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India plans to extend cost-plus tariff regime

According to reports, to hasten the growth of hydropower generation capacity, India plans to extend the so-called cost-plus tariff regime for setting up such capital-intensive projects till 2022.

This means the utilities will get to charge a price that factors in their cost and a certain return. The cost of installing one megawatt (MW) capacity in a hydroelectric project is Rs.6-7 crore. A cost-plus model, currently applicable till 2015, promises assured returns over the investment made and comes in the backdrop of hydropower capacity comprising only 17.55% or 39,623 MW of India’s installed power generation capacity of 225,794 MW.

“The cost-plus model is up to December 2015. We are trying to extend it up to the 13th Plan period (2017-22). Nobody is calling tariff bids for purchasing electricity generated from hydropower projects,” a government official said, requesting anonymity. “This (the proposed extension) will promote hydropower.”

Such a move will have a direct impact on state-run NHPC Ltd, North Eastern Electric Power Corp. Ltd, Satluj Jal Vidyut Nigam Ltd and Tehri Hydroelectric Development Corp. Ltd, besides private firms.
With hydropower holding the key to meet the country’s peak shortage, India’s power ministry may move a cabinet note on the issue. It comes at a time when thermal projects are awarded on the basis of tariff-based competitive bids.

“This (the latest proposal) will require amendments in tariff policy,” another government official said, also declining to be named.
Competition is key to keeping prices in check through a reduction of capital costs and greater operational efficiency, according to the power ministry’s tariff policy of 2006.

India’s efforts to build large hydroelectric plants have run into trouble. Many projects have been delayed due to construction risks on account of contractual and land acquisition problems, geological issues and natural calamities. The recent floods in the Himalayan state of Uttarakhand have also ignited a debate on the damaging consequences of unplanned building.

The government is worried about the shrinking share of hydropower in India’s energy basket. Hydroelectric projects with a capacity to generate 16,754 MW of power—enough to meet the demands of states such as Uttar Pradesh and Punjab—are awaiting environmental clearance, even though they have been cleared by the Central Electricity Authority, India’s apex power sector planning body, Mint reported on 23 August.

To be sure, executing a hydropower project is a time-consuming and tedious process. It includes a thorough survey and investigation, detailed project report preparation, relocation and resettlement of the affected population and infrastructure development. On average, it takes around five years to execute a hydropower project after it is cleared for construction.

“Conventional energy occupies a major share of the energy mix in India,” said a report on India’s energy security released on 3 September by audit and consulting firm PwC India. “Other fuels such as nuclear energy, hydroelectricity, other renewable fuels like solar, wind and geothermal, biomass and others form only 8% of the total primary energy consumption in 2012.”

“Hydroelectricity constituted 5% and other renewable energy constituted 2% of the total primary energy consumption in India in 2012,” said a report prepared for the Federation of Indian Chambers of Commerce and Industry, a lobby group.

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