ACMA Membership Survey

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Financing Issues in Hydro Power Projects
9th ASSOCHAM Energy Summit August 24, 2006 New
Delhi
Dhruba Purkayastha General Manager
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Contents Hydro Power Projects
Current Business Models
Financing Issues
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Hydro Power Projects ..the plus side

• Non fossil fuel clean power
• Lowest lifetime cost of power generation
• Effective tool for load variation management-peak
  loads
• Socio-economic development of remote areas
• Energy security
• No fuel linked inflationary pressures/input price
  risks

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Policy directions are progressively ushering
competitive power sector market ..

• EA 2003 introducing
• Non-discriminatory open access to transmission at
  least
• ERCs to follow competitive bidding process
• CERC to advise GoI on promoting competition
• Controlling abuse of market power
• Competitive Bidding Guidelines
• Competitive acquisition of new generation
  capacity
• National Tariff Policy 2006
• Promoting retail competition
• Supporting competitive acquisition of generation
  capacity
• Enabling choice
• Supporting distribution reforms

Should work well with hydro projects also
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However there are some issues with hydro power
projects

• High capital costs, longer gestation periods
• Geological risks leading to increase in project
  costs
• Long delays in obtaining clearances land and R
  R
• Disputes between states locking up potential
• Rationalization of tariffs and tariff
  determination mechanisms

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Typical market analysis for creating generation
assets

• Current and forecasted demand supply position
• Merit order situation and likely projections
• Transmission constraints /corridor availability
• Credit worthiness of utilities /off-takers
• Typically would need a state wise analysis

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Contracting options for hydro power projects

• Merchant Power Plant
• Bidding in tariff based competitive bids to be
  floated by Discoms
• Long term sale of power to Traders
• Can be a combination of the above options

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Typical tariff estimation
Free power
Capital Cost
Design Energy
Cost Plus Tariff
Premium
Short Term
Saleable Tariff
Merit Order in Neighboring States
Transmission Cost
Long Term
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Likely saleable tariffs in some states

• Most of the long term agreements at lt Rs. 3/ unit
  
• Variable Charges lt Rs.2/unit
• But Merit Order needs to be projected
• Higher tariffs are unlikely

Note Only Variable charges Transmission
Charges, unit- paise/unit
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Short terms tariffs may be somewhat higher

• Since advent of trading, increase in prices
• 190 p/u to 350 p/u
• RTC - 350 p/u
• Peak- 400- 450 p/u

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Transmission Constraints may get eased over time

• In next 7 years 27700 MW of Interregional Link
  Capacity addition planned
• Substantial addition in North West, North- East
  link and North- NE
• Total Transmission Linkage from Northern Region
  added by 15500 MW
• But still intra-regional link capacity of
  HP/Uttaranchal/NE with neighboring states need to
  be validated along with the expansion plan

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1. Merchant Hydro Power Plant Issues

• Merchant Plant with Long Term reservation of
  Transmission network
• For Hydro plant utilisation of Transmission
  Network will be very low
• In case of change in buyer the Transmission
  Network might need to be reserved again
• Un-viable option
• Merchant Plant with Short Term reservation of
  Transmission network
• Sale in short term - peaking season high
  margins
• Risk of transmission network availability- every
  three months an issue
• Feasible Option

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2. Bidding in Tariff Based Competitive Bids

• Would need to compete with mine linked pit-head
  coal based power plants
• NE Hydro Plants - How will they compete in a
  scenario where shortfall is in the western ,
  northern and southern region ?
• Case 1 Standard Bidding Documents still not
  finalized by MoP ?
• Tariff Structure Single Part or Two Part tariff
• Hydrological Risk ?
• Capacity Index / Incentive ?
• Peak power can be priced at margin

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3.Long Term Agreement with Traders

• Traders can either participate in the tariff
  based competitive bidding or can sell power in
  short term
• While selling in long term / tariff based
  competitive bidding, what value addition a trader
  can provide ?
• Credit enhancement
• Bidding assistance
• Creating liquidity
• Need for power exchanges effective market
  clearing mechanism

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Contents Hydro Power Projects
Current Business Models
Financing Issues
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Key Risks associated with Hydro Power Plants.1

• Development Phase
• Non-fulfillment of any of the Conditions
  Precedent
• Issues in getting Environmental Clearance
• Difficulties in Land Possession i.e. RR related
  issues
• Non-Availability of Financing
• Issues in upfront equity Infusion
• Lenders issues with capital cost/ construction
  period in financial closure
• Construction Phase
• Geological Risks
• Delay in CoD, shortfall in tested capacity
• Force Majeure, EPC contractor non-performance
• Change in law leading to increase in project
  cost

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Key Risks associated with Hydro Power Plants 2

• Operation Phase
• Lower Capacity Index due to Force Majeure
• Change in Law leading to increase in additional
  OM expenses and additional capital investment
• Reduction in output of Power Plant
• Payment Default by procurer
• Exchange rate fluctuation

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Typical issues in financing infrastructure

• Size, tenure and uncertainty
• High transaction costs
• Improper risk allocation
• Need for efficient subsidization (in some
  cases)
• Lack of supportive legal and regulatory framework

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Supply side issues in Infrastructure financing

• Lack of long term funding sources
• Under developed debt markets
• Banks unable to prudently lend long term
• Absence of financial engineering/
  instruments/credit enhancement
• Securitization
• Bond insurance
• Risk guarantees

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Typical issues in financing infrastructure also
apply mostly to hydro power projects

• Improper risk allocation- design of
  concessions/PPP
• Lack of common enabling policy and regulatory
  frame works
• Lack of proper financial /lending instruments -
  credit enhancement securitization, bond
  insurance
• Need for private equity .

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Some questions in hydro power projects remain.

• Is it feasible to make the plant run as 100
  Merchant Plant ?
• Regulatory intervention is capital cost
  determination for merchant hydro projects
• Will there be a regulatory ceiling on the sale
  price, even for selling it on short term ?
• Feasibility of routing this power through a
  trader /Absence of power exchanges
• Reserving the transmission network without a
  power purchase agreement/MoUs

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Thank you