Private Hydropower Development In India And Neighbouring States: Opportunities And Constraints

I wish to thank the conference organisers for giving SMEC International the opportunity to present some thoughts on issues surrounding the potential for private hydropower development in India and in its neighbouring states. This is a matter which has preoccupied SMEC for some years now and continues to do so - it is also one of the major dilemmas facing global hydropower development in the next few decades.

I should perhaps begin by indicating what SMEC is and the perspective from which we approach this question. SMEC International is one of Australia's leading consulting engineers and project managers. We are about to celebrate 25 years of operation and our main business is infrastructure development in the Asia-Pacific region - specialising in hydropower, roads and water resources. I believe it is fair to say that SMEC is the most experienced Australian company in Asian hydropower with a track record of several dozen major projects in about ten different countries. SMEC has been operating consistently in India for about 10 years and has projects in various states in water resources, transportation and energy.

For more than five years SMEC has been working on the development of a private hydropower project in the far western region of Nepal with the power to be sold to northern India.

Electricity and Indian Industrial Development

Northern India is one of the world’s fastest growing industrial regions. As you know, the Indian economy has been growing at an average rate of around 7% for nearly a decade and shows no sign of reduction in the foreseeable future. One of the principal constraints to this process, however, is assured access to power. Although around 80% of the Indian population has access to electricity, outages are still common which is a serious problem for domestic and foreign manufacturing concerns. It is possible to overcome power shortages by installing private generators, but this means that power security is acquired in a very costly manner. The Indian Ministry of Power has estimated that an increase of installed capacity of 47,000 MW will be required during the period of the current five-year plan ((1997-2002) and 111,500 MW by 2007. In 1998 the installed capacity was 100,000 MW. Due to the poor financial state of most of the nine State Electricity Boards (SEBs), it is envisaged that a significant proportion of the new capacity will be privately financed.

Economic Reform and Private Power Investment

The power sector plays a prominent role in the Indian economic reform program initiated in 1991. The basic principles of power sector reform are well known and consist of the following objectives:

The institutional framework of power sector reform is extremely complex with a wide range of policy, finance and regulatory organisations involved at both Federal and State level. The principal organisations are:

This array of organisations with often overlapping functions and responsibilities has represented a major obstacle to private investors who have found it difficult to negotiate a way through the process to construction of plant and supply of power. Some of the constraints to private power development in India during the past decade have included:

I am pleased to be able to say, however, that during the past couple of years the Power Trading Corporation has emerged as a central negotiating body for foreign investors or power suppliers which has made the process of securing approval and licenses much easier.

Foreign commentators often claim that power sector reform and private power development in India have been unsuccessful. This is quite at odds with the significant achievements which have been made. The Ministry of Power figures indicate that since 1992 more than 30 private power plants have been commissioned with a total installed capacity of more than 5000 MW. The size of these plants has grown steadily over this period as investor confidence as increased. In addition, a series of proposals with installed capacity of several thousand MW are currently under development.

The Hydropower Potential of the Himalayan Range

Most of the potential for energy supply to Indian from neighbouring countries is related to the gas industry in Bangladesh and hydropower in the Himalayans states. It is not an entirely new idea that part of India’s long term electricity needs might be met from outside the country’s borders. India has invested in a hydropower project in Nepal which supplies power direct to the Indian grid. During the 1970s when the Mahaweli project was being planned in Sri Lanka it was envisaged that surplus power would be transmitted to southern India by submarine cable, though this was never realised in practice.

Most of the people present will be familiar with the Himalayas. The Himalayan region has a population of around 35 million people and very limited resources - there is scope for some light manufacturing, but the principal developmental potential is the utilisation of natural resources through hydropower, forestry and tourism. The region faces a number of developmental options, but it seems likely that hydropower will form part of the long term development strategy of all states in the region.

The hydropower potential of the Himalayas has been estimated in a number of different ways, but in terms of cost-effective capacity it is probably in the order of 60 000 MW to 80 000 MW (depending on the thresholds of financial viability). Only about 2 000 MW has been utilised to date, mostly in Nepal. To put this in perspective, this unutilised potential is almost equivalent to the total installed power capacity in India from all fuel sources. This indicates the scale of the resource with which we are dealing. There is a compelling logic to the linking of this massive energy potential with the growing demand for power in northern India which is emerging as one of the most dynamic regions of the world economy. For all practical purposes, the energy needs of the northern Indian states are limitless. However, in this paper I wish to look at a number of different factors which will affect the realisation of this potential economic link and indicate a range of obstacles which will need to be overcome for this potential to be fulfilled.

The Himalayas consist of four ranges extending about 2 500 kilometres from Arunachal Pradesh on the Tibetan border in the east to Jammu and Kashmir in the West. The mountains in the range are between 5 000 metres and 9 000 metres in height and fall steeply through sheer-sided gorges and river valleys to the northern Indian plain over only a few hundred kilometres.

The total land area of the Himalayas is about 600 000 square kilometres. Nineteen major river systems, including the Brahmaputra and the Indus, rise among the mountains. Our image of the Himalayas is dominated by jagged, snow-capped peaks, but in fact the bulk of this land area is below the snow line. The traditional economy is based on horticulture, livestock herding and crafts. The population is a mixture of Indo-Aryan and Mongol (primarily Tibetan), though there are many ethnic communities and ethnic distribution rarely coincides with political frontiers.

It is clear from the above figures that the distribution of settlement across the Himalayas is highly uneven, with some regions being subject to quite serious population pressures while other regions are very sparsely inhabited.

The physical geography provides excellent hydropower potential which was recognised very early in the history of modern hydropower. The first hydropower generation unit in the Himalayas was constructed, I believe, in Simla in the late nineteenth century and the first plant in Nepal was built in 1911. Nevertheless, there are a number of practical obstacles to the realisation of this potential. The region is quite harsh in climate and in some areas construction work is not feasible for a large part of the year. Many prospective sites are in quite remote locations and the infrastructure costs associated with their development are high. This inevitably pushes up the unit cost of installed capacity.

I will not dwell on the technical aspects of hydro development in the Himalayas which so fascinate engineers, but I would like to make the following general points:

. Remote location: Hydropower differs from other forms of energy generation in that the plant needs to be located at the energy source instead of the fuel being transported to a generating site close to the users. This means that hydropower sites tend to be quite remote - forcing up the infrastructure cost of construction and requiring investment in transmission facilities, often across long distances. The Himalayas are a dramatic example of this.

. Geological complexity: The geological structure of the Himalayas is quite intricate which means that extensive surveying and drilling investigations are required before the technical specifications of a hydro development and also its likely cost can be estimated. This increases substantially the risk finance required for initial appraisal.

. Seismic activity: The Himalayas generally are an area of quite high seismic activity due the collision of geological formations - some of the world's largest fault lines run through these ranges and earthquakes of up to 5 or 6 on the Richter scale do occur in some areas. This does not render hydro development impossible, but does mean that structures need to be strengthened to protect against potential earthquake damage.

. Management of sedimentation: In large scale storage dams it is important to provide as many mechanisms as possible for the discharge downstream of sediment during flooding periods. Excessive sedimentation reduces the sustainability of hydropower developments by limiting the economic life of the storage facility.

In this context I might also mention some of the longer term, strategic aspects of power development in the Himalayas. This region has been characterised for many years by an ongoing debate on the relative merits of small scale and large scale hydro development. In recent years this has crystallised around the plans for Arun III - a project with which many here will be familiar. Opponents of Arun III have argued that the same power need could be met by a series of mini or micro hydro plants which would not require dam construction. It is certainly true that a good deal of development in small scale hydro has been undertaken in the Himalayas dating back to the 1940s. SMEC has worked on both large and small hydro projects in Asia and my view is that the debate on their relative merits tends to miss the point that the functions of the alternative systems are quite different. Small scale hydro is excellent for village use and will undoubtedly play a prominent role in rural electrification in the Himalayas, especially in those remote locations which will probably never form part of a national or district grid. However, the second principal objective of hydropower policy in Nepal, Bhutan and the Indian Himalayan states is the creation a major export industry utilising one of the few natural resources available in the region. I believe that such an industry is feasible only on the basis of large scale plants capable of delivering sufficient quantities of power to the north Indian grid to make the massive investment viable.

Political Aspects

The Himalayas are a border region consisting of the following political entities:

. states of the Indian Republic (Arunachal Pradesh, Himachal Pradesh, Sikkim)

. independent states (Nepal, Bhutan)

. disputed areas (Jammu and Kashmir claimed by both India and Pakistan).

A number of ongoing political problems need to be taken into account in looking at the development of the hydropower potential of the Himalayas as a whole. These include:

. Delineation of frontiers: The Himalayas are remote and the precise location of frontiers is not always certain or even agreed between interested parties. Some participants in this conference may recall the brief conflict between India and China in 1962 over the location of their frontier area. Competing claims to Jammu and Kashmir by India and Pakistan are also well known in the world. The Hindu ruler of the province decided to join India in 1947, but this has always been contested by Pakistan on the grounds that the population is overwhelmingly Moslem. Control of the province is divided between the two countries and an uneasy ceasefire along these lines of control has prevailed since 1972.

. Dependence and independence of states: The states of northern India are by and large extensive and relatively wealthy - the states and provinces of the Himalayas are much smaller and economically weaker, and a corresponding tension exists between the Himalayan entities and India. In the end, these various entities must live together, but it is understandable that small autonomous states or provinces consider themselves to be unduly dependent on their powerful neighbour India. Despite the likely advantages to themselves, these entities are reluctant to become more integrated in an economic unit over which they will have little if any control.

. Equitable access to water supplies: Most of the major river systems in northern India rise somewhere in the Himalayas but are critical to the survival and prosperity of enormous communities living on the riverbanks downstream on the north Indian plains. Most of us here are familiar with the contentiousness of water usage rights in many parts of the world, such as the

Tigris and Euphrates in the Middle East which rise in Turkey and pass through various Arab states

the Mekong which rises in China and passes through Thailand, Laos, Cambodia and Vietnam

the Nile which rises in Ethiopia and passes through Sudan and Egypt.

In each of the above cases the use of water, the principles of allocation of usage rights, and the guarantee of seasonal flows are all highly charged political issues which are made more complicated by hydro development and irrigation. These issues need resolution within a framework of international treaties. However, continuing population pressures can make such arrangements difficult to sustain over time. As yet the hydropower potential of the Himalayas is relatively unexploited, but as hydropower development proceeds, it can only be expected that political disputes will begin to arise over the usage of headwater resources.

Environmental Aspects

The growing emphasis on environmental factors in energy development around the world will also affect the Himalayan region - perhaps more so because of its reputation as a pristine wilderness area beloved of western trekkers. I have no glib solutions for reconciling the competing demands of environmental protection and economic development. However, I would like to make a few points in relation to these matters as they affect Himalayan hydropower.

First, I wish to mention the question of national sovereignty. I pointed out earlier that the Himalayan region is characterised by a very limited resource base, primarily

. hydropower

. forestry

. tourism.

All of these sectors are vulnerable in an environmental sense. Of course, every effort must be made to develop these resources in a responsible manner. Yet in the end these resources are all that the Himalayan states and provinces have with which to earn their way in the world. We could perhaps envisage circumstances in which the aid donor nations agree to underwrite income levels in this region indefinitely in return for a commitment to environmental protection. However, in the absence of such an agreement by western nations, it is simply not reasonable to expect that some of the poorest communities in the world will abide by western standards of conservation. Electricity consumption is by no means the only indicator of economic wellbeing, but present per capita consumption in Nepal is less than 1% of the OECD countries.

The other factor I want to mention is the concept of sustainability which is so central to this conference. I acknowledge that there is inevitably some environmental price to pay for hydropower development - particularly large scale development which is likely to form the basis for a power export industry. On the other side of the balance sheet, hydropower involves

no atmospheric pollution

no greenhouse gases

no contribution to global warming.

As I understand it, one of the critical factors in climate change over the next few decades is expected to be the nature of energy and industrial development in India and China. The key issues will be:

. the extent to which coal will continue to provide the principal basis for energy generation in India and China

. the success in reducing the adverse effects of coal-based energy through clean coal technologies.

Fossil fuels (mainly coal) account for 70% of power generation in India at present and hydropower about 20%. There is no doubt that coal-fired power stations will continue to be built and operated in northern India in the decades ahead, but the future balance between coal and hydro is a key environmental issue. The future role of hydro will depend in part on the extent to which the hydropower potential of the Himalayas is developed as a substitute for some of the coal-based generation. I fear that in the foreseeable future we will be faced with a trade off between some degradation of the atmospheric environment or interference with the natural flow of river systems. You may believe that as a engineer specialising in dam construction and hydropower I have a vested interest in addressing that question, but in the end all parties interested in the sustainability of energy systems will need to set priorities in terms of various concepts of sustainability.

I would like to conclude my comments on environmental issues by leaving you with some thoughts which seem to be gaining ground concerning the long term scope for new energy systems without associated environmental costs. It may well be that given a long enough time period conventional energy systems are historically limited phenomena and will eventually give way to new systems which are as yet unimagined or which will develop rapidly in the next few decades. In centuries to come hydropower may be as redundant as, say, draught animal power in Europe today. When that time comes it may be possible to restore the river systems to their natural state if sufficient care has been taken to document the natural habitat and preserve plant and animal species. I do not claim for a moment that this would be technically straightforward. In Australia there is currently a discussion about the possibility of draining Lake Pedder in Tasmania which was dammed for hydropower development in the 1970s. I have no idea whether this is feasible or what would be involved in doing it, but this debate may be an indication that what were originally envisaged as permanent engineering structures - dams, power stations - may come to be regarded as temporary civil works designed with their eventual dismantling in mind.

Financial Aspects

Financing is emerging as the most critical factor in infrastructure development worldwide in the 1990s. I understand that financiers regard power plants as one of the most complex of infrastructure projects to finance because of the extensive network of agreements and interlocking arrangements which need to be put in place and reflected in contractual obligations. Of power projects, hydro projects are regarded by many financiers as especially complex because they have:

. high up front construction costs due to the need for dams

. long lead times (with consequent long loan terms)

. long working lifetimes.

The Himalayan states and provinces are not wealthy by any standards and the small size of their economies restricts to some extent their access to multilateral aid finance for hydro development. The need for hydro power therefore far exceeds what governments can finance, even with aid support. Clearly, private sector investment in Himalayan hydropower is essential if its potential is to be realised within a reasonable time frame. There are already moves in this direction, especially in Nepal, though to date on a fairly small basis.

Private financing of large scale hydro development in the Himalayas represents one the great challenges to project finance in the next decade because of its intrinsic problems. These include:

. very high construction costs by world standards due to remote locations and necessary strengthening against earthquake threats

. the long term financing required

. the need for transmission facilities, often across long distances

At present it seems that costs can be contained enough to make projects viable in the tariff range of US$ 0.07-US$ 0.09/kWh which is at the upper end of acceptable tariff levels for power utilities in northern India.

One of the unknown quantities of hydro financing in the Himalayas at present is the likely role of Indian capital. I mentioned political sensitivities earlier, and it is the case that independent Himalayan states are understandably reluctant to become excessively dependent on Indian investment in any sector of their economy. Whether questions of access and investor security can be overcome will determine to some extent the rate of commercial hydropower development in the region.

Profile of the West Seti Hydro-electric Project

SMEC has been engaged in the development of the West Seti Hydro-electric Project since 1992 when we signed a Memorandum of Understanding with His Majesty’s Government of Nepal (HMGN). This gives SMEC the exclusive right to design, build and operate the plant for a 30 year concession term including the construction period. The project is located in the Far Western Region of Nepal which is one of the poorest parts of the country. Technical features of the project are as follows:

. 195 metes high concrete faced, gravel fill storage dam

. storage capacity of 1483 million cubic metres of water

. 6.7 kilometre long 10 metre diameter headrace tunnel

. 750 MW capacity underground power station

. 169 GW/h energy production per month in the dry season and 366 GW/h in the wet season

. 400 kV power transmission line from site to the Indian power grid

. access roads to site (5 kilometres).

The total project cost will be in the order of US$ 1 billion.

SMEC’s role in the project is as follows:

. development manager

. equity stakeholder (with other investors)

. designer and construction supervisor

. operation and maintenance with an international operator.

SMEC has given particular attention to the Environmental Impact Assessment process. This was undertaken under Terms of Reference agreed with HMGN. The advice of the World Bank was sought on the process adopted. Discussions with NGOs and government agencies were held from the outset. The affected population of a few thousand people were consulted extensively from the concept stage onwards and support the project. The draft EIA report is open now for public comment in Nepal prior to being submitted to HMGN for approval.

SMEC is currently engaged in negotiations in India concerning a Power Purchase Agreement and in parallel discussions with prospective investors ,financiers and construction contractors. We expect to reach financial closure soon after signature of the Power Purchase Agreement early in 2001 and to commence construction later in that year. The construction period will be about five years.

The West Seti Hydro-electric Project will be the largest single foreign investment in Nepal to date. It is expected that other private hydropower developments will follow, but many developers are awaiting the outcome of the West Seti project before committing finance. The development process for West Seti has been pioneering for both SMEC and HMGN and many of the procedures for approval and regulation of such projects have been developed as the project has evolved.

Conditions for Future Development

I think it is clear from my comments so far that I believe the harnessing of the hydropower potential of the Himalayas is feasible in principle. The extent to which it will be realised depends primarily on a number of key factors falling into place. These include:

. Sound regulatory framework: There needs to be an effective framework for the development of hydro projects based on power exports to India. This needs to exist in India itself and in both Nepal and Bhutan. The framework needs to be comprehensive, stable, understood by all parties, and formulated with the needs of international investors in mind. The initial private power projects being developed in India are laying the basis for such a framework in regard to the purchasing of power from external suppliers by Indian utilities. Progress has been predictably slow in the early stages, but will proceed more rapidly as the parties gain experience and expertise.

. Investor safeguards: Since the development of hydropower projects for power sales to India will inevitably involve commercial finance, there must be internationally acceptable safeguards for investors in power projects. The capital markets in Nepal and Bhutan are in their infancy, but they are evolving quite rapidly and there is no reason why they should not prove adequate to this task, especially if international agencies provide technical assistance.

. International agreements: I believe that the full potential of Himalayan hydropower will only be realised if international agreements are in place which provide an environment of stability and confidence within which to negotiate investments which may last as long as forty years.

Patterns of Future Development

The harnessing of the hydropower potential of the Himalayas represents one of the great challenges in international hydro development into the next century. It will test the ingenuity of engineers, financiers, government officials and multilateral agencies. I am confident that if the conditions outlined above can be created, the process will go ahead, primarily because of the coincidence of the need for power in India and the need for export income in the Himalayan states.

The key features of this development are likely to be:

. Usage: The bulk of the new power developed will be sold to northern India, though some projects will serve both domestic and export markets.

. Scale: Relatively large scale projects (in excess of 300 MW) will predominate for power sales to India with smaller mini and micro hydro playing an important part in local supplies.

. Financing: Commercial financing will become increasingly important in Himalayan hydropower over the next decade and beyond with support from multilateral agencies being critical in mitigating the risks and financing costs involved.

. Environmental protection: Hydropower development is now an environmentally sensitive issue anywhere in the world, but especially in the Himalayan region. However, all potential sites are not of equal importance from the perspective of either conservation or resettlement. I fully expect that some potentially viable projects will not proceed at all on environmental grounds. Other projects will proceed, but invariably in a form which minimises the environmental impact of their construction and operation.

. Location: The first sites to be developed will be located at points close to the furthest extensions of the Indian grid in areas that are not politically in dispute.

Harnessing the hydropower potential of the Himalayas reflects a number of global trends in international hydropower development, for instance:

. Commercialisation: Private financing, ownership and operations to complement traditional public sector utilities.

. Internationalisation: In Europe and Asia electricity is becoming a traded commodity with cross-border. power sales more and more commonplace (eg in Indochina)

. Politicisation: Hydropower development is a topic of political controversy - between national governments as well as between governments and various interest groups - in a way that would have been unimaginable half a century ago.

Within this global framework I believe that hydropower development will continue to be an important component of any sustainable energy mix in Asia or elsewhere well into the next century. SMEC International intends to remain at the forefront of technological development in this historic process.