him urja (p) ltd.1 workshop on small hydropower pricing october 21, 2007 kandy, srilanka small...
TRANSCRIPT
HIM URJA (P) LTD. 1
Workshop on
Small Hydropower PricingOctober 21, 2007Kandy, Srilanka
Small Hydropower Pricing Issues – Indian Developer’s Perspective
By Arun Gupta
B.E., MFM, IRS (Retd.)
Chairman & Managing Director Him Urja (P) Ltd., Delhi, India
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Why Small Hydro ?• Low Investment• Short gestation period• Negligible Impact on environment & ecology• Creates small nodes of development • Lower Transmission cost.• Helps in stabilizing the local Grid.• Large potential of Small Hydropower in India.
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SHP Different from Large Hydro
• The scale of construction and operation is entirely different.
• Works on shoe string budgets.
• Difficult to attract quality manpower due to low cost and small scale of operation.
• Mostly water conductor system is channel which is prone to land slides.
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Historical Background• Electricity Sector opened to Private sector
in 1991• Guidelines for determination of tariff of
large hydro notified in 1991• Small hydro was separately covered by
benchmark tariff based on avoided cost in 1993
• Electricity Regulatory Regime ushered in 1998
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Historical Background Contd-
• Electricity Act 2003 came in force
• National Tariff Policy and National Electricity Policy declared in 2005-06.
• The Act as well as the policies mandated promotion of renewable energy and made provisions for providing incentives and protection to the RE sector.
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Historical Background Contd-
• The Regulation of tariff for large hydro notified which were almost identical as the 1991 Tariff Notifications of Government of India
• No separate regulations are framed for small hydro by the Central Regulatory Commission which is nodal commission
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Historical Background Contd-
• State Commissions notified regulation for small hydro which were at great variance with each other with the result developers in some states were benefited and others were starved.
• Many State Commissions made discriminatory regulations depriving small hydro even to what is being allowed to large Hydro
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Large Hydro Tariff Principles
• Tariff is two part.
• First part consists of the Annual Fixed Charge (AFC) recoverable on design energy
• Second part consist of payment of incentive, secondary energy charges and taxes
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Large Hydro Tariff Principles
• AFC consists of following items with normative ceiling– O&M Charges @1.5% of the capital cost– Interest of term loan of 70% of capital cost– Depreciation and advance against depreciation
to the extent of 1/10 of the loan amount– Return on Equity @ 14%– Interest on working capital
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Large Hydro Tariff Principles
• The AFC so calculated is spread over design energy and denominated as monthly charges.
• Design Energy has been defined as energy generated on 95% availability of machines in 90% dependable year hydrology.
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Large Hydro Tariff Principles
• Energy generated over and above design energy has been defined as secondary energy and it is paid @ minimum variable charges of the thermal power projects of the region.
• Incentive is paid for generation above 90% Declared Annual Capacity Index as per formula
• The incentive is linked with AFC• Income Tax payable is pass thru
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Tariff Principles -Small Hydro as Adopted by State Commissions
• Many State Commissions have applied the principle of large hydro to small hydro with minor variations and most of which are detrimental and discriminatory in nature.
• Many State Commissions have allowed O & M Charges varying from 1.5% to 3% of the capital cost.
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Tariff Principles Small Hydro as Adopted by State Commissions
• Pegged recovery of AFC on 45% PLF.• For generation above 45% PLF nominal rate of
US Cent 0.5 per unit has been allowed which has been termed as incentive.
• No payment of secondary energy has been considered which is allowed to large hydro @ US Cent 2.0 at the present rate and increases yearly as the variable cost thermal power project increases .
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Tariff Principles Small Hydro as Adopted by State Commissions
• The Commissions came to conclusion that the rate of return allowed to small hydro is 20% in the best circumstances which is fair, ignoring the fact that the rate of return of large hydro is 26% under the average conditions dependent upon secondary energy and efficiency
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Tariff Principles Small Hydro as Adopted by State Commissions
• Some of the Commissions have even regulated that benefits such as – the cash subsidy granted by central
government – 12% free energy exemption granted by state
governments – the carbon credit
shall not be available to the small hydro.
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Issues to be considered
• Whether the promotional framework for small hydropower development is retained as mandated by law?
• Whether small hydro should be discriminated or differentiated from large hydro?
• Whether small hydro should be considered for tariff based on benchmark cost?
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Issues to be considered
• The O&M Charges
• Impact and calculation of Design Energy and consequential secondary energy and correlation with Plant Load Factor
• Payment of secondary energy to small hydro
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Issues to be considered
• Calculation of annual capacity index for payment of incentive
• Incentives• Case for better incentives and deal to small hydro• The small hydro constitutes 2% of the gross
generation capacity in India• Payment of remunerative rate to green power shall
burden the consumer not even 0.1%
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Design Energy - Unrealistic to Decide
• Discharge Data not available for more than 5 years.
• Unreliability of discharge data available.
• Longer measurement of discharge data not feasible.
• Working of 90% dependable year unrealistic based on 5-10 years discharge data. In working out 90% probable data the data should have at least one repetition.
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As a result of which...
• Design Energy as a starting point for calculation of tariff itself becomes questionable.
• Annual Capacity charge may be underestimated
• Small hydro is underpaid in terms of primary energy, secondary energy and incentives.
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Issue of O&M Charges
Status:
• Presently O&M charges are allowed at 1.5% of capital cost for small as well as large hydropower projects.
• There are no studies available on O&M Charges of the small hydro in himalayan region as there are very few operational plants.
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Issue of O&M Charges
Status:• Some studies have been conducted on the
Government owned small hydro but such studies do not reflect all expenses as these units are owned by state corporations who are operating large hydro also.
• Standard O&M Charges 1.5% of project cost is irrelevant since small hydro power project cannot be compared with large hydro .
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Issue of O&M Charges
Status:
• A study conducted in US on hydro power projects of various sizes have shown that O&M cost of small projects of 5 MW could be as high as 6 times the cost of O&M of 200MW project.
(As reported in Guthrie Brown)
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Issue of O&M Charges
COST OF OPERATION AND MAINTENENCE
10.00
21.66
30.0035.00
46.6650.00100.00
150.00 200.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210
SIZE OF PROJECT IN MW
CO
ST O
F O
PE
RA
TIO
N A
S %
OF
CO
ST O
F P
RO
JE
CT
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Issue of O&M Charges
Status
• SHPs in hilly areas are subjected to vagaries of nature. Hence major repair costs and loss of generation.
• Power Channel is prone to damage.
• The weir design & construction is not as elaborate as large hydro due to cost considerations.
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Comparison of O&M Cost of SHP And Large Hydro
400MW 5MW
Capital Cost Rs.2000 Crores Rs.30 Crores
O & M Charges as per regulation
Rs.30 Crores Rs.0.45 Crores
Diversion 60m Barrage 60m Weir
Whether manned yes Yes
Water Conductor System 10 Km Tunnel 2.5 Km Channel
Whether manned No Yes
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Comparison of O&M Cost of SHP And Large Hydro
400 MW 5 MW
No of Generation Units 4 2
Whether manned Yes Yes
Sub Station 1 2
Whether manned Yes Yes
Transmission Line No Yes
Transmission Losses No Yes
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Comparison Manpower SHP And Large Hydro
400 MW 5 MW
Power House 36 12
Weir & Intake 8 8
Channel Inspection 0 4
Security 24 8
Administrative & Accounts 44 8
Total 112 40
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Comparison Manpower SHP And Large Hydro
• Many studies have shown that the manpower cost is about 40 to 50% of the total O & M Cost.
• Thus small hydro has a case for much higher percentage of the capital cost as O & M Charges
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Return on Investment
• At present 14% ROE is allowed
• Besides this incentive is allowed
• In the best scenario 20% ROE is allowed
• The Equity of the promoter is invested for two and half years before commissioning of the project and no income is earned .
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Return on Investment
• Reasonability of return has to be assessed which is low
• The cost of the risks associated with development, construction and running have to be assessed and built in the ROE
Return On Equity 16% 24%
Value of Equity after 2.5 Yrs 145.3% 172.2%
Net Return on Value of Equity 11% 13.9%
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Suggestions
• Remunerative tariff may be given to SHP to attract large number of IPPs to distribute development nodes in a state.
• The tariff for Small Hydropower Projects should be decided as benchmark tariff without recourse to two part tariff.
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Suggestions
• The policy for Small Hydropower should be consistent in all the states with minor geographical variations.
• For the purposes of arriving at the benchmark tariff the following deviations from the large hydro should be considered on normative basis i.e. without correlation to actual expenses incurred:
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Suggestions
– O & M Charges at a rate of 8%.– Return on Equity at the rate of 18% to provide
incentive to the small hydro.– 30% Energy above 45% PLF should be treated
as secondary energy and may be considered at the rate of US Cent 2.0 per unit.
– The taxes payable.
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Suggestions
– The incentives at the rate of US Cent 0.5 per unit on the energy generated above 45%
• The tariff so arrived at may be treated as benchmark tariff for small hydro.
• The capital or interest subsidies wherever applicable may be allowed to the small hydro.