Competitive Bidding & its issue in

Power Sector
DEVELOPMENT OF INDIAN ELECTRICITY MARKET
STRUCTURE
• Basic Framework of Electricity Market
Indian Electricity Act 1910
• License for supply of electricity by State

Electricity (Supply) Act 1948 • Creation of SEBs.

• Private Generating Companies to Set up plant & sell power to
Amendment in 1991:
Grid
• Introduction of Mega Power Project Policy
Amendment in 1995 • To Promote, monitor, purchase power & sell to identified SEBs
through a Govt. Company
• Setting up of Independent CERC & SERC.
Electricity Regulatory
• Main function to regulate tariff & promote competition,
Commission Act 1998
efficiency & Economy
• Participation of Private sector in area of Transmission
Amendment in Act-1998 construction, operation & maintenance under control of CTU
& STU.

• Generation De-licensed
Electricity Act 2003
• Determination of tariff by bidding process
Electricity Act 2003: Provisions for
Competitive Markets
 Electricity Act 2003 emphasizes the promotion of competition in the sector
through various provisions, such as delicensed generation, open access for T&D
systems
 All these provisions leading to the development of an open and competitive
market in electricity
 Electricity Act, 2003 opens up the power sector for
competition with the following provisions:

 Delicensed captive generation

 Encourages distributed generation
 Open Access to transmission and distributionsystems
 Removal of exclusivity in DistributionLicense
 Trading is recognized as a distinct activity
 Mandatory Electricity Regulatory Commissions
 Establishing an Appellate Tribunal for Electricity
(APTEL) for disputeresolution
Structure of Indian Power Market
Concurrent Policy Making Central Government 29 State Governments

Central Electricity State Electricity Regulatory

Regulations RegulatoryCommission Commissions

National Load Regional Load State Load Dispatch

System Operators Dispatch Center Dispatch Centers Centers

Central Generating State Generating

Generation Stations Stations
IPPs

Central Transmission State Transmission

Transmission Utility Utilities
IPTC

State Distribution
Distribution Companies
Private Distribution Companies*

Markets Power Exchanges Bilateral Markets

POWER PROCUREMENT ROUTES
Power
Procurement

Competitive
MoU route
route

Competitive
bidding Markets –
PPA Banking
guidelines OTC & PXs
(DBFOO and
DBFOT)

DBFOO- Design Build Finance Own and Operate

DBFOT- Design Build Finance Operate Transfer
 Indian Power Market - Design
Nature of Contract Duration of Contract Transmission Open access
availability
Long Term 20 years or more Long term open access is
available for a period of 12
years to 25 years
Medium Term >1 years to 5 years Medium term open access is
available for a period of 3
months to 3 years
Short Term
Short Term – Bilateral Up to 1 year For a period of up to 3
months
Short Term – Power Exchange Day Ahead Market (1 day) 1 day (corridor left after
short term bilateral)
Term Ahead Market ( Week Weekly basis (FCFS/Day
Ahead) Ahead)
Deviation Settlement Real time balancing mechanism for settling deviation from
Mechanism schedule
Provisions for Competitive Markets
 Section 66 of the Act mandates the development of an electricity market
& market institutions

 Section 60 empowers the ERCs to issue such directions as it considers

appropriate to a licensee or a generating company if the licensee or
generating company enters into an agreement or abuses its dominant
positions or enters into a combination which is likely to cause an
adverse effect on competition in the electricityindustry
Provisions for Competitive Markets
 Allows multiple generators to come up andcompete
 Allows larger consumers to choosesupplier
 Prescribes competitive procurement of power on
long term
 Aims to create a National Market via compulsory open access
 Policy framework assures
 reasonable and stable returns oninvestments
 Well defined Regulatory mechanisms

 Makes governments responsible for providing power on

demand
 Tariff Based competitive bidding
• Tariff determined through the process of competitivebidding.
• Procurer can invite bids for purchase ofpower.
• Contract for supply of power is awarded based on the lowest tariff.
• Supply of power by the generating company could be with or
without any fuel and specificlocation.
Why Competitive Bidding
 Competitive procurement of electricity reduces
the cost of power procurement for thediscoms
 It prevents the formation of buyer/sellercartels
 End-consumer gets electricity at optimum
price as 80- 85% of what consumers pay as
tariff is power procurement cost
Why Competitive Bidding
Efficient power procurement becomes important
to ensure that:
 Consumers get affordablepower
 Generation and transmission capacity owners
and developers get attractive return on their
investments
 Discoms remain financiallyviable
 Competitive tariffs ensure that operational and financial
efficiencies are enhanced in a sector largely dominated
by state-owned companies used to working on the cost-
plus methodology
CERC Study Findings
• The levelized prices discovered under the
competitive bidding process are lower compared
to levelized prices under cost plus methodology
for 11 of the 14 projects examined
• Sensitivity analysis also shows that levelized
prices discovered under competitive bidding
would continue to be lower as compared to
levelized price arrived at under cost plus
methodology even after accounting for
considerable variation in coal costs and coal cost
escalation rates
CERC Study Findings
Competitive Bidding Guidelines: Objectives

 Promote competitive procurement ofelectricity

 Facilitate transparency and fairness in procurement
processes:
 Transparency ensured by Guidelines & Standard Bid
Documents for tariff based bidding
 Enhance standardization and reduce ambiguity and time
for materialization of projects
 Standardization of Bid documents, Bid submission and
evaluation process, timeline for bidding process, tariff
structure
Competitive Bidding Guidelines:
Objectives
 Provide flexibility to suppliers on internal operations while
ensuring certainty on availability of power and tariffs for
buyers
 Tariff to be quoted upfront for life of plant and Regulator to
adopt tariff arrived at through transparent bidding process as
specified by the Guidelines
 Developer has the flexibility to choose optimum unit
configuration
 Provides incentive to Developer to adopt innovative financial
modelling and tax planning to ensure competitive tariff &
return on investment
Competitive Bidding Guidelines
March 2009 Amendments
 The National Electricity Policy stipulates that 15% of the
new generating capacity can be sold outside the long
term PPA
 Hydro project tariffs to be determined by the ERCs,
provided it has long term PPA for at least 60% of the
total saleable design energy of the project
 Sale of electricity outside long term PPA: Usually for less
than 1 year
 Under Case 2 bidding, in order to ensure timely
commencement of supply of electricity and to convince
the bidder of the irrevocable intension of the procurer,
project preparatory activities must be completed on
time by the procurer
Case 1 & Case 2 Bidding
Case 1 Bidding
Case 2 Bidding
 Case I Bids: Gujarat

Case I Bids: Gujarat

 Bids received for 4430 MW as against requirement of

3000 MW
 Levelised Tariff quoted by the bidders was in the range of Rs 2.34/kWh to Rs 4.35/kWh
at Gujarat STUinterface
 Section 62 & Section 63
 Section 62 provides for determination of tariff through the
MOU route
 Section 63 says that the ERC “shall adopt the tariff ” if it is
determined by a transparent bidding process according to
guidelines
 Aptel ruled in 106 & 107 of 2009 that it is “purely” an ERC’s
decision whether it approves a negotiated tariff or directs a
licensee to procure power through compettitive bidding
 Competitive Bidding - Issues
 Association of Power Producers and Prayas in their recent presentation to Forum of
Regulators have apprised the Forum about the emergent issues in competitive
bidding:
 Co-existence of cost plus regime with competitive bidding
 Rebidding based on unconvincing grounds
 Post bidding changes
 Issues withthe timeperiod of 25 years and the uncertainty that it may
bring to project developers, especially with respect to fuel costs & fuel
availability
Competitive Bidding - Issues
 State owned discoms seem reluctant to issue RFPs for power
procurement
 Many states have state owned gencos whose power they have
to buy
 As these state owned gencos have not been efficient in
delivering contracted quantum of power, discoms have
tended to buy more in the short term market
 Data on power procured through bilateral trades Vs
exchanges shows significantly higher volumes and prices for
bilateral trades than forexchange traded power
Competitive Bidding - Issues
In the recent years, many state governments have
started to demand up to 50% of the power
generated from a plant situated in their state
should be allocated to them – example,
Chhattisgarh, Orissa, in return for land, water,
etc
Tamil Nadu has demanded that the entire power
from phase 1 of the Kudankulam nuclear power
plant (1000 MW) should be allocated to it
Competitive Bidding - Issues
NTPC – India’s biggest generator is still selling
its power through the MOU route
With next scheduled plants coming up in three
power hungry states – UP, Bihar and Tamil
Nadu, the states are likely to up the ante on the
allocation issue
Competitive Bidding - Issues
The 5 year exception granted to NTPC and other
PSUs by MOP on competitive bidding 2006-
2011 has been withdrawn from FY 14 onwards,
through a new circular dated 5 Jan, 2011
All appeals by the PSUs have been rejected by
MOP
Fuel Supply Issues
 2 main issues in both domesticand imported coal

 Uncertainty of pricing

 Uncertainty of supply
Domestic Coal
 CIL’s inability to fulfill targets
 Project developers not getting coal on time or in contracted
quantities
 Project developers’ risk goes up as PLFs fall or forced use
imported coal, raising generation costs – domestic coal is 45-
70% cheaper than imported coal
 Refusal to sign FSA withgenerators
 Despite a Presidential directive, CIL is yet to sign FSAs
with generators
 CIL’s board is yet to approve fresh penalty clauses
 Proposed penalty levels:
Domestic Coal
 CIL is also considering introducing a mechanism to pool
the prices of imported coal with domesticsupplies
 CIL has sought technical advice from CEA on the
feasibility of a pooling mechanism as most plants can
handle only up to 15% imported coal mix
 Such a pricing system would work only if all domestic
consumers accept the resulting higherprice
 CIL board has yet to decide on final draft of standard FSA
Domestic Coal
 CIL’s independent directors have objected to
severe penalties for non-performance.
 NTPC has refused sign FSAs until the penalty
clause is made stiffer
Imported Coal
• Imported coal

 Indonesian coal prices have gone up

significantly that government’s decision to link
export prices of coalwith international benchmarks
 The escalation of fuel cost will continue to be governed
by CERC regulations in force

• Two UMPPs, Tata Power’s Mundra and Reliance Energy’s

Krishnapatnam projects are in trouble on account of the
Indonesian government’s decision to raise coal export
prices
Natural Gas
 KG D6 production is falling – is expected to be down
to 65% of the target
 Affects power plants proposing to use KG D6gas
 1st priority to fertilizer sector; thenpower
 RGPPL was to get gas allocation on par with the fertilizer sector
(up to 90% of the allocation) but the order has been held back
after other power producers protested. Current production in
the range of 1000 MW
 Reliance Energy’s Samalkot power plant based on KG D6 gas
is practically shelved
Other PPAs in trouble - Adani-
GUVNL
 According to the PPA signed by Adani Power and GUVNL
in 2007, the company was to supply GUVNL 1,000 MW
for 25 years at a levelised tariff of Rs 2.35 a unit.
 Adani sought termination of the PPA in November
2008 claiming difficulties in obtaining coal (from
Gujarat Mineral Development Corporation Ltd). It also
cited the rise in the prices of imported coal from
Indonesia.
 GUVNL moved GERC which refused to terminate thePPA
 Adani Power moved the ATE which also ruled inGUVNL’s
favour last year.
 Following this, Adani approached the Supreme Court
and the case has beenadmitted.
Some Other PPAs in trouble –
Tiroda
 Tiroda TPS in Maharashtra (Adani Power)
 To supply 1320 MW to MSEDCL @Rs.2.64 levellised tariff, fuel
sourced from Lohara coal block with a performance guarantee of Rs
99 crore. But was denied MOEF clearance since it was in buffer zone
of the Tadoba tiger sanctuary and was given tapering linkage in lieu
of Lohara.
 Adani claimed force majeure and asked for tariff revision/return of

• performance guarantee but not revoking of the PPA

 Adani Power had already obtained additional coal linkage from
WCL and SCCL meeting entire capacity of 1980 MW, which
together with the tapering linkage is enough for the full 1980 MW
 Case is subjudice
Conclusion
Competitive bidding is one of the ways to
introduce transparency and accountability in
thesector
Present glitches are part of the learning curve
Competition will bring in optimisation of
resources, bring in operational and other
efficiencies and ultimately, lead to greater
customersatisfaction
THANK YOU