Tariff-based Competitive Bidding in the Power Sector


Published on

Mr. Shubhranshu Patanaik
Senior Director, Energy & Resources, Deloitte India
at RPR 2012, 23-26 August, Goa, India

Published in: Technology, Business

Tariff-based Competitive Bidding in the Power Sector

  1. 1. Tariff-based Competitive Bidding in thePower SectorIs it working or not?
  2. 2. Contents• Overview of Competitive Bidding in India• Concerns in Bidding Framework in Recent Times• Aspects to be Reviewed2 Deloitte
  3. 3. Overview of CompetitiveBidding3
  4. 4. Electricity Act 2003 de-licensed the generation sectorPrivate Power Policy of 1991 Electricity Act 2003• Under this policy CEA became pivotal • CEA approval for TEC for generation with its project appraisal role projects was done away with but for large hydro projects• CEA’s function was to evaluate PPA’s entered into by SEB’s, approve tariffs • Under EA 2003, as per Sec 82, setting and issue techno economic up of state regulatory commissions is clearances (TEC) made mandatory and under Sec 86 (b), Commissions are given authority• CEA approval was a huge bottle neck to regulate power purchases for most of the projects • Section 63 of EA has revolutionized power purchase procedures and erstwhile MoU route with state utilities is no longer valid as a means of procurement4
  5. 5. Guided by Section 63 of Electricity Act 2003, National Tariff Policymandates the utilities to procure power through competitive bidding routeBefore 06 Jan 2006 After 06 Jan 2006• Approval of PPA governed through • National Tariff Policy mandates that the individual State Regulatory Acts, which power procurement for future was on a cost plus basis and offered a requirements should be through a regulated return of only 14% transparent competitive bidding mechanism• There was lack of clarity on the basis for approval of PPA and the scope for • Process to be followed as per the negotiations on almost every cost item guidelines issued by the Central resulted in long drawn processes GovernmentClause 5.1 of tariff policy “Even for the Public • Competitive bidding mechanism allowsSector projects, tariff of all new generation and for the bidder to bid on a competitivetransmission projects should be decided on the return basis and the process isbasis of competitive bidding after a period of transparent and time boundfive years or when the Regulatory Commission issatisfied that the situation is ripe to introduce • From 6th January 2011, all new publicsuch competition.” sector projects also required to supply through competitive bidding5
  6. 6. Developers now have option to invest in mega power projects, facilitatedby Government, through a tariff based competitive bidding processPower procurement under Case 2 Winning Bids for Ultra Mega Power Projects• Central Government/State Government Project Fuel Tariff Winner facilitates these projects and the (Rs./kWh) procurers are the state utilities Sasan Captive 1.19 Reliance Tilaiya Captive 1.77 Reliance• location, technology and fuel is Mundra Imported 2.26 Tata specified by the procurer Krishnapatnam Imported 2.33 Reliance• tariff (capacity and energy charges) for 25 years to be quoted in the bid Winning Bids for state sponsored Case 2 projects Tariff ‒ selection is based on lowest Project State (Rs./kWh) Winner levelized tariff Jhajjar Haryana 2.996 CLP Talwandi Punjab 2.864 Sterlite sabo• Bidders have bid higher for levelized fixed cost for linkage projects (state specific risks/ transaction 0.81 (35% Bhaiyathan Chhattisgarh Indiabulls costs being factored into higher FC) merchant)• Reliance, Lanco, Tata Power, Sterlite, CLP etc. Karchana UP 2.97 JaiPrakash have all quoted FC in a narrow range on all other Projects – Key differentiator is Fuel Strategy!!! Bara UP 3.02 JaiPrakash6
  7. 7. Independent Power Plants can tie up their capacities under long termPPAs through a transparent tariff based competitive bidding processPower procurement under Case 1 Players participating in Case 1 bids• State utilities are now mandated to Developer Capacity bid* Adani Power 8500 procure power through competitive CLP 1150 bidding process Essar 4050 Indiabulls 1200 ‒ quantum is to be approved by the JSW Energy 1500 Commission and bid process must be Lanco 1500 as per standard guidelines PTC + Players 2200 Reliance Power 5400 ‒ tariff discovered to be adopted by Tata 800 regulator, subject to overall 4.50 * Same plant may have been offered in different bids 4.00 reasonableness 3.50 3.00• power can be sourced from any 2.50 2.00 developer 1.50 1.00 ‒ location, technology or fuel is 0.50 - UP Karnataka AP R-infra Rajasthan Gujarat Gujarat Maharashtra Maharashtra Haryana Bihar specified by the procurer• IPPs have an option to tie-up only part of their capacity 2007 2008 2008 2009 2010 2010 2010 2010 2011 2011 20117
  8. 8. More Peaking Case 1 bids are expected in future• Traditional Case 1 bids were long term State Type Capacity bids for base load for 25 years Maharashtra LT Base 4000 Gujarat LT Base 6000• Gujarat and Haryana have called for fuel Haryana LT Base 2000 based bids or restricting bids on non- Bihar LT Base 1500 escalable basis Rajasthan LT Base 1000 Karnataka LT Base 2000• There have been many short term bids and some medium term bids. Torrent Power MT Base 150 R-infra LT Base 1500• Recently, some utilities have called for R-infra MT Base 450 peaking medium term bids, but have not R-infra MT Peak 450 got any participation. UP LT Base 5000 AP LT Base 2500• There is a gradual shift to tie up for AP MT Base 700 peaking loads as base loads are expected Tata Power MT Base 200 to be met by UMPP and state and central Tata Power MT Peak 150 additions.8
  9. 9. Solar Generation - CERC Tariff Vs Bid Tariff CERC Tariff Avg. Bid Tariff 20 17.91 15.39 15.39 16 12.16 11.48 Rs. Per Unit 12 8.77 8 32 % 43% 25 % reduction reduction reduction 4 0 SPV Batch-I SPV Batch-II ST
  10. 10. Concerns with Bidding Process
  11. 11. Case 2 BiddingDomestic 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 profiteeringLinkage 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 sourcesImported Coal Based Projects• Major regulatory changes in countries of import not recognised 11
  12. 12. Case 1 BiddingLinkage 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 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. 12
  13. 13. 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
  14. 14. Aspects to be Reviewed
  15. 15. Way forward1. 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-thru2. 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
  16. 16. Thank You16