Risks for Small Hydro Projects - IT Power India - GVEP - ESMAP

Bhoruka Power has set up several small hydro projects and its Managing Director, Mr. Chandrashekhar shared his experiences in setting up of such plants and the risks associated with small hydro projects.

The speaker brought out several key issues which were hindering growth of RE projects viz.

The utility purchasing power take very short term view on the RE projects and do not compare long term benefits vis-à-vis the conventional fuels. Then again the payment terms from utilities have moved in an unfavorable manner. Though the utilities eventually make the payments, it is not sure when. This plays havoc with the developers’ cashflows.

The regulators setting the tariff for the RE projects consider only the consumers view point and rarely entertain requests to reconsider raising the tariffs in view of increased costs (for e.g. high costs of debt have made biomass projects unviable at the current tariff levels). More over, earlier the price guidelines were provided by MNRE. These have now been delegated to different regulators and each regulator takes a different view on the prices.

Government subsidies and incentives. Though the government has noble intentions and aims to achieve energy security, better light etc; the policies are very generic and tend to be misused by unscrupulous players.

Poor resource assessment. There are hardly any databanks available on water flow from small streams and rivulets. This implies a huge risk for the project and this is borne by the project developer alone. For Bhoruka power the company has done its own assessments for the 12 or more plants that it owns. The projects have run upto 80-90% of the capacity as provided in the detailed project reports. Mr. Chandrashekar suggested that it was important to have satellite imagery done of the water resources and a database needed to be established. The government could fund the initial set up of the databank the project developers pay an information cost proportionate to the size of the project that they establish.

Mr. Chandrashekar then went to explain that it was not possible to mitigate all risks. It was better to avoid some of the risks. This is because risk mitigation implied a financial cost and smaller RE projects cannot afford these costs. Moreover, the speaker’s experience has been that the insurance products available are not suitable for the project requirements. The products offered are extremely costly. He has been in conversation with several insurance companies and none have offered any insurance on loss of profits. Again this can be attributed to the lack of adequate data in the field.

Another important experience that Mr. Chandrashekar shared was the experience with the debt – equity ratio. The speaker cautioned that it was not prudent to have a high debt equity ratio in hydro projects. He explained that in hydro projects you repay capital costs over the first 8 years or so. In case there are dry spells and the generating capacities are lowered then the debts will really mount. Bhoruka Power themselves have maintained a ratio of 1:1 and have never exceeded 1.5:1. This has enabled the company to repay all debt obligations on time even when there were 3 consecutive years of dry spells. Another important factor for RE projects is that loans have to be given for longer tenure and repayment should be considered from date of commissioning. Mr. Chandrashekar had discussed with the regulator in Karnataka and had the PPA become effective from the date of commissioning and not from date of signing (as commissioning could take 2 -3 years from the date of signing).

Yet another important concept to be considered was that least project cost did not mean least time. Mr. Chandrashekar elaborated that the focus should be on least time. For e.g. an evacuation line for 10 kms through a wasteland is infinitely better than a 2km line through a thick forest. While this increases costs in the short term, it also raises the success rate of the projects.

Mr. Chandrashekhar highlighted that man power shortage was also a barrier. Given that most of the projects are in remote areas, it is not always easy to staff such plants. Mr. Chandrashekar’s company provides in house training but faces high attrition. The government or the ministry needs to step in and establish an RE training program. There is lots of scope for training and these personnel could easily be planned.

Lastly, Mr. Chandrashekar touched about CDM. He said that transaction costs were still high for small projects and only bundling would make these projects viable. There have been several organizations who have talked about bundling but nothing has really worked out. The speaker suggested that maybe the banking sector could play a pivotal role in bundling RE projects and negotiating for CDM benefits.

Mr. Chandrashekar’s talk raised several important issues and there is an important role for everyone from the government to the banker and to the developer for RE projects to be successful.