India - Upper Indravati Hydro Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4289-IN STAFF APPRAISAL REPORT INDIA UPPER INDRAVATI HYDRO PROJECT April 11, 1983 Regional Projects Department South Asia Regional Office This document has 2 restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Rupee (Rs) Rs 1 - Paise 100 US$ R Rs 9.5 l/ Rs 1 - US$ 0.105 1/ Rs 1 million US$ 105,263 1/ MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (m) = 0.6214 miles (mi) 1 Meter (m) = 39.37 inches (in) 1 Cubic meter (m) 1.31 cubic yard (cu yd) = 35.35 cubic feet (cu ft) 1 Hectare (ha) = 10,000 m2 = 2.471 acres (ac) 1 Kilogram (kg) = 2.2046 pounds (lb) 1 Ton (t) = 1 metric ton = 2,200 lbs 1 Kilocalories (kcal) 3.968 British thermal unit (Btu) 1 Kilovolt (kV) 1,000 volts (V) 1 Kilovolt-ampere (kVA) 1,000 volt-amperes (VA) 1 Megawatt (MW) 1,000 kilowatts (kW) = 1 million watts 1 Gigawatt hour (GWh) 1,000,000 kilowatt hours (kWh) ABBREVIATIONS AND ACRONYMS AG - Accountant General BSEB - Bihar State Electricity Board CIF - Cost Insurance Freight CAG - Comptroller and Auditor General CEA - Central Electricity Authority CESC - Calcutta Electric Supply Corporation CWC - Central Water Commission DVC - Damodar Valley Corporation FOR - Forced Outage Rate GOI - Government of India GOO - Government of Orissa IERD - International Bank for Reconstruction and Development IDA - International Development Association LOLP - Loss of Load Probability LRMC - Long Run Marginal Cost LTPP - Long Term Power Plan OSEB - Orissa State Electricity Board NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation GIPD - Orissa Irrigation and Power Department RE - Rural Electrification REC - Rural Electrification Corporation Limited REB - Regional Electricity Board SED - State Electricity Board UI - Upper Indravati WASP - Wien Automatic System Planning vBSEB - West Bengal State Electricity Board ORISSA'S FISCAL YEAR ENDS MARCH 31 1/ The US$/Rs exchange rate is subject to change. Conversions in this report are made at US$1 = Rs 9.5, the projected exchange rate over the disbursement period.  INDIA FOR OFFICIAL USE ONLY UPPER INDRAVATI HYDRO PROJECT STAFF APPRAISAL REPORT Table of Contents Page No: I. THE POWER SECTOR Background ..**.................................1 Energy Resources .................................... ............... 1 Past Bank Group Involvement in the Sector .............. ............ 4 Sector Institutions ........ ........................... ............. 5 Bank Group's Strategy. . .. . . ....................................... 6 Demand and Supply - Eastern Region ... ....... 7 II. THE BORROWER, THE IMPLEMENTING AGENCY AND THE BENEFICIARY Lending Arrangements ...................................... 9 Implementing Agency - Organization and Management .................. 9 - Project Management and Accounting .... ........ 9 Beneficiary - Organization .............. .......... ......... 10 - Management and Staffing ..... ................. 11 - Accounts and Audit .. . 12 - Insurance....... .13 III. THE PROGRAM AND THE PROJECT The Program .......... ................... ........................... 14 Existing Power System in Orissa .................................... 14 Objectives of the Project ........................ ........ 14 Project Description ... ........ 15 Transmission ........ . . . . ....... . .......... 15 Engineering .. ................................ ....................... 15 Project Management ................................................. 16 Operation of the Project ........................................... 17 Project Cost ........... ......................................... . ... 18 Construction Schedule .............................................. 19 Project Financing ..................................................... ..... 00.. 19 Procurement and Implementation ..................................... 19 Disbursements ............ . . 20 Land Acquisition .............................................. * ................. 20 Ecology . . ..... 20 Risks ...................... ,.. ... ,0 ..,.. ..,.. 21 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ( ii) Page no: IV. FINANCIAL ANALYSIS Background to SEB Finances .. ... 22 Orissa State Electricity Board Finances - Past Financial Performance 24 - Present Financial Position 25 - Billing and Collection 26 - Tariffs .26 - Financing Plan . , 27 - Transfer of Upper Indravati Hydro electric station 28 - Future Finances .29 Orissa Power Sector Financing Plan ..30 V. JUSTIFICATION AND ECONOMIC ANALYSIS Least Cost System Expansion ..31 Cost Benefit Analysis ................. ... .. ................... 32 Orissa Tariffs ...... 33 VI. AGREEMENTS AND RECOMMENDATION . ................... 35 This project was appraised by Messrs. K.G. Jechoutek (Economist), B.C. Davis (Senior Financial Analyst) and J.C. Ryan (Power Engineer).  (iii) ANNEXES Page no: 1. All India Sales and Energy Data 1974/75 to 1980/81 ............ 37 2. Previous Loans and Credits to Indian Power Sector 38 3. Rates of Return of SEBs FY1979 - 1982. ... .. 39 4. Eastern Region Capacity Expansion 1980 - 1995 .40 5. Growth and Pattern of Electricity Consumption. 44 6. Long Term Power Plan ... .46 7. Organisation of Orissa State Electricity Board . .58 8. Project Description ........... ... 63 9. Project Cost Estimate .67 10. Construction Schedule . ......... . ......... ..68 11. List of Contracts to be Financed .69 12. Schedule of Estimated Disbursements .70 13. Electricity (Supply) Act - Proposed Amendments October 1982 71 14. OSEB - Income Statement FYs 1976 through 1981 .... ............. 76 15. OSEB - Average Tariffs FYs 1977 through 1983 .................. 77 16. OSEB - Income Statement FYs 1981 through 1992 . ................. 78 17. OSEB - Balance Sheets FYs 1981 through 1992 . ................... 79 18. OSEB - Net Cash Generation FYs 1981 through 1992 .... .......... 80 19. Assumptions for Financial Projections ......................... 81 20. Power Sector Investment Program FYs 1983 through FY1990 85 21. CEA Norms for Estimating Capacity and Energy Availability 86 22. Economic Cost of the Project and the Thermal Alternative 88 23. Economic Justification: Results . .. 89 24. Economic Benefits ............................................. 90 25. Additional Transmission and Distribution Cost. .. 93 26. Economic Costs and Benefits of the Project. 94 27. OSEB Tariffs ....95 28. LRMC Estimates from OSEB and Bank Studies and OSEB Tariffs 97 29. Related Documents in the Project File. 98 MAPS IBRD 16546 Orissa Resources IBRD 16886 Upper Indravati Hydro Project Site IBRD 16887 Upper Indravati Hydro Project Area   INDIA UPPER INDRAVATI HYDRO PROJECT I. THE POWER SECTOR Background 1.01 The development of India's economy and the improvement of its people's standard of living depend to a large degree on the development of the power sector. Over the last two decades, power demand has grown twice as fast as the economy, and the power sector now takes the largest share of public investment (12% of the Sixth Five-Year Plan outlay). This was due to the rapid development of power intensive industry and the expansion of rural electrification for irrigation. 1.02 In spite of an increase in generating capacity from 5,600 MW in 1960 to about 35,000 MW in 1982, power shortages have been experienced in various parts of the country for a number of years, and gaps between supply and demand will impose major constraints for some years to come. 1.03 Before 1975, power facilities were planned, constructed and operated by each State to meet its own needs. Because of the rapid growth of the power sector (Annex 1), the Government of India (GOI) decided to create new institutional structures in the power sector, and to emphasize central planning of generation and high voltage transmission with the ultimate objec- tive of central control through a national grid. The Central Electricity Authority (CEA) performed studies of a national power system, and GOI decided to proceed with the construction of four large centrally-owned thermal power stations located at coal fields, supplying bulk power to the States through an interconnected 400 kV transmission system. The construction of these power stations (2,000 MW at Singrauli, 2,100 MW at Korba, 2,100 MW at Ramagundam, and 2,100 MW at Farakka) was begun with Bank Group financial assistance. The first phase of the program comprised the first stage of 600 MW at each plant, and its associated transmission. In addition, IDA Credits for the second stage of Singrauli (1,400 MW) and the second stage of Korba (1,500 MW), and a Bank loan for the second stage of Ramagundam (1,500 MW) have been approved. Energy Resources 1.04 Commercial energy accounts for about 46% of total energy used, the balance (54%) coming mainly from non-commercial sources such as firewood and agricultural and animal wastes. The main commercial energy resources are coal, oil, natural gas and hydro power. There are also resources of nuclear fuels, principally uranium and thorium. Some geothermal energy sites have  -2- been identified, but their potential appears to be small. Over the past ten years, total energy consumption has grown at an annual rate of about 4%. Consumption of commercial energy has increased by about 5% per year, slightly faster than that of non-commercial energy. Coal and hydro-power meet about 70% of the country's commercial energy requirements. The consumption of petroleum is relatively low in comparison with other developing countries, accounting for less than 20% of total demand for commercial energy. 1.05 Despite the low petroleum consumption, the extensive development of domestic energy resources such as coal and hydro power, and the recent development of off-shore petroleum resources, the country has not attained energy self sufficiency and remains dependent on imported oil to meet part of its primary energy requirements. Moreover, in recent years there has been a growing demand for petroleum products mainly because of difficulties in coal supply. The impact on India's balance of payments of the increase in world oil prices after 1973 is evident from the following: while oil imports grew by 40% (6.9 million tons) between 1973/74 and 1980/81, the cost of imports rose by some 800% from US$719 million in 1973/74 to US$6.5 billion in 1980/81, equivalent to more than 72% of India's merchandise exports. Domes- tic energy resources such as coal and hydro are large enough to supply most future commercial energy requirements, particularly for industry and for power generation. However, known oil and gas resources would not be suffi- cient to meet the demand for oil in sectors such as transportation and residential where scope for further substitution by other fuels is limited. Therefore, the exploration for new petroleum reserves and development of existing sources is one of the most pressing priorities. 1.06 Coal constitutes the main domestic source of commercial energy. Coal reserves to a depth of 600 m and of seam thickness of more than 1.2 m are currently estimated at 85.4 billion tons, of which 17.9 billion tons are of the coking and 67.5 billion tons of the non-coking variety. The Geological Survey of India has recently estimated that an additional 26.1 billion tons of coal deposits exist at depths below 600 m. 1.07 The economi'cally exploitable hydroelectric potential of India is estimated at about 400,000 GWh of annual energy generation which might sus- tain an installed capacity of 100,000 MW at 45% load factor. About 12,000 MW (one third of the total installed generating capacity) of hydro potential is developed, 4,700 MW is scheduled for commissioning by 1984, and a further 23,000 MW is under study for development. Some 70% of the total hydroelec- tric potential is in the north and northeast, in remote areas difficult of access. 1.08 India has sufficient reserves of uranium (34,000 tons equivalent of Uo0 , of which 15,000 tons is considered economically exploitable at current iAt rnational prices) and thorium to meet the foreseeable nuclear power program. The existing nuclear power plants have a total installed capacity of 860 MW, consisting of two boiling water reactor units at Tarapur in  -3- Maharashtra, and two pressurized heavy water reactor units at Kota in Rajasthan. In addition, two units of 235 MW are under construction at Kal- pakkam in Tamil Nadu and two units of the same size at Narora in Uttar Pradesh. It is planned to set up two new stations of two units of either 235 SW or 500 MW each. The construction of a prototype fast breeder reactor is in progress. It is expected that it will be possible to co-mission fast breeder reactors as part of the power system by the mid-nineties. Beyond the year 2000, fast breeder reactors may play an increasingly important role in nuclear power generation. An installed nuclear capacity of 5,000 MW has been visualized by the year 2000. However, given the limited options available for meeting the growing power demands and the likely role that nuclear power may have to play beyond the year 2000, GOI considers that it may become necessary to accelerate the nuclear power development to achieve an installed capacity of 8,000 - 10,000 MW by the turn of the century. 1.09 India's recoverable reserves of oil and gas are currently estimated at 6.5 billion tons of oil equivalent. Of this, proven recoverable reserves are about 360 million tons of oil equivalent, of which 294 million tons are oil and 66 million tons are gas. Over 60% of the recoverable oil reserves are offshore. 1.10 Domestic oil production currently meets about 40% of India's internal requirements. Gas production is estimated at about two million tons of oil equivalent, of which about half is used as fuel or feedstock for fertilizer plants and about half is flared, mainly because no market has yet been developed for it within a reasonable distance from its production sites. Pipelines to carry the gas to industrial centers are under construction. Fertiliser plants are under construction, and investment decisions have been made to build petrochemical plant, which will use the gas as feedstock. 1.11 In 1980/81 the power sector used about 44 million tons of coal equiv- alent 1/, representing about 40% of total consumption of commercial primary energy. Of power generated, 44% came from hydroelectric and nuclear plants, 50% from coal, and 6% from oil. Over the past ten years the share of coal in thermal generation has fluctuated between 85% and 90%, and this is expected to continue. The share of primary (hydro and nuclear) electrical energy in total generation has varied between 43% and 50%. It is expected that by 1987/88 the power sector will no longer use oil for generation. 1/ The following conversion factors were used: 1 ton of coal equivalent (or 7 million kilocalories) is equivalent to 0.72 ton of crude oil and 3,030 kWh.  -4- Past Bank Group Involvement in the Sector 1.12 The Bank has made thirteen loans for Indian power projects amounting to US$982.5 million, and fifteen IDA credits totalling US$2,096.0 million (Annex 2). Fifteen projects financed under the following loans and credits have been completed: ten generating projects, the Beas Project (Credit 89-IN), the first three transmission projects (Loan 416-IN, Credits 242-IN and 377-IN) and the First Rural Electrification Project (Credit 572-IN). The closing date of the Fourth Transmission Project (Credit 604-IN) was extended to June 30, 1983, in order to permit full implementation. The Third Trombay Thermal Power Project (Loan 1549-IN), Singrauli (Credit 685-IN), Korba (Credit 793-IN), and Ramagundam (Credit 874-IN and Loan 1648-IN) Thermal Power Projects, and the Second Rural Electrification Project (Credit 911-IN) are in advanced stages of implementation. The credit for the Second Singrauli Thermal Project (Credit 1027-IN) and the credit/loan for the first stage of the Farakka Thermal Power Project (Credit 1053-IN and Loan 1887-IN) were approved in May and June 1980. Korba II (Credit 1172) was approved in July 1981, Ramagundam II (Loan 2076) in December 1981 and the Third Rural Electrification Corporation Project (Loan 2165-IN) in June 1982. The first two units of Singrauli were commissioned on schedule in 1982. The third Singrauli unit and the first at Korba will be commissioned soon. The Trombay unit will be a few months late. The Farakka and Ramagundam projects are proceeding satisfactorily after initial delays. Disbursements for the Second Rural Electrification Project are on schedule and a satisfactory start has been made on the Third. 1.13 A Project P'erformance Audit Report on the Second Power Transmission Project (Credit 242-IN), issued on June 3, 1980, stated that the project had been successful in assisting nine State Electricity Boards in extending their transmission systems to help meet their growing requirements. Utilization of generating capacity in the nine SEBs exceeded the appraisal forecast. Institutional objectives mainly concerned the rehabilitation of the finances of the SEBs, and while the results achieved by project completion were modest, improvement was continued by the Third and Fourth Power Transmission Projects (Credits 377-IN and 604-IN). In FY 1980, seven of the nine par- ticipating SEBs reached their target rate of return of 9.5% (Annex 3). The conclusions of the Report pointed to: (a) the difficulty for the Bank Group in adequately supervising work other than procurement on the project, since it consisted of many sub-projects scattered all over India, and (b) the absence of a close working relationship between the Bank Group and the beneficiary SEBs, which made it difficult to attempt institutional improve- ments. The Report suggested that more direct involvement with the SEBs in projects of this nature, where an efficient intermediary is not available, would be beneficial. The Upper Indravati project provides the first direct involvement of the Bank Group with an SEB.  -5- Sector Institutions 1.14 The principal agencies in the industry are: the State Electricity Boards; the Atomic Energy Commission; the Central Electricity Authority; the Regional Electricity Boards (REBs); the central power corporations National Thermal Power Corporation (NTPC) and National Hydro Power Corporation (NHPC); and the Rural Electrification Corporation Ltd (REC). 1.15 The SEBs were constituted by the State Governments under the provi- sions of the Electricity (Supply) Act, 1948, to promote the coordinated development of generation, transmission and distribution of electricity in the most efficient and economical manner, and to control and regulate private licensees and utilities. The States effectively own or control over 90% of electricity supply facilities. While the SEBs are corporate entities and enjoy some autonomy in the management of their day to day operations, they are under the control of State Governments in such matters as capital invest- ment, tariffs, borrowings, pay scales and personnel policies. 1.16 The CEA was constituted in 1950 with responsibility for developing national power policy and coordinating the activities of the various agencies involved in electricity supply. Its powers were enlarged by amendments in 1976 to the Electricity (Supply) Act, 1948. It is now also responsible for the formulation and coordination of plans for power development, optimization of investments in the power sector for the whole country, development of interconnected system operation, training of personnel, and research and development. Its Thermal Department takes responsibility for monitoring the performance and maintenance records of thermal power stations, and for organizing the training of power station personnel. The Economic and Commer- cial Department accumulates data on economic, financial and accounting aspects of the power industry, both at Center and State levels, with par- ticular reference to the operations of the SEBs, and advises SEBs on finan- cial matters. 1.17 As a means of improving collaboration between SEBs and establishing Regional rather than State power systems, Regional Electricity Boards have been set up for each of the Northern, Southern, Eastern, Western and North-Eastern Regions. The general function of an REB is to operate its system to the maximum benefit of the Region as a whole, to coordinate over- haul and maintenance programs, to determine generation schedules and power available for transfer between States, and to determine tariffs for the transfer of power within the Region. At present, REBs function mainly in an advisory role. 1.18 Because SEBs had proved unable to build and maintain sufficient plant to meet the rising demand, GOI in 1975 incorporated NTPC and NHPC, whose main purpose is to construct, own and operate large central power stations. NTPC is at present building six large thermal power stations, while NHPC is build- ing three hydro stations in India. Both bodies also build, own and operate  -0- high voltage transmission lines and substations associated with generating stations. Althougnh the Center is becoming increasingly important in the sector, the SEBs viii continue to play a major role, particularly in hydro electric projects. The States own most hydro sites and are unlikely to turn over these sources of comparatively inexpensive energy to the Center. NHPC can develop hydro sites only when the water rights are clear and the State surrendered its claim on them. Bank _Group's Strategy 1 19 The Bank Croup's strategy in the Indian power sector has been to cooperate with GOI in finding solutions to the many difficult and politically sensitive problems confronting the Indian electricity supply industry. The Bank's main objectives in the sector are: (a) to eliminate power snortages by the installation of generation and transmission capacity, and the promotion of measures to improve the operation and maintenance of plant; (b) to introduce long range system planning on a nation- wide basis so as to assure implementation of a least-cost power development program; (c) to promote improvements in sector organization and training; (d) to strengthen the finances of the institutions in the sector, particularly the State Electricity Boards. 1.20 The States, through their Electricity Boards, develop and operate most power facilities. Under the Constitution, power supply is a concurrent subject, which meanis that responsibility is shared between the Central Government and the State Governments, requiring full agreement between them before action can be taken. Despite many difficulties, improvements achieved so far have been encouraging. With the establishmert of REBs, NTPC and NlIPC, important steps towards an improved organizational structure of the power sector have been made. CEA was reorganised and its powers were enlarged. Amendments to the financial provisions of the Electricity (Supply) Act clarified the requirements to be followed in setting tariffs, the finan- cial performance of SEB's has improved, most SEB's have completed tariff studies based on marginal cost pricing principles, and increased investment in the sector will accelerate the elimination of power shortages. 1921 Because of the rapid expansion of the power industry, all aspects of the sector needed to be reviewed and solutions found for its various problems; GOI established in 1978 the Committee on Power, which submitted its  -7- conclusions to GOI in September 1980. They refer to all major aspects of the power sector including planning, project formulation and implementation; operation and maintenance; organization and management; finance, financial management and tariffs; rural electrification; and research and development. The recommendations of the Committee on Power, most of which are satisfactory in light of the Bank Group's strategy, form a basis for improvement of all those aspects of the power sector. Implementation of the Committee's recom- mendations has already started with those aspects that do not require GOI's formal approval, such as better planning procedures and improved operating and maintenance management. Demand and Supply - Eastern Region 1.22 The major supply authorities of the Eastern Region, of which the Project forms a part, are the Bihar State Electricity Board (BSEB), the West Bengal State Electricity Board (WBSEB), the Orissa State Electricity Board (OSEB) which will own and operate the project when it is completed, the Damodar Valley Corporation (DVC), the Calcutta Electric Supply Corporation (CESC), and Durgapur Products Limited (DPL). All these authorities, with the exception of CESC, are publicly owned boards or corporations. Each owns generating facilities and supplies electricity to final consumers. The three SEBs and CESC supply all the final consumers in their areas. DVC's supply to final consumers is limited mainly to industrial consumers in the Damodar Valley. OSEB usually supplies surplus energy from its hydro stations to BSEB and some to Andhra Pradesh. The Eastern Region system is not yet fully integrated, the main reasons being a lack of interconnecting facilities, and operational problems that cause difficulty in maintaining frequency. Regional transmission lines, including some in the Farakka Thermal Power Project (Credit 1053-IN and Loan 1887-IN), are under construction and will improve parallel operation in the Region. 1.23 The total installed capacity in the Region in March 1982 was about 5,350 MW, of which OSEB accounts for about 17%. More than 80% of generating plant is thermal, making the Region vulnerable to unplanned outages of ther- mal units, which have arisen frequently in recent years, particularly in West Bengal. Orissa is exceptional, since only about 27% of its capacity is thermal. 1.24 During the late 1970s, installed capacity in the Region increased by about 4 to 5% per year. Availability, however, deteriorated during the later years, leading to a decrease in generation in 1979/80, and only small increases thereafter (Annex 4). Much of this was due to poor maintenance of thermal plant in the major SEBs, labor disputes in operations and coal supply, and institutional weaknesses of the SEBs. 1.25 The pattern of electricity consumption in the Region shows a predominance of industrial use, which accounts for about 70% of total con- sumption, compared with less than 60% nationwide. Railway traction also  -8- takes a larger share than nationally. Overall, consumption in the Region is thus even more industrially oriented than it is generally in India. This is oarticularly pronounced in Orissa, where about 85% of all electricity is supplied to industri