1 Competitive bidding guidelines for power procurement Presentation to Hon’ble Central Electricity...

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Competitive bidding guidelines for power procurement

Presentation to Hon’ble Central Electricity Regulatory Commission and Distinguished Invitees

May 7, 2004

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AGENDA

• Context and objectives

• Need and importance of competitive bidding for power procurement

• Guiding principles

• Our suggestions

–Scope of guidelines

–Bidding process and evaluation of bids

–Enablers for speed, transparency, and fairness

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CONTEXT FOR TODAY’S DISCUSSION

Electricity Act, 2003 aspires to create a liberal framework for the development of the power sector – “An Act to consolidate the laws…for taking measures conducive to development of electricity industry, promoting competition therein, protecting interests of consumers and supply of electricity to all areas…”

Current situation End goal

Largely cost plus tariff systems with limited incentives for improving efficiencies

A well functioning power market leading to free competition – rewards more efficient generators and reduce power procurement cost

Gradual transition path

The power sector needs to introduce competition into the

power procurement process as it gradually migrates to competitive markets across electricity value

chain

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INDIAN ELECTRICITY REGULATIONS ENVISAGE A COMPETITIVE MARKET

• “Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government”

• “Under the competitive bidding route, the Commission perceives its function of regulating tariffs to primarily be the scrutiny and approval of the process adopted for competitive bidding, with a view to ensure that competitive conditions do prevail”

• “A significant portion (which could be up to 50% of the new capacity) should be committed to trading or other forms of competitive power markets. This could be attained over a period of time, keeping in view the transition requirements.”

• “As far as possible, power procurement should be through a transparent competitive bidding mechanism.”

Section 63 Electricity Act 2003

CERC order dated 9th March 2000 on a petition filed by Power Trading Corporation Ltd.

Task force report on power sector 2004 , page # 275

Tariff Policy, Appendix 1 of the Task force report 2004 , page # 275

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THE TASK FORCE REPORT ALSO SEEKS TO ENHANCE COMPETITION IN THE SECTOR USING COMPETITIVE BIDDING

*Page 289 – Report of the Task force on Power Sector Investment and Reforms (Feb 2004 Volume I)

The task force report of 2004 specifies five preferred mechanisms for procurement of electricity through competitive bidding*

• Tariff based bid for entire project capacity

• Tariff based bids for blocks of capacity

• Competitive tariff based bidding, without being related to any particular generation source

• Tariff based bidding for peaking requirements

• Bidding on capital cost of specific project (with overall two part tariff structure)

Linked to particular generation capacity

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OBJECTIVES OF TODAY’S DISCUSSIONS

• Share our views on competitive procurement of generation and transmission capacity

• To achieve consensus on how to formulate and implement guidelines for competitive bidding process, so that it embodies the spirit of the Electricity Act 2003

• To discuss and arrive at a consensus on the extent of standardization required in the bidding process and documents in order to expedite the process

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AGENDA




• Our suggestions




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221

363

267230

106

98119136

POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL COST OF SUPPLYPaise/Kwh, 2001-02

357

469

365349

Power procurement cost

Other cost

Power procurement cost as percentage of total cost of power(Per cent)

62 77 73 66

Maharashtra Delhi Gujarat All India

Source: Planning commission report on SEB performance (2001-02)

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0

500

1000

1500

2000

2500

3000

3500

4000

0% 20% 40% 60% 80% 100%

POWER PROCUREMENT IS COMPLEX DUE TO DIFFERENT BASELOAD AND PEAK LOAD REQUIREMENTS

Hours of the year

Delhi’s ‘unrestricted’ load duration curve (MW)

Source: Delhi operations of REL

Baseload

Intermediate

Peak

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TODAY, SIGNIFICANT COST DIFFERENCES EXIST AMONG GENERATORS

• While some of these differences can be explained by differences in fuel type, technology, location and vintage, some differences are attributable to differing generation efficiencies

• Current cost plus system does not adequately encourage generators to improve operational efficiencies

Tariffs of various plants supplying to Delhi

Power plant Type MUs bought Rs/Kwh

• Salal

• Baira Siul

• Tanakpur

• Singrauli

• Chamera

• Rihand

• Anta

• Auraiya

• Unchachar-I

• Uri

• Dadri (Gas)

• Unchachar-II

• Dadri (Thermal)

• Badarpur BTPS

• RPH

• IP Station

• GT

• Pragati PPCL

• RAPP(B)-III

• NJPC

• RAPP (B)-IV

• Hydro

• Hydro

• Hydro

• Thermal

• Hydro

• Hydro

• Thermal (GT)

• Thermal (GT)

• Thermal

• Hydro

• Gas

• Thermal

• Thermal

• Thermal

• Thermal

• Thermal

• Thermal (GT)

• Thermal (GT)

• Nuclear

• Hydro

• Nuclear

358

86

58

1,370

132

850

375

600

190

286

640

400

5,065

4,600

740

490

1,060

1,706

28

160

276

0.59

0.63

1.04

1.09

1.32

1.47

1.61

1.62

1.88

2.08

2.24

2.26

2.27

2.37

2.50

2.50

2.50

2.71

2.98

3.02

3.25

Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04

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POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE

Today’s wholesale power procurement model

Desired market structure for power procurement (in the end-state)

• Single buyer model - SEB/transco pools distribution utility requirements to procure power

• Multiple buyer model (e.g., each distribution company procuring for its own requirements)

• Primarily long duration contracts • Suitable mix of long, medium and short term contracts

• Cost plus tariff setting– CPSUs and SEBs: cost plus tariffs

based on CERC/SERC orders– IPPs: mix of cost plus and tariff based

bidding

• Tariff setting driven by market forces

• Limited incentives to improve efficiency • Market rewards players with lower costs and higher efficiencies

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TO REACH THE REQUIRED STRUCTURE, IT IS IMPERATIVE TO ACHIEVE COMPETITION IN GENERATION

What needs to be achieved as the market transitions to full competition?

• Reduce inefficiencies in generation plants to enable low cost power production

• Encourage private investment in generation to keep pace with growing demand

• Develop a fast, efficient and transparent bidding process that expedites procurement

• Building a framework for the end state of the power procurement in the envisaged free market pricing system

Competitive bidding based power procurement is crucial for the healthy development of this sector

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AGENDA




• Our suggestions




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GUIDING PRINCIPLES FOR COMPETITIVE BIDDING

Competitive bidding process should ensure

• Free fair and effective competition

• Transparency

• Simplicity and cost effectiveness of process

• Minimal burden on regulator and other stakeholders

• Flexibility to adapt to varying needs of power procurement according to the structure of the sector

The new guidelines should adequately build on CERC and GOI guidelines issued

earlier by incorporating new inputs from EA 2003 and the Task Force report

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AGENDA




• Our suggestions




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GUIDELINES SHOULD COVER PROCUREMENT BY VARIOUS ENTITIES

Procurement transaction

Buyers Sellers

Existing generatingstationsDistribution

Licensee

New generatingstations

Distribution Licensee (?)

Trading licensee

Nominated Buyer (?)

Trading licensee

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GUIDELINES SHOULD COVER BOTH GENERATION AND NEW TRANSMISSION CAPACITY

Procurement category

• Generation

Should guidelines cover it?

• Yes – Capacity

– Energy

May be baseload/Peak or off peak

• Transmission capacity

• Not required– Existing

– Setting up new capacity

May be entire day/part day

• Firm

• Non-firm

• Yes

• Ancillary services

Rationale

• This would form the bulk of the power procurement bids; hence it is imperative that the guidelines cover these

• Rules for open access on transmission lines already well defined (e.g., transmission service charge bidding)

• New capacity addition not based on competitive bidding so far, but lends itself to the process quite naturally

• The concept of ancillary services not well developed yet

• In future as market matures guidelines may be expanded to include these as well

• Not initially– Spinning reserves– Reactive Power– Harmonics etc.

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TODAY, DISCOMS/TRANSCOS PROCURE POWER MAINLY THROUGH LONG TERM BILATERAL CONTRACTS

Description/Details

• Generally 15-25 year contracts. New capacity may be added if needed

• Capacity added in three ways -

• Upto one year duration contracts; (form small part of total power procured)

• SEBs propose power purchase from third parties in their ARRs, prior to actual contract

• Some SERCs have taken a hands off view on these bids as long as the total annual power purchase cost remains within budget

Long term

Short term

• No day ahead market

• Real time power requirement (in excess or deficit of scheduled drawls) drawn directly from grid without any prior permission from regulator

• SEB pays/receives UI charges under ABT regime at the end of accounting cycle

Real time/day to day

No clear process currently for bridging medium term requirements (i.e. more than one year and less than 15 year duration)

– Self generation (SEB owned generators); capacity cleared by SERC as required

– Allocation from central generating stations ; CERC determines tariffs

– Independent power producers; Bid/MOU route for projects; CERC/SERC vets the tariff

Excessive burden on regulator

Medium term

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PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE

Competitive bidding

Traders

Generators

• Competitive bidding

Pricing mechanism

MOU based bilateral

contracts

With generator

With traders (e.g., PTC)

• Cost plus pricing

Pricing mechanism

• Cost plus pricing

• Competitive bidding by Trader

Discom power procurement

Covered by competitive bidding guidelines

Discom forecasts its power requirements for • Long term• Medium term• Short term

Regulator approves forecasted power need

Discom procures power

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IN TERMS OF DURATION, GUIDELINES WOULD COVER ALL PROCUREMENT CONTRACTS OUTSIDE THE DAY AHEAD AND REAL-TIME MARKET

Description of type of contracts

• All contracts greater than 10 year duration

• Contracts that span 1-10 years duration

• Power requirement for several months duration (upto 1 year)

Long term

Medium term

Short term

• Typically a day to a week ahead demand

• Requirement typically driven by forecasting error/ weather changes/unforeseen conditions

Day(s) ahead market / Emergency procurement

Proposed scope of guidelines

• Unscheduled spikes/drops in demand that have to be managed

• Can continue with current UI/ABT system until the establishment of a fully functioning wholesale and spot market

Real time

The lead time (advance

notice before start of

contract) needs to be decided for each term

(long/ medium/ short) to ensure

effective competition

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AGENDA




• Our suggestions




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BIDDING PROCESS WOULD START WITH THE REGULATOR APPROVING THE DEMAND FORECAST FOR THE DISTRIBUTION COMPANIES

Demand forecast for short / medium / long term by discom

Regulatory approval of forecast

Procurement process

Path 1

Using non-standard bid documents

Using standard bid documents

• Guidelines specify process to be followed in each case

• Standard documents supplied for following path 1

• Regulator approves documents if path 2 is followed

Path 2

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PROPOSED POWER PROCUREMENT BIDDING PROCESS IF STANDARD DOCUMENTS ARE USED

Key activities/Salient points

At each stage we may specify minimum number of bids to

proceed to next stage

Requirement definition

Initiate RFQ Shortlist bidders

RFP Bidding Evaluation of bids

Award of bid(s)

Post bid negotiations

• Specification of – Quantum– Timing– Duration of

contract

• Publish notice

• Issue RFQ

• Evaluate responses to RFQs

• Shortlist bidders

• For short term contracts bidders may be pre- qualified

• Issue RFP to selected bidders

• Conduct pre-bid conference

• Short listed bidders invited to submit bids

• Technical compliance must for any bid to be considered

• Determination of winner on bases of price bids

• Use of independent observer if necessary • RFQ/RFP process may be combined into single

step, especially for short term contracts

Regulator kept informed at all stages of the process

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PROPOSED POWER PROCUREMENT BIDDING PROCESS IN CASE OF DEVIATIONS FROM STANDARD BIDDING DOCUMENTS

• Any modifications suggested by bidders, or due to any other reasons to be approved by regulator – possibly over several rounds of iterations

Requirement definition

Prepare bidding documents

Initiate RFQ Shortlist bidders

Seek regulatory approval

Iterations on development of bid documents

Regulatory clearance of forecast

A

RFP Bidding Evaluation of bids

Awards of bid

Post bid negotiations

ARegulator’s comments on process and go ahead

Even though active regulatory approval

needed in only certain stages, but the regulator is

always kept informed of all developments

Regulatory approval if required

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IN THE RFQ STAGE, BIDDERS SHOULD BE SCREENED ON THE BASIS OF AN ARRAY OF METRICS

Financial metricsTechnical metrics Past record

To ensure supply contracts, in case of default

To minimise risk of delay/shortfall

To prevent frivolous/mischievous bidders

• To ensure supply contracts, in case of default Net worth

• Credit worthiness • Bank/other financial

guarantees

• For new plants – Past infrastructure

project execution– Resource raising

• For existing plants– Reliability – Performance in the past

• Tie ups with transmission companies preferred

• Should be an organization of repute

• No default on previous contracts

• Net worth • Credit worthiness • Bank/other financial

guarantees

• For long term contracts trader should show the capability/history to source 70-80% of contract amount

• Tie ups with generators and transmission companies are preferred

• Source of power has to be specified

• Trader of repute • No default on past

contracts• Past litigation record • No conflict of interest

between other obligations and contract being bid

Limits to vary by duration of contract and amount of load contracted

To be suitably relaxed in initial stages for traders, as they would have no history of trading operations

For generators

For traders

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FOR MEDIUM/LONG TERM CONTRACTS, AT RFP STAGE, BIDS SHOULD BE SCREENED BASED ON NON PRICE EVALUATION PRIOR TO PRICE COMPARISONSElement for evaluation Details

• Financial guarantee covering supply default

• Different bidders could be capable of delivering power at different points in grid

• Most reliable/least bottlenecked point most preferable

• Relevant for time of day contracts, or for parts of long term contract

• Best fit to demand should get preference

• Bidder asking for least financial guarantee from buyer would be preferred

• Risk sharing mechanism in case of forced outages/unforeseen circumstances

Supplier’s guarantee

Delivery point

Delivery dates/period

Buyer’s guarantee

Force majeure /risk sharing

All these aspects need to be

sufficiently detailed in the standard bid

documents and processes, to

enable bids to be efficiently and transparently

evaluated/ rejected on technical merits

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BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL

Whether part bidding is allowed?

What is being bid for?

What is the tariff structure used?

• No part bidding

• Part bidding allowed

• Part bidding allowed in multiples of some pre-specified minimum bid unit (preferred option)

• Energy

• Capacity

• Percentage of load (varying)

• Single part tariff

• Two part tariff with suitable indexation (preferred)

Elements of a bid

Illustrative examplesElement

Discussed further

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BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF

Details

• Two part tariff structured as followsPrice setting mechanism

Aspect

Fixed component (X) + Variable component (Y)

X = X1 + X2 X1: Inflation linked (e.g., O&M)

X2: Non-Inflation linked (e.g., debt servicing)

Y = Y1 + Y2 Y1: Variable component not linked to any index

Y2: Linked to suitable energy index*

• Both X and Y could vary by time frame

• Buyer should compare the competing bids based on annualised/NPV type calculations

• Bidder should not be disqualified for submitting different price bids in different contracts

*Index might be a reference fuel price, or price of a basket of fuels, or some other indexNote:Medium term contracts could follow a pricing mechanism similar to long term contracts with simplified indices

Tariff bid =

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FOR SHORT TERM CONTRACTS, THREE ASPECTS SHOULD BE MODIFIED TO SPEED UP THE PROCESS

Details

• Single part tariff– No escalation/inflation– No fuel variation

• Bids compete purely on single price (i.e., all bids that fulfill all technical criteria beforehand)

Bid pricing

Aspect

• Bidders empanelled once• Panel kept updated on regular basis• For each short term requirement, panel members asked to bid –

eliminates the need for bidder qualification step in procurement process

Empanelment of bidders

• Bid process may be started (public notification stage) upto a few weeks before the actual requirement of the contract

• Thus mostly traders and existing generators would likely bid for these

Short lead times

Discussed further

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EMPANELMENT OF BIDDERS - DETAILS

Rationale

Process/details of empanelment

Updation of bidders panel

• Short term bids need to be executed rapidly since time is of the essence

• Need to avoid unnecessary repetition/ duplication of records

• For short term bid, buyer should skip bidder qualification

• Buyer should ask the existing panel of bidders to bid

• Buyer should regularly update the list of empanelled bidders

Buyer should update the list of empanelled bidders to reflect changes over time. These would include –

• New entrants – should be allowed to submit details at 3-4 occasions in an year. Once a bidder is empanelled, he stays on the panel until he withdraws, or is disqualified

• Regular checks - Empanelled bidders should submit details of credit worthiness and make other financial/ legal disclosures annually. Any discrepancy / shortfall could lead to revoking of pre-qualified status

• Disqualification from panel - Bidders will attract disqualification if

– They default (or dishonor) on any contract

– They have not participated in the last 3-4 bids up for competition

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INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR FORMULATING THE COMPETITIVE GUIDELINES

Aspect International examplesReference document Issue date/number

Bidding for part of the contract

• RFP for Central Maine Power Company allows bidders to bid in multiples of 20% of total contract amount

• November 18, 2003; issued by Maine PUC

Use of Independent observer

• Independent observer was used for overseeing the process of RFP’s for Portland General Electric Company

• January 20, 2004; Interim report of independent observer

Use of discounting/ NPV calculations for evaluation

• Public service commission of Maryland approved use of single discounted average term price (DATP) for evaluation of bids in the phase II settlement proceedings

• Order no. 78710 Case no. 8908; Phase II September 2003

Pre-qualification of bidders to form a panel

• Rules of the Florida Public Service Commission on general purchasing procedures allow the prequalification of bidders to form a panel

• Ch.25-25 Sup no.194

Financial guarantees from bidders

• RFP for Central Maine Power Company required bidders to provide financial guarantees upto US$ 1.21 million/month and 1.50 million/month while bidding for service to 2 classes of consumers

• November 18, 2003; issued by Maine PUC

Bidding for percentage of load

• Rather than a fixed load (in MW/ MWh) the bid may be asked for the percentage of the utility’s load, so as to offload some risk to the suppliers

• EPSA guidebook for design implementation and monitoring of competitive power supply solicitations

Bidding for partial duration

• EPSA guidelines mention use of annuity based calculations while comparing bids for unequal (part) duration and choosing a lower overall bid portfolio

• EPSA guidebook for design implementation and monitoring of competitive power supply solicitations

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INTERNATIONAL BIDDING PROCESS - EXAMPLE

US long term PPA bid process

• Posting of information publicly

• Request for Expressions of Interest (EoI)

• FERC and PJM qualification

• Credit application and financial information received

• Pre-bid conference

• Eligible bidders qualified and issued certification

• Request for detailed proposals from eligible bidders

• Price proposals received

• Bids evaluated

• Award of bids

• More rounds if previous rounds fail to meet objectives

• Iteration continues till satisfactory solution reached

• Retail prices published 6 months before start of contract

Receiving proposals

Process start

Receiving EOIs

Regulatory Validation

Bidder selection

Round 1Revision/Round 2

Contract start

Steps

Timeline

Details

3½ months 15 days 15 days 15 days 2 months 9 months

Source: Allegheny power RFPs and RFQs

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AGENDA




• Our suggestions




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SYSTEMS REQUIRED TO ENSURE SPEED, TRANSPARENCY AND FAIRNESS

Communications

Information dissemination

Independent observer

• All communications to be made in written form

• All records retained for a certain duration after the end of bidding

• Optional separate rounds for RFP and RFQs

• All details of bid process and method given to all bidders

• All factors that will be considered and their relative weights notified in advance

• Not required in usual biddings – as long as standard processes are being followed

• Needed if an affiliate of the buyer is also bidding for the contract

• This would be more of an oversight role without any involvement in decision making

Standardization of contracts

• Standard contract documents to cover as many scenarios as possible

• All deviations counted as material deviations – requiring regulatory approval

Speed

Transparency

Fairness

Discussed further

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STANDARDIZED BIDDING DOCUMENTS NEEDED FOR EXPIDITING PROCESS

• Providing standard documents as templates is important to

– Expedite process

– Prevent the whole process from getting bogged down in litigation

– Reduce burden on regulator and all shareholders

• Standardization is easy for short term contracts. It gets increasingly complex as the duration of contracts increases

• For new plants standard documents need to capture all possible aspects of

– Finance structuring

– Risk sharing

• Need to provide flexibility for future requirements

Need for detailed documents as standard templates; but with sufficient flexibility to ensure responsiveness to

new needs

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IMPORTANT ISSUES FOR DEBATE – NOT EXHAUSTIVE

• Can any buyer aggregate power requirements

– Across distribution companies?

– Across states?

– Across regions?

• Even though the Electricity act itself does not prohibit such aggregation, would this lead to a dispute between state and central bodies ?

• How do these guidelines change with the development of a power pool?

• Should there be a common energy index to link the variable costs of plants? If yes, how should it be developed/monitored/updated?

• Should the buyer inform rejected bidders about reasons for rejection?

• Should the buyer seek power at one specific delivery point per bid and compare costs accordingly?

• For long-term procurement requiring set up of new capacities, should the buyer specify location, fuel, technology (e.g., for BOT basis)?

• Evaluation of non-price factors

• What is the process for dispute resolution?

• Is the duration definition (long-term > 10 years, medium-term between 2 and 10 years, and short-term less than 2 years) rigid or evolving over time?

• Should these guidelines cover competitive bidding by a trader as well?

In order to avail benefits of scale (e.g., flattened load curve, economic size of the plant) and reduce transaction costs

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Thank you

1 Competitive bidding guidelines for power procurement Presentation to Hon’ble Central Electricity...

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