Broken dams, crippled plants: Calamities hike insurance costs for hydropower

Income from insurance claims for the country's largest hydropower company NHPC Ltd jumped twentyfold to ₹472.68 crore in FY24, while premium payments rose 42% to ₹376.5 crore. SJVN Ltd's income from claims was ₹51 lakh in FY24, after gaining no money from claims in FY23, while premium payments rose 8.6% to ₹56.63 crore.

NTPC Ltd did not specify its income from claims in its annual report, but stated that its insurance expenses touched ₹336.58 crore in FY24, up 31.4% from ₹256.12 crore in FY22. Hydropower makes up just 5% of the total generation capacity of NTPC, which is primarily a thermal power producer.

Extreme weather episodes over India's hydropower projects have been relentless. In 2021, a glacier burst in Uttarakhand paralyzed NTPC's under-construction 520 MW Tapovan Vishnugad project site. In 2022, JSW Hydro Energy's 1,091 MW Karcham Wangtoo plant in Himachal Pradesh saw a massive slope failure. In 2023, the Chungthang dam which is part of the 1,200 MW Teesta III hydro power project operated by Sikkim Urja Ltd was damaged due to a glacial lake outburst flood. Just last month, the power station of NHPC's Teesta V project in Sikkim suffered damages after river waters rose.

Rising trend

“Insurance premium has an increasing trend, and we have paid insurance premiums in the range of ₹200-500 crore per annum in the last five years," said Rajendra Prasad Goyal, director of finance at NHPC, acknowledging that “the insurance claims and the insurance losses in the past year are due to landslides and flash floods, which have significantly impacted the operations at power stations located in Teesta basin particularly Teesta-V Power Station."

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Power generation companies such as NHPC and NTPC sell electricity to distribution companies through power purchase agreements (PPAs), and higher costs for generation companies translate into more expensive power over time. Besides losses and insurance, damage to hydropower projects may strain the electricity grid as well. This is because unlike thermal projects, hydropower projects can be swiftly turned on and off, keeping the grid stable at times of high demand.

Power prices

"PPAs are generally based on cost-plus-return on equity," said Vikram V., vice-president & co-group head, corporate ratings, ICRA. "Operating cost plays a key role in the PPA, and thereby the tariffs. An increase in insurance costs would increase the overall cost. If the cost increases, the power generator would pass on the increased cost to the discoms and the discoms would then pass it on to the consumers. However, when the discoms decide on reflecting the higher cost on the tariffs depends on them," he added.

NTPC said in its annual report that it has diversified its thermal project locations to mitigate climate risk, but hydropower projects do not have that luxury, and need to be built necessarily over rivers or close to glaciers, facing much higher risk.

Hydropower projects are always insured since they are vulnerable to weather events and repairs require significant expenditure, said Rajeev Vishnoi, chairman and managing director of THDC India Ltd. "So, insurance companies get a lot of claims against damages that occurred because of extreme weather events. Because of the trend, they have increased premiums in the range of 20-50% offered to hydro projects, which are an extra burden to hydropower project developers," Vishnoi said, adding, “This puts additional burden to the cost of electricity which is being generated from the project and the additional cost gets passed on to consumers."

Frequent claims

According to Sajja Praveen Chowdary, director at Policybazaar for Business, insurance claims have increased in the past three years in line with the rise in damages to hydro projects due to natural calamities. The premiums are likely to have increased more in hilly states prone to landslides and floods.

Out of India's installed capacity of 448.381 GW, hydropower makes up a tenth or 46.92 GW. Under its energy transition plan, the government aims to increase it to 67 GW by FY32.

"Premiums have definitely increased by two to three times year-on-year," said Chowdary, director at Policybazaar for Business, adding that premiums in such cases are location-specific since climatic phenomena repeatedly occur in the same region.

NHPC witnessed significant damage to its operations due to the flash floods on Teesta in 2023. The company submitted claims for ₹1,086.80 crore but received only ₹112.50 crore, with balance receivables of ₹834.19 crore.

Flood fury

“The observations regarding extreme weather events caused by climate change taking a toll on hydro-electric power companies are correct and generally understandable in the light of the flood incident in Teesta Valley during October 2023," Goyal of NHPC said. "Earlier, onset of monsoon in hilly areas where hydro plants are located generally used to begin from second week of June and normally used to last till July-August. In recent years, it has been observed that monsoon season is gradually extending to September-October. Due to the said expansion, risks exposure for hydro power plants has increased in recent time. This has resulted in rising premium costs."

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SJVN, which had 89 renewable and non-renewable projects under its belt to generate over 56 GW of energy at the end of FY24, added climate change and water management as "risks" in its FY24 Business Responsibility and Sustainable Report (BRSR), indicating a renewed focus on mitigating risks such as natural disasters including floods, hurricanes, and forest fires. The company added these risks because they cause "immediate financial losses for people, the government, and companies". Just a year earlier, SJVN had mentioned climate change as an opportunity to boost investment.

Water management risk

To be sure, SJVN's FY23 BRSR identified water management as a risk. "SJVN may face risks in water management due to climate change and hydrological variability. Fluctuations in water availability can affect electricity generation capacity and revenue, while droughts or reduced flows can reduce power production," the report said. In its latest BRSR for FY24 SJVN added that it may be impacted financially by rising sea levels, erratic rainfall, and frequent heatwaves and natural disasters.

Queries sent on Wednesday to the chairman of SJVN, the Insurance Regulatory and Development Authority of India, chairman, secretaries and spokespeople of power, environment and the department of water resources remained unanswered.

Policybazaar’s Chowdary said rising frequency of such incidents has made insurers wary of climate-related risks. “Insurers use loss limits more frequently in agreements now. The other thing that has come up is the loss limits, which have been put in place due to any of the AOG (Act of God) perils that have been happening," he said.

Act of God

A loss limit is the amount of money insurers would pay back in the event of an 'Act of God'. For instance, in October 2023, the glacial lake outburst flood which damaged the Teesta-III project, the insurance claims were limited to ₹500 crore, the loss limit. The designation of the climatic event as an 'act of god' decides the way insurers will handle the claim. "We could have paid the entire ₹12,000 crore, if an earthquake had destroyed the project," a reinsurance company representative reportedly told the Asia Insurance Post last October.

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"Based on these incidents which have started to occur at a higher frequency, the RIs (reinsurers) have started to apply loss limits for AOG risks in the treaties for a medium level of risk also," Chowdary said. Mega risks are generally those above ₹2500 crore of risk cover where for the pricing of all deal reinsurers are engaged in, while medium to large risks are majorly part of the annual reinsurance treaties that the insurance companies negotiate for the complete year, he explained.