research (Ind-Ra). Ind-Ra expects hydro projects in the region to become more amenable to debt funding. Ind-Ra also believes that as a result of policy changes, bids for new projects in the basin will result in more competitive levelised tariffs, since the tariffs will not be front loaded.

The policy amendments have been approved by the state cabinet for hydro power plants bid out on basis of the international competitive bidding in the Chenab basin in the state of HP. The harnessed hydro power of HP represents around 8% of the country's total hydro power. The estimated hydro power potential in HP is 27GW, with only 4GW harnessed so far. The Chenab basin has the potential of 4GW and is among the least developed river basins in the state.

As per the amended policy, the projects in the Chenab basin will now have the option to defer the sharing of 12%-15% of free power with the state to the thirteenth year from start of operations and also extend the sharing of free power over a long tenure of 18 years compared to the earlier 12 years.

The quantum which is deferred will be recovered in a uniform percentage over a period of 18 years.

Earlier, a plant with generation of 100MUs annually, had to share 12MUs as free energy to the state during the first 12 years of operations, whereas now the developer has the option of deferring the sharing of free cumulative power of 144MUs (12*12MUs) over a period of 18 years after the twelfth year. Thus the effective free energy to the state from the thirteenth year will work out to 8% per annum, keeping the total quantum over the life of the project unchanged. The deferring of the free power for projects bid out in the Chenab basin is likely to result in higher availability of cash in the initial years, which will aid the debt servicing ratios for the hydro power developers and make the lenders more amenable to funding these projects.

Ind-Ra opines, that for projects which will be bid out in the future on the international competitive bidding basis, this can lead to lower initial tariffs, as the saleable energy will be higher in the initial years. Ind-Ra estimates, the levelised tariffs could be lower by 5%-10% on account of this change in policy. Generally, hydro power plant loans have a repayment period of 12 years, thus the tariffs tend to fall after the loan repayment period. With the deferring of free power to the state, the decline in the tariffs after the loan repayment period will also be lower. The earlier policy resulted in frontloading of tariffs, since the saleable power in the initial years was low on account of the free power to the state while the interest and principal repayments were high.

The lowering of procedural hurdles through the single window concept will also lead to the better harnessing of potential hydro power in the state and may result in lower lead time in setting up the project.

The Himachal Pradesh government had allocated 37 projects in the Chenab basin on an international competitive bidding basis and some projects which stand to benefit from the changes include, 120MW Miyar Hydro Electric Power, 400MW Seli Hydroelectric power plant being developed by Hindustan Power Project Private (HPPPL) and 420MW Reoli Dugli hydropower being developed by Larsen and Toubro.

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

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First Published: Fri, August 12 2016. 12:56 IST