Bhutan’s Hydro basket gets smaller as India becomes power surplus and tariff rates drop

From 2008 onwards the ‘10,000 MW by 2020’ was projected as the solution to all of Bhutan’s economic woes, and the main basis by which Bhutan would become economically self sufficient. The basis being India’s perennial power shortage and the huge expected demand of the future.

It was for this reason that Bhutan essentially put its economic eggs in the hydro basket investing the maximum resources, effort, time and even political capital on the projects. Various economic projections were also made showing huge amounts of revenue coming in and Bhutan turning into a self sufficient economy by 2020.

However, all of this has now been shaken to the core with India turning power surplus in its 2017 April to 2018 March financial year.

Surplus India

The Central Electricity Authority (CEA) which is India’s main electricity regulator in a recent statement said that overall India would have a power surplus of 8.8 percent in the current fiscal year of 2017-18. The agency had already forecasted this in its 2016-2017 report.

An influential Non-profit organization called ‘Prayas’ that specializes in Energy and sits on several power related advisory committees of the Indian government has authored a detailed report titled ‘The Price of Plenty- Insights from ‘surplus’ power in Indian States,” released earlier this year.

The report details India’s problem of plenty in power and how it will continue to get worse in the coming years as more projects come online. Worryingly, one of the report’s main solutions is to avoid bringing in extra capacity or projects online.

Apart from this, several Indian news reports have also started to highlight the problem of plenty for India’s power market.

Barring the six Indian states of Bihar, Jammu and Kashmir, Kerala, Jharkhand, Arunachal Pradesh, Uttarakhand and the Union territory of Chandigarh the rest of India’s 23 states and six union territories are power surplus.

In fact other Indian states have so much power that a lot of their power plants are not operating at full capacity.

‘Surplus power,’ is actually a misnomer as India is still yet to provide electricity to 55 million households and there are frequent power cuts in even big cities.

The problem in many ways is twofold. One is that India has massively added power generation capacity by building power stations and projects and ensuring more efficacies in supply of coal etc in the 11th and 12th five year plan (which ends in 2017), due to an overestimation of demand.

However, it has not solved the problem of insolvent power distribution companies (DISCOMS) at the state level.

The state level DISCOM are essentially not buying power due to their power financial health brought about by free or discounted power supply schemes of politicians, power theft, tariff rate issues and inefficiencies.

So while on the ground level there is need for power the problem is the ability to pay for it.

The DISCOMS in 2015 had accumulated loss of INR 3.8 lakh crores and outstanding debt of INR 4.3 lakh crores. Though many have become solvent for now by a debt transfer scheme of the Power Ministry the core problems remain.

According to Prayas the over capacity is set to continue for many years to come in the medium term as there are many projects in the pipeline that are coming online in India. The situation is such that even newly commissioned projects in India are not used to full capacity with high idle time.

The increase to open access or power markets, migration to captive power options where industries create their own source of power and the proliferation of renewable power, whose costs are declining rapidly, will all mean that demand for power will not be as high as is projected by state DISCOMs.

Prayas says that the possibility of increased industrial and economic growth does not, in today’s dynamic situation, necessarily imply an increase in demand for power, as consumers can migrate to other sources of supply.

It points out that the quantum of surplus will be further exacerbated even if the renewable energy target of 175 GW by 2022 for India is met only in part (say 40% to 70%).

Its report recommends that India stop adding surplus capacity. It also recommends that since power surplus is not a temporary phenomenon DISCOMs should commit to signing new power purchase agreements only after a robust and consultative process to establish the case for additional power procurement.

Falling tariff in India

One direct impact of the surplus in India is that tariff rates have seen a dramatic drop in the last few years.

The Indian Power Exchange saw the average rates of selling power from Nu 7.31 per unit in 2008-09 drop down to Nu 3.51 in 2014-15.

Another major energy trading exchange named the Indian Energy Exchange as of 21st July, 2017 saw power selling at an average rate of Nu 2.73 per unit.

What is a bigger concern is that on the same day 206,712 million units were on sale but only 138,258 million units were bought on the day. This has been the trend on this exchange site along with others where there are more sellers then buyers and the tariff rates have been consistently low.

Ironically, only a few years ago it was at these power exchanges that one could sell power at the highest rates.

Only recently the Indian Power Minister had declared that his goal was to have power at not more that INR 3 per unit from all sources.

Impact on Bhutan

For Bhutan all the above is not good news as our entire hydro project sector is premised on the shortage of power in India and its unlimited market.

This puts a shadow on the ongoing hydro project construction of 1,200 MW Punatsangchu I, 1020 MW Punatsangchu II, 720 MW Mangdechu, planned four joint venture projects in 770 MW Chamkarchu, 600 MW Kholongchu, 180 MW Bunakha and 570 MW Wangchu and under process mega reservoir projects like 2,560 MW Sunkosh and 2,640 MW Kuri Gongri.

The impact for Bhutan could be two fold. One is that with India already saying that 10,000 MW by 2020 would not be possible, a power surplus in India raises a question mark on the projects in the 10,000 MW basket which have not yet been approved.

The second issue could be with tariff setting for upcoming projects and tariff negotiations for existing projects. While Bhutan’s bilateral projects base the tariff on cost plus model which takes into account the cost of the project along with a return for the project, very low tariff rates in India could have a bearing on the tariff setting of new projects.

A early 2013 report by the DGPC had calculated that given the then estimated project completion costs the tariff of  P I would be around Nu 3.50 and for P II and Mangdechu it would be around Nu 3 per unit. This tariff rates is expected to increase as the project completion costs now are even higher.

The tariff increase for an existing project like Chukha is already seeing the effect with representatives from the India side pointing to low tariff rates in India.

Apart from this existing 126 MW Dagachu project and the upcoming 115 MW Nikachu project of the Druk Green Power Corporation (DGPC) will also be affected. The Dagachu project where Tata Power is a minority partner has already been seeing the effects with Tata power unable to sell the power at the higher rates that had originally been envisaged.

Under a 15 year purchase agreement Tata Power is currently paying Dagachu Nu 2.90 per unit with a two percent escalation every year though it is understood to be selling the power for less in India. Bhutan would have gotten a good share if Tata power could sell the power at higher than Nu 2.90 rates.

However, in addition to enduring a loss Tata power has not been allowed yet to sell its power at the power exchange market by the Central Electricity Regulatory Commission (CERC) whose decision is still pending after Tata filed an appeal in February 2015. The CERC itself was waiting for directions from the Ministry of Power on cross border trading of power through the Indian Power Exchange.

Interestingly the National Load Dispatch Center (NLDC) of India which is a fully owned subsidy of the Power Grid Corporation of India Limited an Indian government owned company said in 2016 that presently only India has Power Exchanges. It said when multiple sellers from Bhutan sell power at Power Exchanges in India, the discovery of the real price of power from Bhutan will happen in India.

The Power Ministry in 5th December 2016 issued the Cross Border Trade in Electricity (CBTE) guidelines which among other things does now allow Bhutan access to India’s Primary Power Exchange market and restricts sale of Bhutanese power to only secondary markets.

The primary power market is where the best power tariff rates are available as power buyers come and buy what power is available from the power market. Once the primary market purchase is done then only the secondary market is left where good rates are not available.

A safety net for the bilateral projects is that at least there is an implicit and later a power purchase agreement to buy power from such projects but there are no such guarantees for projects like Dagachu and Nikachu.

Nikachu currently has an agreement to sell power to the Power Trading Corporation of India.

Way out for Bhutan

To address the above issues and other issues related to hydropower, the government has constituted a high level Hydropower Committee composed of high level relevant experts. Apart form other issues they are also looking at this issue of surplus power in India along with falling tariff rates.

The result of the study by the committee is expected to play a significant part in the government deciding on the future of hydropower in Bhutan given its various implications.

This is one reason why Bhutan is currently already on a ‘go slow mode’ on its Joint Venture projects given several financing and viability issues.

One bright spot for Bhutan is that most of the capacity addition in India is thermal and it is also thermal power causes pollution.

So given that Bhutan’s hydropower power is already competitively priced it could play an important role in India’s renewable energy mix targeted at 175 Gigawatts by 2022. Until recently only hydro projects below 25 MW were considered as renewable in India but the Power Ministry, to help its own hydro sector has finalized a policy that says that all hydro mega projects would be considered as part of the renewable energy mix. However, this applies only for hydro projects that come on stream by 2022.

Being a part of the renewable energy mix will mean more priority in terms of purchase of power as power companies will mandatorily have to purchase some power from the renewable mix.

India’s CBTE guidelines that restrict the type of hydro investment in Bhutan and hydro trade by Bhutan is a major hurdle, but Bhutan has already taken the matter up with New Delhi and so far New Delhi has clarified that Bhutan will be put in the case by case basis for special clearance.

DGPC Managing Director Dasho Chhewang Rinzin said that India will require substantial input in hydropower to balance solar and wind which are less reliable. He said that in the future cost of LNG and also imported coal would keep going up. Dasho said that power prices will not remain suppressed in the long term.

The Prime Minister Lyonchhen Dasho Tshering Tobgay said that as far as Bhutan’s bilateral hydro projects with India are concerned he said they all have guaranteed buy back from India. Lyonchhen also pointed out that the tariffs for the projects set on a cost plus basis ensure profits and return for Bhutan.

Another hope is given that the hydro projects between India and Bhutan are not just normal economic projects but also have a political and strategic dimension, India would ensure that these projects in Bhutan are given adequate priority. Hydro projects form the largest portion of revenue for the government.

However, whatever the course ahead Bhutan will have to do some clear headed calculations and thinking along with preparing for detailed negotiations, while India will have to show some large heartedness given that hydropower over the years has become a central pillar in Indo-Bhutan ties.