Should the cost-plus regime for HEPs be extended?

The Task Force on hydel development in India, under the Ministry of Power, has recommended that the prevailing MoU regime for the award of HEPs, tariffs for which are determined on a cost-plus basis, should be continued till January 2016. This is in contravention to the National Tariff Policy, which stipulates that HEPs be awarded exclusively through competitive tariff-based bidding from January 2011.

• The task force has cited the high risks and uncertainties inherent to hydropower projects while recommending the extension. Given their location in hilly areas, sites for HEPs suffer from adverse geological conditions and natural calamities. Further, most hydel sites are also located in tribal areas, with their own specific land acquisition and rehabilitation issues. This is especially true for storage-based schemes, which are preferred over run-of-river projects due to the more efficient use of water. The committee feels that allowing cost-plus tariffs would help the project developers recoup some of the costs that may be incurred due to unforeseen events.
• On the other hand, allowing the states discretion in awarding projects leads to a lack of transparency in such project execution deals, in turn leading to higher end-use tariffs. In addition, the firms awarded a project do not have the incentive to economize their resources. And, assuming a competitive bidding scenario, could the winning entities simply not buy enough insurance to cover contingencies while covering the cost of the risk premium in the quoted tariff?