The government of Arunachal Pradesh plans to scrap the hydroelectric projects awarded to India’s largest power generation company, NTPC Ltd, because it claims the state-owned firm is not “keen and committed to develop the projects".

The move, apart from being a major embarrassment to NTPC, will also affect the company’s plans in the hydro-electric sector.

Power ambitions: NTPC’s hydro project under construction at Kol dam in Himachal Pradesh. The firm has bet big on hydro-power generation with an aim to become an integrated utility with a diversified fuel mix

NTPC had not “responded to our demand of an upfront payment of Rs225 crore and not done any work on the site. Though it has now been a year, they are yet to carry out even the geological and resettlement and rehabilitation (R&R) studies for the site. We are planning to re-tender the two projects," said T. Norbu, Arunachal’s power secretary.

The projects have a combined capacity of 4,500MW.

The Rs225 crore would have gone to the state’s treasury; Arunachal Pradesh wants NTPC to pay Rs5 lakh per megawatt as the upfront payment. Such payments are standard practice in the industry, said an expert.

“Power projects in the state are now awarded on competitive bidding basis, wherein one of the main criteria of awarding the project is the upfront payment offered to the state government along with the free power and contributions to state funds for area development. Projects of such size could fetch upfront payments to the tune of Rs130 crore if offered to private players," said Abhishek Puri, an analyst with ASK Securities.

“We can’t make this payment because we are a public sector unit and (have to follow the) the guidelines laid down by the Central Vigilance Commission (CVC). We have declined to do so," said a senior NTPC executive who did not wish to be identified.

NTPC had signed an agreement on 21 September 2006 with the state government for the implementation of the two projects at Etalin (4,000MW), and Attunli (500MW) at an estimated total investment of Rs22,500 crore. Other state-owned firms that won similar projects from Arunchal Pradesh at the same time were National Hydroelectric Power Corp. Limited, or NHPC, (4,500 MW) and North-Eastern Electric Power Corp. (1,230 MW).

Norbu said NHPC has already made its upfront payment. “We do not want to depend on NTPC for the development of these projects. They may be good for thermal power project development but I think they are facing some difficulties in developing hydroelectric power projects," he added.

NTPC has bet big on hydro-power generation in an attempt to become an integrated energy utility with a diversified fuel mix. The company currently has a hydel project (800MW) that is under construction at Koldam in Himachal Pradesh.

“The projects were in initial stages of site study. Stripping such projects from NTPC could be a setback for the company. While they were not factored in the current valuations for the company, still it may act as a minor dampener to the current bull run in the stock," said ASK’s Puri.

NTPC shares closed at Rs226.8 on the Bombay Stock Exchange on a day when the exchange’s benchmark index rose 3.5% to 19,058.67. The shares closed very near their 52-week high of Rs232.4.

Not everyone shares Puri’s view. “Although not a major blow for the company, it may affect the NTPC’s project development plans in the hydroelectric power space. Nuclear could be a (greater) priority area for the company than hydro," said Hitul Gutka, an analyst at Mumbai-based India Infoline Ltd.

NTPC currently has a power generation capacity of 27,404MW, which it plans to increase to 50,000MW by 2012. Of the 22,596MW it plans to add, 15,180MW will be through coal-based power generation, 4,550MW through gas-based generation and the balance from hydro-power.

It is easier to set up a thermal power project than a hydro-electric one due to the issues relating to preparation of detailed project report (DPR), relocation and resettlement, and environmental surprises such as floods, all of which delay the latter.

According to the sector’s regulator, Central Electricity Authority, Arunachal Pradesh has hydropower potential of around 50,328MW, the highest in the country.