Baglihar II HEP:Is it really Water Cess or the High Construction Cost of the Project?

The project would be even more expensive than even Baglihar II since it will run only for a few weeks in year and its tariff has been estimated to be around Rs 9 per unit.
Baglihar II HEP:Is it really Water Cess or the High Construction Cost of the Project?
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In recent months there have been numerous articles and news reports about the inability of JKSPDC to sell the power generated by Baglihar II HEP. One would have loved to hear what the apologists for the 'contractor' and the poster boys of JKSPDC have to say in this regard but unfortunately they have chosen to remain silent. 

While we may debate and blame water cess for this, the fact of the matter is that it is the high construction cost of the project which is primarily responsible for the current situation. Universally, Stage II projects cost much less than a Stage I project since, amongst other things, a number of project structures are common with Stage I and stand already constructed. On a high level these are the project infrastructure, all the diversion works and a good proportion of the underground works. The main elements to be constructed for Stage II are only the water conductor system, power house cavern, gates and of course the generating equipment. Secondly, the geological surprises for 'to be constructed works' are virtually non existent in Stage II projects resulting in virtually no risk and thus lower costs. Thirdly, since the infrastructure and a number of project structures are already in place the construction duration of Stage II projects is shorter and thus interest during construction element of the project cost is also less. And lastly, during running of the plant, the Operation and Maintenance costs of Stage II projects are lower than Stage I because of available existing set up for Stage I. All these result in reduced cost of generation of energy from the project.    

But in case of Baglihar II HEP this is not the case. With a construction cost of Rs  7.3 crores per MW, the project is as expensive as any new green field project. In 2012/13 the going rate for new projects was Rs 7 crores to Rs 8 crores per MW. And this is the primary and the only reason for the current situation.  

While the construction costs of Stage II projects is low, correspondingly the annual energy yield from these projects is also low as compared to Stage I projects since they operate only for a few months in a year. The general rule of thumb for a good project is 4.5 MU of annual energy yield per MW. In this particular case of Baglihar II this is less than 2.9 MU per MW. On the other hand for Baglihar I it is exceptionally high at 6 MU per MW – it actually means that Stage I undersized and should have been built with a larger installed capacity, of say 600MW. This high annual yield of energy is precisely the reason why Baglihar I is still giving returns even at an astronomically high construction cost of Rs 13 crores per MW. 

Coming back to costing of Baglihar II HEP, the construction cost should have been a little over one third of what it cost JKSPDC. On a straight line principle the saleable rate of energy would then have been around Rs 2.20, including water cess. At this tariff JKSPDC would have had buyers lined outside its office to buy the power.  

With regard to water cess it is applicable to all hydro power projects in J&K irrespective of whether they are operating in central, state or private sector. The central regulator allowed the water cess to be included while determining the tariff and thus for the NHPC operated projects it is charged from the consumers. On the other hand the state regulator disallowed it and JKPDD was to absorb this additional cost.   

Various options to reduce the tariff are reported to be under consideration of the government with one of them being waiving off the water cess for Baglihar II to make the tariff competitive. That is the last thing one would want the government to be doing. It is better to sell energy at a loss rather than exempt the project from water cess. Both the cases mean a loss of revenue to the state exchequer. However, any decision to provide an exemption to Baglihar II can have other serious ramifications, besides the revenue loss. It will unnecessarily open the Water Cess Act to discussions, deliberations and possible litigations where the government will find itself on weak ground.   

The foremost impact of exemption could be on the water cess collected from NHPC projects. What would prevent NHPC from seeking a similar exemption for all their operational projects in J&K. Since the promulgation of the Water Cess Act we have received more than Rs 3400 crores from NHPC as water usage charges. With the imminent commissioning of 330MW Kishanganga HEP, we should be getting about Rs 500 crores annually from NHPC just on account of water cess. Jeopardising or risking this large revenue to state by exempting Baglihar II from water cess, where the total annual water cess amount is going to be only Rs 100 crores, is not the most sensible thing to do. If not for all, NHPC can still seek exemption for high cost projects like Nimo Bazgao, Chutak and Kishanganga HEP to make their tariff competitive – the same logic as for Baglihar I. 

Besides the option of absorbing the loss of on account of reduced tariff, the other option the government could consider is to provide a large grant to JKSPDC so that it does not have service any debt for the project. This could reduce the tariff from Rs 4.4 to Rs 3.6 per unit. Various other options could be also considered to reduce the tariff. If the government could grant exemption of entry tax amounting to around Rs 1200 crores (effectively a loss of revenue to state exchequer of the same amount) to 1000MW Pakal Dul HEP to make it viable why cannot it do something similar for Baglihar II rather than alter the existing water cess act which could have other wider ramifications as highlighted above.      

Today the situation has come to a point where JKSPDC should forget the return on equity and instead focus on cutting their losses. Currently the power is being sold to JKPDD who do not pay JKSPDC with the result that it is not able to service the debt in a timely manner. It is time for JKSPDC to bite the bullet and sell it to a utility, even at a reduced tariff, who can provide it payments in a timely manner so that it can at least service its debt.         

And not learning from this, I recall reading some news reports sometime back that the Government/JKSPDC is planning for Baglihar III HEP. The project would be even more expensive than even Baglihar II since it will run only for a few weeks in year and its tariff has been estimated to be around Rs 9 per unit. 

Iftikhar A Drabu is a civil engineer from NIT (previously REC), Srinagar

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