Risk return analysis of CDM small hydro power projects in India

Abstract

Limiting the emission of green house gases from power generation will depend among other things on continuing and increased use of hydroelectric power. India has vast untapped hydropower resources, only 23 percent of which has been harnessed so far. Increasing the use of hydroelectricity is among the top priorities of Government of India. The target is to increase the portion of hydroelectricity from current 25% to 40%. In particular small hydro-power (SHP) has an estimated gross potential of more than 15000 MW. Also SHPs are more viable and feasible for India because of its dense population, earthquake prone landscape. The impact of SHP on environment and neighboring society is minuscule when compared with large hydro-power projects with large dams and reservoirs. In spite of all these visible benefits, development of SHP was quite slow in India because of low ROC and Internal Rate of Return. SHPs were financially not viable for most of India’s private sector. Also risks like natural risks, PLF uncertainty risk, political risks, technology risks and High Initial Installation cost make these SHPs unattractive. Introduction of Clean Development Mechanism (CDM) under the Kyoto Protocol is an attempt to increase the IRR and ROC of the projects to compensate for these risks. CER generated through CDM at one hand increases the mean IRR and ROC of the projects but on the other hand increases the uncertainty about the revenue stream. The aim of this project is to quantify risks and returns associated with any CDM Small hydro-power (Run-of-the-river) projects and data from all the SHPs which have applied for CDM under UNFCC has been used for this quantification. Only run-of-the river has been considered in this project because of the fact that they constitute largest part (70%) of all the SHPs and also they are the most environment friendly among all the hydro-power projects. Only quantifiable uncertain variables like PLF, Tariff, Installation Cost, Number of CER generated etc and certain variables like running cost per MW capacity etc. has been considered and used to accurately determine the risk and return with SHP.