Bidding Power Sector

Indian Power Sector
Bidding Strategies
& Issues

Rajat Misra

SBICAP
pfi rankings#1 MLA in Asia pacific (# 9 globally)#1 Advisor in Asia pacific (#5 globally)Petrochemicals deal of the year (GGSRL)

SBICAP
Power Sector AssignmentsBid Advisory & MLA to TPL for UMPPBid Advisory to CSEB for 1500 MW Bhaiyathan ProjectAdvisor to PGCIL for Tala TransmissionAdvisor to GERC for all rules and regulations under EA03 and Gujarat ActUnbundling & Privatization of DVB

Current State
The story of futureGDP growth rate 8% will require similar growth in power capacityInstalled generating capacity of 128 GWRequired 200GW / 300GW by yrs 2012/2017Electricity Act 2003 focuses on reforms, competitionPolicies framed under Act reinforce the spirit

ISSUES
All (??) procurement through bidding No cost-plus projects through MoU (??)AdvantagesCompetitionTransparent processRisk Allocation to Bidder and its LendersIncentivization for Efficiency

ISSUES
However, flawed strategy can negate the advantagesFurther, no real competition if mines are allocated in non-transparent mannerDifference in Bids where mines are attached vis--vis case2 bids is evident

Bid Scenario

Policy Framework
Section 63 of EA03: ..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. Tariff Policy issued in Jan 2006 under Section 3 of EA03

Bidding Guidelines
Case I: Location, technology or fuel is not specified Example GUVNL bidCase II: Location specific projectsExample: UMPP, Bhaiyathan, JhajjharStandard bid documents preparedHowever, these should not be taken as the Holy Grail..

Bidding Guidelines
Guidelines binding on procurers and deviations to be approved by ERCRole of SERCs extremely importantAppropriate deviations should be approved keeping in view special situations (eg qualification criteria in case of bhaiyathan; umpp; overleveraging)

Bidding Guidelines
A 2 part tariff (Capacity and Energy charges) for long term procurement. Combined allowedTariff to be in Indian Rupee only (except)Capacity charges may have separate escalable and non-escalable components.Min/Max capacity Charges > 0.7How feasible is it?

Bidding Guidelines
Energy ChargesFixed in Base Year and indexedMay have separate escalable and non-escalable componentsOR fixed for each of the yearsNo provision for heat rate degradation, ambient conditions

Bidding Guidelines
Energy Charges for Imported CoalBase Energy Charge to be escalatedImported fuel in USD/kWhTransportation in USD/kWhInland fuel in Rs/kWhEach of above may have escalable and non-escalableDifferent Strategies adopted by Bidders recently

Bidding Guidelines
Combined Capacity and Energy Charges permittedNo escalations above those quoted allowedMin offtake to be specified in Bid dox

Bidding Guidelines
Indices for bid evaluation by CERCDiscounting rate for levelised tariff calculation to be specified by CERCCurrent Rates are as follows:

Evaluation Rates by CERC
ParameterRateDiscounting Rate for tariff10.49%Imported coal fuel7.61%Imported coal transport14.79%Captive mining coal6.39%

Developers Perspective

Case Studies

Bidding Steps
Extremely important to have pre-bid tie-ups in placeCommitment on major costsTime period for financial closeInterest rates risk?Escalation & Currency provisions on EPC?Bids not required to be underwritten

Bidding Steps
Imported Coal as FuelBidding Strategy and appetite for risk are more importantRecent bids have clearly underlined this factMix of Indexed and non-indexed costs much more importantMore sensitive to variation in quality

Imported Vs Domestic
CriteriaDomesticImportedCalorific Value(kcal/kg)35006000Cost (Rs/MT)10002700Variable Cost(Rs/kWh)0.801.4

CoalJan-112001Jan-112001Jan-112001Jan-112001Apr-06Apr-06Apr-06Apr-06Jul-13Jul-13Jul-13Jul-13Oct-05Oct-05Oct-05Oct-05Jan-112002Jan-112002Jan-112002Jan-112002Apr-05Apr-05Apr-05Apr-05Jul-12Jul-12Jul-12Jul-12Oct-04Oct-04Oct-04Oct-04Jan-102003Jan-102003Jan-102003Jan-102003Apr-04Apr-04Apr-04Apr-04Jul-11Jul-11Jul-11Jul-11Oct-03Oct-03Oct-03Oct-03Jan-092004Jan-092004Jan-092004Jan-092004Apr-02Apr-02Apr-02Apr-02Jul-09Jul-09Jul-09Jul-09Oct-01Oct-01Oct-01Oct-01Jan-072005Jan-072005Jan-072005Jan-072005Apr-01Apr-01Apr-01Apr-01Jul-8thJul-8thJul-8thJul-8thOct-14Oct-14Oct-14Oct-14Jan-132006Jan-132006Jan-132006Jan-132006Apr-07Apr-07Apr-07Apr-07Jul-14Jul-14Jul-14Jul-14Oct-06Oct-06Oct-06Oct-0612-Jan200712-Jan200712-Jan200712-Jan200705-Apr05-Apr05-Apr05-Apr13-Jul13-Jul13-Jul13-Jul05-Oct05-Oct05-Oct05-Oct11-Jan200811-Jan200811-Jan200811-Jan200804-Apr04-Apr04-Apr04-AprAustralia - Newcastle (6700 kc GAD)China - Qinhuangdao ( 6800 kc GAD)Russia - Vostochny (6700 kc GAD)S.A. - Richards Bay (6000 kc NAR)28.32830.8532.53431.5343332.0529.529.253331.129.152931.227.252827.529.6527.926.32727.5522.4242321.3723.7525.7524.826.824.9827.527.2527.723.2525.4526.123.624.7526.3526.12927.2313236.4540.65425342.7553.1506245.1562.86066.568.2555660.559.253.1535751.5552.1535647.1552.153.554.552.5541.2549.654641.641.75484443.2553495156.45351.2550.351.944.65250.2548.6551.6595849.654.5667153.467747257.8571.2574.373.566.5589.99797100.9119125130100FOB FortnightlyMcCloskey's steam coal spot FOB prices20012002200320042005200620072008PortJan-11Apr-06Jul-13Oct-05Jan-11Apr-05Jul-12Oct-04Jan-10Apr-04Jul-11Oct-03Jan-09Apr-02Jul-09Oct-01Jan-07Apr-01Jul-8thOct-14Jan-13Apr-07Jul-14Oct-0612-Jan5-Apr13-Jul5-Oct11-Jan4-AprAustralia - Newcastle (6700 kc GAD)28.3034.0032.0531.1027.2527.9022.4023.7524.9823.2524.7527.2040.6553.1062.8055.0053.1052.1052.1041.2541.7553.0053.0044.6051.6054.5067.0071.2589.90119.00China - Qinhuangdao ( 6800 kc GAD)28.0031.5029.5029.1528.0026.3024.0025.7527.5025.4526.3531.0042.0050.0060.0056.0053.0053.0053.5049.6548.0049.0051.2552.0059.0066.0074.0074.3097.00125.00Russia - Vostochny (6700 kc GAD)30.8534.0029.2529.0027.5027.0023.0024.8027.2526.1026.1032.0053.0062.0066.5060.5057.0056.0054.5046.0044.0051.0050.3050.2558.0071.0072.0073.5097.00130.00S.A. - Richards Bay (6000 kc NAR)32.5033.0033.0031.2029.6527.5521.3726.8027.7023.6029.0036.4542.7545.1568.2059.2051.5547.1552.5541.6043.2556.4051.9048.6549.6053.4057.8566.55100.90100.00US$/TSteam Coal Spot FOB prices (2001-2008)

Bidding Scenario
ScenarioAffect on Tariff in spreadsheet exampleD/E 80:208 paiseLoan repayment 15 years7 paiseInterest Rate increase by 1% p.a.3 paise

Lenders Views
Paradigm Shift in financing Move from Payment Security based lending to Competitive Tariff based lendingAvoids mistakes of the pastUnbundling, Open Access Provisions drive lenders comfortEncouraging Response from ECA/ECB

Lenders concerns
Buy Out ProvisionsEvacuation Transmission RiskTime Frame to achieve Financial Closure1 year from date of signing of PPAEnvironmental ConcernsECA/ECB financiersThird Party SaleCure Period- Resumption of supplyForce MajeureLand acquisitionProcurers responsibility!!Change in Law, still

Lenders Perception
Imported Coal as FuelTake or pay only at 65% on imported fuelLenders see the above as a risk in long term contracts.What would a developer do??

Case Studies

Imported Coal

UMPP Mundra & GUVNL Bids
For UMPP Bids for Mundra, Tata Power and Reliance had different bid strategiesTPL bid numbers were broken into escalable and non-escalable componentsReflects clear direction of owning mine and ships (or equivalent long term contracts) while retaining limited risk

Reliance has bid all numbers as escalableReflects strategy of procurement on spot basis for coal and transport No upsides possible unless captive mines / long term contract on different termsWas it conservative or aggressive?

For GUVNL bid that was all-inclusive, Adani had bid based on imported coal Tariff for each year fixed and no escalationsRisk of international coal price, transportation cost, forex variation borne by bidderPossible only with ownership / long term contracts for coal & transportWhat about exchange rate risk??

How does Adani bid address goals of bidding?CompetitionEfficiencyTransparencyRisk sharing

UMPP Krishanapatnam
Significant change in Reliance StrategyWhat do the numbers tell?

Summary

For SERCs
Take a pragmatic view on deviations from bidding documentsBE TRANSPARENT ALL BID NUMBERS TO BE IN PUBLIC DOMAINBidding Strategies Take a call on appropriate risk sharing mechanismWHEN TO CANCEL A BID????

Any Questions?
Bhaiyathan Model???

Thank you

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Australia - Newcastle (6700 kc GAD)China - Qinhuangdao ( 6800 kc GAD)Russia - Vostochny (6700 kc GAD)S.A. - Richards Bay (6000 kc NAR)

Bidding Power Sector

Documents

Transcript of Bidding Power Sector