Privatisation and an urgent need for clean electricity in the north of India is improving the prospects of developing Himalayan hydro. Timothy Sharp reports

As India’s privatisation progresses, prospects to develop Himalayan hydro are steadily improving. Even though environmental activism continues to hobble other projects in the country, India’s desperate need for clean power in the north, its changing regulatory structure, and US attempts to promote regional co-operation seem certain to combine to foster new schemes.

However these schemes will probably not begin before 2005. The intervening period is needed to develop credible commercial power markets and to dissipate mutual distrust within the region.

India’s overall electricity demand is enormous. For example, its 1998 per capita consumption was around 450kWh. The comparable figures for China, Thailand and Japan are 900kWh, 1350kWh and 7900kWh, respectively. The Indian figure is very low, partly because State Electricity Boards (SEBs) have not even been able to meet the demand that does exist. This is historically due to retail subsidies imposed by the central government that have denied SEBs the cash to operate efficiently or expand.

Since 1995, India has begun to privatise. Although it has so far encountered many more problems than successes, most states now formally accept the privatisation agenda.

The greater clarity provided by the agenda has enabled the Central Electricity Authority (CEA) to announce revised, more realistic targets for additional installed capacity. CEA now believes that 100GW of new plants will be required by 2015, 30GW of which would be hydro. New plants will double the existing installed capacity of 100GW.

This new target incorporates efficiency upgrades at existing generation plants and transmission and distribution (T&D) systems equivalent to 50GW. While this appears feasible in relation to generation, where planning commission data show that overall capacity utilisation has increased from 55% in 1991 to 64.6% in 1998, T&D losses are so far increasing with privatisation.

The ministry of power has listed the states of Orissa, Andhra Pradesh, Rajasthan and Harayana (all privatisation leaders) as having T&D system losses last year of 51%, 45%, 43% and 40% of dispatched power, respectively. These are typically 5-20% higher than those reported before privatisation.

These figures underline the central problem facing Indian privatisation, namely the lack of credible commercial power markets. In this financial climate, many independent power producers (IPPs) are finding it extremely difficult to achieve financial closure. Even state governments are unwilling to guarantee the necessary power purchase agreements (PPAs).

Paradoxically, all these difficulties could benefit Himalayan hydro. First, there is no doubt that India urgently needs much more electricity. Second, it is equally important that this should be ‘clean power’ in the northern states of Harayana, Uttar Pradesh and Bihar. This is where much of the country’s industrial load is concentrated, and as these states have relied on inefficient low-grade coal fired plants, the belt is now a national air pollution ‘black spot’ that runs much of the length of the Himalayas. Meanwhile, well over 100GW of hydro is potentially available from the mountains, typically within 300km of load centres. In addition (see table), 30GW of new hydro envisaged by 2015 has already been identified within the region.

The key issues for Himalayan hydro come down to credible commercial power markets and finance. Since these are also at the crux of the entire Indian privatisation dilemma they are being given considerable attention.

In terms of credible markets, private sector power distributors as well as state and national governments agree that pilfer-proof solid state meters and stronger legal sanctions must be deployed. It is not yet clear if the meters’ high capital costs can be subsidised, but given the urgent need to establish real power markets, this could happen.

In finance the central government is carrying out the following actions:

•Mobilising domestic financial institutions to play a much larger role in power project finance, including holding equity.

•Forming the IFC-backed Power Finance Corporation (PFC).

•Encouraging other specialised finance organisations. For example, the Indian Infrastructure Equipment Trust (IIET) helped finance the long delayed Tehri hydro project where it has equipment worth US$3M.

To accompany administrative changes, the central government is:

•Allowing foreign investors outright ownership of any power project except atomic power, effective by 13 June 2000.

•Establishing the Power Trading Corporation (PTC) as the national power wholesaler. This will release project developers from having to negotiate separate PPAs with each client state.

•Planning to privatise the ineffective National Hydroelectric Power Corporation (NHPC) and other state power enterprises. NHPC will keep the proceeds from the sale, which will be used to finance further projects

•Preparing to hold only minority shares in even major NHPC projects.

Bright prospects

Many of these developments will boost other power projects besides hydro. But Himalayan hydro has particularly bright prospects. The US sees it as the key to much needed regional co-operation and is therefore aggressively promoting it.

During the run up to President Clinton’s South Asian tour, the US Trade and Development Agency (USTDA) organised the Energy South Asia conference in Kathmandu to try and persuade Nepal, Bangladesh, Bhutan and India to adopt joint energy projects.

One scheme aired by the American Chamber of Commerce in Bangladesh, a few days before the President landed at Dhaka, suggested that Bhutanese hydro power could substitute the abundant Bangladeshi source of natural gas which could then be piped to India for a net gain to Bangladesh. But when mutual distrust among the proposed partners resulted in Clinton leaving empty-handed, the United States Agency for International Development (USAID) promptly stepped in. In early April, it announced a South Asia Regional Initiative/Energy programme (SARI/E) which will catalyse and facilitate a long term process of rationalising energy supply and distribution across the region.

SARI/E’s four-year phase 1 plan aims to:

•Create institutional decision making capacity for sustainable energy development.

•Increase private sector participation and civil society support for energy development.

•Create and/or strengthen regional forums, networks and associations to co-operate for energy development.

Should the need arise, SARI/E will also have access to about US$1B of clean development funding — a carrot dangled by US Energy Secretary Bill Richardson when he visited New Delhi in October 1999.

Himalayan hydro of course gets no specific mention in the programme but what else could ‘regional energy integration as a way of promoting clean energy sources to meet excess power demand’ mean? These were Richardson’s words but they echo one of SARI/E’s main goals of regional economic integration quite nicely.

The prospect of developing Himalayan hydro was confirmed when the World Bank published a Nepal Power Develop-ment Project proposal on 20 April 2000. Although nothing is firm — the proposal will not be formally discussed at the World Bank until November — it recommends upgrading Nepalese hydro power development capabilities.

The proposal specifically aims to:

•Develop Nepal’s hydro power potential in an environmentally and socially sustainable manner.

•Improve overall operational efficiency of the Nepal Electricity Authority.

•Promote private participation in the power sector.

Exporting hydro

Although these activities would all be resolutely domestic, the ultimate objective is clearly to enable Nepal to export hydro power to India. For, as the proposal notes: ‘In February 1997, Nepal signed an understanding with India that allows any party (government or private) in India or Nepal to enter into an agreement for power trade.’ Even though this agreement still requires Nepalese ratification, the World Bank points to a number of (Nepalese hydro) projects, ranging in size from 400-10,000MW, that have attracted private sector interest.

‘It will take time for these projects to achieve financial closure,’ the World Bank observes, ‘partly because of the considerable preparatory work still to be undertaken, but also because of the lack of credit-worthy customers in India and the need to resolve downstream benefit issues.’ Since this is a clear, if indirect, reference to the market establishment issues India is addressing and the trust building measures taken on by SARI/E, Himalayan hydro is definitely ‘in’.

Environmental issues will not be much of a barrier. As an important marker, India’s first hydro IPP, the 400MW Maheshwar project, achieved financial closure in early July, despite being located in the Narmada river basin, a flash-point if ever there was one. The deal also accommodated a 50% rise in estimated costs to US$500M, caused in part by anti-dam activism.

In another show of support, the Indian Prime Minister Atal Behari Vajpayee laid the foundation stone of the 800MW, US$1B Koldam project near Mandi, Himachal Pradesh state. India’s power minister, P R Kumaramangalam, later signed a memorandum of understanding on 20 July 2000 with Jammu and Kashmir leader Farooq Abdullah, for NHPC to build seven new hydro projects in Kashmir by 2010, five of which are over 100MW. NHPC will hold minority equity in all the projects which are likely to be build, own, operate, transfer schemes.

And don’t forget Laos. Like Nepal, Laos is landlocked and can only achieve any kind of sustainable development by exporting hydro power. This has finally been accepted by the environmental community, which could therefore accept Nepalese hydro as well.

The signs for Himalayan hydro are exceptionally strong. It will probably take about five years for India to create the necessary commercially viable power markets. In the meantime, USAID and the World Bank will be preparing the regional foundations.