By: Ejaz Ayoub
J&K is going to host one of its first Global Investor meet on hydro-power in July 2018. This meet is aimed at addressing the financing needs of the proposed 20,000 MW hydro power potential of J&K. The event needs to be understood beyond a routine financing occasion. Especially when globally many hydro-power-projects are being dismantled and replaced by ecologically less demanding solar and wind energy options. There seem to be a number of deeper and wider geo-political and socio-economic equations which seem to be driving this hydro electricity renaissance in J&K.
No doubt the energy demands of our state are growing every passing year, but the economics unfolding in energy markets have already raised questions about the feasibility of capital intensive and ecologically demanding hydro electric power projects across India. With new low cost energy option like solar, wind and thermal available in the market, the survival of many existing hydroelectric plants is already in jeopardy.
We have a situation where in solar power distribution companies are disrupting the Indian energy markets by offering a per kilowatt hour of energy at as low as Rs. 2.44 while as in case of hydroelectric plants; the cost of production alone is approximately Rs. 5 per kilowatt hour. With such dramatic price disruptions, investing a fortune on a business model which is gasping for breath, demands a serious rethink. If the outsourced energy supply is available at half the price, there is no business sense in manufacturing it in-house. Now factor to it the changing water supply due to unpredictable weather vagaries on account of encroachng global warming, the hydro electric bulb seems to die sooner than later.
We learned enough lessons recently when PDC faced a daunting task of finding buyers for energy produced by Baglihar-II. The market prices were far less than the cost of production. The financial mess created by power expenditure in state finances across India can be gauged by the fact that GOI had to approve issuance of a special financial vehicle in the form of UDAY bonds for offloading the piled up debt from State Govt balance sheets. Just because power debt started piling up so much, J&K had to make a separate budget for its accounting. Given the prevailing norms and cost equations in hydroelectric industry, the fact is that the problem of cost and price mismatches is not going to get any better.
Globally, there is a tremendous shift toward cheaper sources of electricity which are ecologically and financially less demanding. Take for example China Pakistan Economic Corridor’s mammoth 17000 MW energy project. Over 70% of this production is expected to come from non hydroelectric sources like solar, wind and thermal.
There is no doubt that the proposed financing from the investors will come in the form of a long term debt. The pricing (interest rates) of which shall possibly be determined by an auction process. As per information available in some national newspapers, the projects shall have a 70:30 mix, with 70% as loan from investors and 30% as State’s own contribution. With empty state coffers, this 30% is possibly coming from centre, the conditions of which are still ambiguous as to whether it will be a grant or a low cost loan. But one condition available in public domain states that J&K has to commit to joint ventures with Central Public Sector Companies like the National Hydroelectric Power Corporation (NHPC), the Satluj Jal Vidyut Nigam (SJVNL) or others.
In both the cases the debt profile of our state is going to take a serious beating. Particularly, given the risk that the asset that shall be created with this huge loan will produce energy at a cost which might find no takers in the market flooded with low cost players.
Centre has never been so aggressive and prompt in approvals, clearances and sanctions. Take for example the environmental clearance of 800 MW Bursar power projects, which was done even without any site inspection. New Delhi seems to be in hurry and the possible reasons are pointing more towards geo-political objectives rather than socio economic endeavors. This time J&K should expect New Delhi very forth coming in terms of not just providing counter guarantees for the financing, but a major chunk of financing as well.
In the race of scoring goals with Pakistan and China, J&K will possibly be pushed towards creation of assets which are commercially not feasible. The time, financial costs and ecological damages are huge. The developments should be seen in the backdrop of Pakistan’s repeated objections in the light of Indus Water Treaty. Pakistan’s plea with World Bank against India regarding setting up of “Court of Arbitration” is still hanging. On the other hand Pakistan is also lobbying with China for using the Brahmaputra card to pressurize India. India meanwhile is trying to take full advantage of the time consuming procedures at World Bank and soft diplomacy with China. The paucity of time is what is driving entire machinery in New Delhi for expediting work in strategically important water resources in the vale of Kashmir.
No doubt building power projects is one of the great means of meeting the energy needs of the state and possibly generate big revenues for state exchequer, but for that to happen the revenue model needs to pass the test of economic feasibility. Moreover, the ownership dynamics of the assets created determines as to who the ultimate beneficiary of the fruits of development is. Otherwise, it will end up as the same old story of huge resources, poor policies and lifetime of earned economic slavery.
(Author is an investment and foreign exchange professional based in Mumbai)