Stop building hydropower projects in the Northeast | Analysis
The Northeast in general, and Arunachal Pradesh in particular, is considered to have immense hydropower potential. Yet, what is little known is that these projects are financially unviable and are likely to burden India’s financial institutions with non-performing assets, while adversely affecting the health of state electricity distribution companies.
First, thanks to sustained investments, increased efficiency and attractive pricing in the solar and wind energy sector, and recently-commissioned power assets, there is a supply glut in the energy market. The market for energy is saturated and there is a negligible shortage in peak demand (which was only 0.7% in the last 18 months). This is likely to continue in the future, well beyond the current decade.
Over the years, hydropower has been justified as being necessary to provide power at night, when demand peaks and solar energy is absent. This rationale is no longer applicable for new projects, as hydropower loses ground to hybrid solutions — a mix of solar and spare thermal capacity, for instance — that offer round-the-clock power and are priced at low, competitive rates. Power storage — specifically battery technology — is rapidly evolving. A report by McKinsey & Company, The New Rules of Competition in Energy Storage, predicts: “The total cost of energy-storage systems should fall 50 to 70% by 2025 as a result of design advances, economies of scale, and streamlined processes”.
Second, the proposed hydropower projects in the Northeast are financially unviable and it is likely that most of them will end up as stranded assets. An analysis of the Etalin Hydropower (3,097 Megawatts) project shows cumulative cash flow during the loan life-cycle of 23 years to be negative, despite a highly favourable levelled tariff of Rs 4.32 per unit. At prices being offered in auctions for round-the-clock power supply today (prices are likely to drop further in future), the project will be unable to even service its loan of Rs 17,500 crore.
Third, there is a high risk of geological accidents: Arunachal Pradesh is categorised as Zone V (maximum risk) in the mapping of seismic zones in India, and there is a recent history of numerous quakes above five on the Richter scale. In 2011, an earthquake at the Teesta Dam site left 16 people dead and damaged the project. Regular landslides in the monsoons have also been disruptive. A study by the Institute of Earth and Environmental Sciences, University of Potsdam, Germany, estimates that at least 25% of hydropower projects in the India, Nepal and Bhutan’s Himalayas are likely to face severe damage from quake-triggered landslides. Then there are risks from glacial melt and lake bursts due to the unpredictable nature of the volume and velocity of the water.
Fourth, long gestation period: A hydropower project in Arunachal Pradesh will, realistically, take eight to 10 years or more to be operational, after considering the terrain, monsoon activity and the clearance of forest cover. The economics of power generation are likely to change substantially in favour of consumers in this decade, which will affect revenues and profitability.
Fifth, hydropower projects will lead to further deterioration in distribution companies (discom) finances. If the government supports the Etalin Hydropower project, for example, by mandating a Power Purchase Agreement at Rs 4.32, the estimated implicit taxpayer-funded subsidy (considering the current opportunity options available) would be about ~11,480 crore. This does not consider the inevitable power transmission losses from a remote location in the Northeast to its user destination. In a recent interview with the Mint, the chief operating officer of the Indian Energy Exchange predicted that, in future, the discoms would emphasise more on lowering costs and increasing consumer choices, which imply a lowering of tariffs and consequent increase in financial losses.
Sixth, hydropower projects in India have a notoriously poor record in engaging with local communities and their concerns of livelihood and displacement; these concerns have been met with indifference and, at times, force. The existing projects in the Northeast are no different and do not pass even the most basic tests in the social responsibility checklist that financial institutions seek from their borrowers.
Hydropower projects in the Northeast are today a poor financial investment and need to be shelved for the larger common good. Instead of providing subsidies to the power-generation value chain, the urgent imperative is to encourage power conservation (by introducing, for instance, a variation of surge pricing during peak hours), reduce distribution losses, promote optimum utilisation of existing energy infrastructure and popularise rooftop solar energy.
Gopakumar Menon has a PGDM from IIM (Bangalore), and is a consulting professional in the area of strategic planning and business viability, with about three decades of experience
The views expressed are personal