National hydro policy to meet India’s power demands

By Akshay Jaitly, Shailendra Kumar Singh and Anuja Tiwari, Trilegal
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The Ministry of Power (MoP) recently published the National Hydro Policy, 2008. The need for quicker harnessing of the country’s hydro potential was the stated objective for formulation of the policy.

Akshay Jaitly Partner Trilegal
Akshay Jaitly
Partner
Trilegal

Hydro power, also known as hydraulic or water power, is a system that converts the captured energy of flowing water into electricity. It is a renewable, efficient, non-polluting and environmentally friendly source of energy.

Overcoming India’s dire need for reliable power supplies is essential to the country’s development. According to the World Bank, power shortages and the lack of sufficient electricity severely hinder India’s economic development, affecting commercial productivity, disrupting education, contributing adversely to health problems and increasing the costs of doing business in India.

As a result, part of the Indian government’s efforts to aid economic growth and human development, involve the provision of reliable access to electricity for all its citizens by 2012.

Why a “national” hydro policy?

States in India with the potential to generate hydro power, such as Himachal Pradesh, Uttrakhand and Sikkim, have existing hydro policies, however, other states like Arunachal Pradesh do not.

Given the differences in various state hydro policies and their history of being marred by litigation, the introduction of a national hydro policy is a welcome initiative.

Apart from assuring standard regulations for projects, the policy addresses some of the practical problems faced by developers and is an effort to provide feasible solutions to them.

Some of the problems faced by developers in implementing hydro projects include logistical quandaries in terms of projects located in remote areas with inhospitable terrain. Projects of this nature require additional clearances, such as forest and wildlife clearances and extra infrastructure development to access the site and overcome natural hazards such as landslides.

Rehabilitation and resettlement issues create further problems and varied geological uncertainties such as underground lakes, with cost implications, make it difficult for developers to participate in tariff-based competitive bidding.

Shailendra Kumar Singh Senior associate Trilegal
Shailendra Kumar Singh
Senior associate
Trilegal

Salient features

The salient features of the policy include requirements for the allocation of sites through a bid process for the development of projects, with selection based on financial strength, experience and track record, discouraging negotiated memorandum of understanding based projects.

The policy prohibits tariff-based bidding until January 2011 as well as the recovery through tariffs of any expenditure incurred or committed to be incurred by developers for the allotment of the site. Instead, the policy allows 40% of energy generated to be sold on a merchant basis for the recovery of such expenditure.

Further, the funds received from the sale of 1% of the power are required to be contributed towards local area development. This is in addition to 12% of free power which must be provided to the host state.

Positive steps

The MoP has constituted a task force on hydro power to undertake an optimization study to identify better locations for projects, along with cost-effective and coordinated infrastructure development opportunities for roads and power evacuation.

The ministry is also creating model contract documents for public and private sector developers to reduce costs and is working on publishing pre-feasibility reports as a starting point for the preparation of detailed project reports (DPRs) to prevent implementation delays.

Will it work?

Although the policy encourages private sector participants to invest in power projects and promises to encourage the optimal development of hydro projects in the country, it neglects certain issues.

Anuja Tiwari Associate Trilegal
Anuja Tiwari
Associate
Trilegal

While providing for a local area development fund, the policy does not clarify the manner in which the fund will be utilized.

State governments typically insist on upfront payments from developers before allocating hydro projects and payments are made even before DPRs are prepared. Further, the refund basis of such payments in the event that the project does not go ahead, remains unclear in the state policies and is not addressed by the national policy.

The policy also fails to deal with the critical issue of jurisdiction of the different states on the development of inter-state river basins.

In spite of the policy’s limitations, the MoP has made a positive start by encouraging consistency and transparency in the development and operation of hydro projects and should contribute to developing India’s hydro potential.

Akshay Jaitly is a partner, Shailendra Kumar Singh is a senior associate and Anuja Tiwari is an associate at Trilegal in Delhi. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.

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