Tariff-based Competitive Bidding in the Power Sector

Is it working or not?

Contents

Overview of Competitive Bidding in India

Concerns in Bidding Framework in Recent Times

Aspects to be Reviewed

Deloitte 2

Overview of Competitive

Bidding

3

Electricity Act 2003 de-licensed the generation sector

Private Power Policy of 1991

Under this policy CEA became pivotal with its project appraisal role

CEAs function was to evaluate PPAs entered into by SEBs, approve tariffs and issue techno economic clearances (TEC)

CEA approval was a huge bottle neck for most of the projects

Electricity Act 2003

CEA approval for TEC for generation projects was done away with but for large hydro projects

Under EA 2003, as per Sec 82, setting up of state regulatory commissions is made mandatory and under Sec 86 (b), Commissions are given authority to regulate power purchases

Section 63 of EA has revolutionized power purchase procedures and erstwhile MoU route with state utilities is no longer valid as a means of procurement

4

Guided by Section 63 of Electricity Act 2003, National Tariff Policy

mandates the utilities to procure power through competitive bidding route

Before 06 Jan 2006

Approval of PPA governed through individual State Regulatory Acts, which was on a cost plus basis and offered a regulated return of only 14%

There was lack of clarity on the basis for approval of PPA and the scope for negotiations on almost every cost item resulted in long drawn processes

After 06 Jan 2006

National Tariff Policy mandates that the power procurement for future requirements should be through a transparent competitive bidding mechanism

Process to be followed as per the guidelines issued by the Central Government

Competitive bidding mechanism allows for the bidder to bid on a competitive return basis and the process is transparent and time bound

From 6th January 2011, all new public sector projects also required to supply through competitive bidding

5

Clause 5.1 of tariff policy Even for the Public Sector projects, tariff of all new generation and transmission projects should be decided on the basis of competitive bidding after a period of five years or when the Regulatory Commission is satisfied that the situation is ripe to introduce such competition.

Developers now have option to invest in mega power projects, facilitated

by Government, through a tariff based competitive bidding process

Power procurement under Case 2

Central Government/State Government facilitates these projects and the procurers are the state utilities

location, technology and fuel is specified by the procurer

tariff (capacity and energy charges) for 25 years to be quoted in the bid

selection is based on lowest levelized tariff

6

Project Fuel Tariff (Rs./kWh)

Winner

Sasan Captive 1.19 Reliance

Tilaiya Captive 1.77 Reliance

Mundra Imported 2.26 Tata

Krishnapatnam Imported 2.33 Reliance

Winning Bids for Ultra Mega Power Projects

Winning Bids for state sponsored Case 2 projects

Project State Tariff (Rs./kWh)

Winner

Jhajjar Haryana 2.996 CLP

Talwandi sabo

Punjab 2.864 Sterlite

Bhaiyathan Chhattisgarh 0.81 (35% merchant)

Indiabulls

Karchana UP 2.97 JaiPrakash

Bara UP 3.02 JaiPrakash

Bidders have bid higher for levelized fixed cost for linkage projects (state specific risks/ transaction costs being factored into higher FC)

Reliance, Lanco, Tata Power, Sterlite, CLP etc. have all quoted FC in a narrow range on all other Projects Key differentiator is Fuel Strategy!!!

Independent Power Plants can tie up their capacities under long term

PPAs through a transparent tariff based competitive bidding process

Power procurement under Case 1

State utilities are now mandated to procure power through competitive bidding process

quantum is to be approved by the Commission and bid process must be as per standard guidelines

tariff discovered to be adopted by regulator, subject to overall reasonableness

power can be sourced from any developer

location, technology or fuel is specified by the procurer

IPPs have an option to tie-up only part of their capacity

7

Players participating in Case 1 bids

Developer Capacity bid* Adani Power 8500 CLP 1150 Essar 4050 Indiabulls 1200 JSW Energy 1500 Lanco 1500 PTC + Players 2200 Reliance Power 5400 Tata 800

- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Gu

jara

t

Ma

ha

rash

tra

Ha

rya

na

Ma

ha

rash

tra

Bih

ar

Gu

jara

t

Ra

jas

tha

n

Ka

rna

tak

a

R-i

nfr

a

UP

AP

2007 2008 2008 2009 2010 2010 2010 2010 2011 2011 2011

* Same plant may have been offered in different bids

More Peaking Case 1 bids are expected in future

Traditional Case 1 bids were long term bids for base load for 25 years

Gujarat and Haryana have called for fuel based bids or restricting bids on non-escalable basis

There have been many short term bids and some medium term bids.

Recently, some utilities have called for peaking medium term bids, but have not got any participation.

There is a gradual shift to tie up for peaking loads as base loads are expected to be met by UMPP and state and central additions.

State Type Capacity

Maharashtra LT Base 4000

Gujarat LT Base 6000

Haryana LT Base 2000

Bihar LT Base 1500

Rajasthan LT Base 1000

Karnataka LT Base 2000

Torrent Power MT Base 150

R-infra LT Base 1500

R-infra MT Base 450

R-infra MT Peak 450

UP LT Base 5000

AP LT Base 2500

AP MT Base 700

Tata Power MT Base 200

Tata Power MT Peak 150

8

Solar Generation - CERC Tariff Vs Bid Tariff

17.91

15.39 15.39

12.16

8.77

11.48

0

4

8

12

16

20

SPV Batch-I SPV Batch-II ST

Rs.

Pe

r U

nit

CERC Tariff Avg. Bid Tariff

32 %

reduction

43%

reduction

25 %

reduction

Concerns with Bidding Process

Case 2 Bidding

Domestic Coal Based Projects Captive Mine-based

Coal reserve estimations were inadequate in all cases bid out

As a result, infeasible / substantially larger coal mines allocated than required for Power Project, leading to allegations of misuse and profiteering

Linkage Based Projects

Coal supply has varied significantly from assumptions at the stage of bidding

Often ACQ is only at 50-60% of capacity, balance having to be procured from other sources

Imported Coal Based Projects

Major regulatory changes in countries of import not recognised

11

Case 1 Bidding

Linkage based Projects

Earlier formulation did not permit blending not aligned to current realities!

Current formulation permits blending only as a fixed proportion

this is a risk inappropriate for Sellers to bear

Wide post-bid variations in fuel supply conditions for a Power Project makes a firm energy price bid impractical in current times

12

In all cases, including UMPPs, the Central Government distances itself after

projects are bid out.

Are State Utilities capable of effective post-award monitoring? Weak monitoring will lead to private sector resorting to managing the

environment post project awards.

Reverse Bidding in Solar

Are underlying factors driving price reductions (from Batch 1 to Batch 2) sustainable?

Global oversupply in PV modules (particularly in thin-films), was a major contributor

Solar Projects still unable to get non-recourse finance

Is competitive bidding the right strategy for emerging technologies?

Is it a wise strategy for solar thermal ?

What happened to the demonstration projects under JNNSM?

Does excessive focus on tariffs hold the danger of early failures, which could result in stakeholders confidence being set back by a few years ?

13

Aspects to be Reviewed

Way forward

1. Nothing wrong with basic framework of Competitive Bidding u/s 63.

Only modifications required to make implications of fuel side contractual defaults by a Govt. Supplier (viz, CIL) to be passed-thru

2. Competitive Bidding in the Power Sector should not be confused with Licensing.

The role of the Public Sector is crucial in both Case-2 and Case-1 projects.

Inadequately prepared projects will invariably create information asymmetries & competitive distortion.

3. Technologies which are not fully commercial require public sector to take a lead in on-field demonstration

Uncertainties are too many to create true competition

Need for high Technical Qual Req while selecting the Private Partner

Focus on successful on-field demonstration first before expecting competitive tariffs.

15

Thank You

16