IDFC ENERGY ADVISORY BOARD

February, 2010

Issues with Tariff based Competitive Bidding under Case I route

Issue 1: Qualifying requirements

a. Land: The Bidder should have acquired and have taken possession of at least 50% of the area of the land as indicated in the environmental clearance (eg. TOR) and also certify through an affidavit the total land acquired for the power station and that there are no pending claim(s)/litigation of any nature against/involving the Bidder vis--vis land and that the Bidder has absolute rights and authority to establish and run power plant on the land.

b. Fuel: In case of domestic coal, the Bidder should have fuel tied up for the total installed capacity for the term of the PPA. In case of imported coal, the Bidder shall have either acquired mines having proven reserves for at least fifty percent (50%) of the total installed capacity for the term of the PPA or should have at least signed Fuel Supply Agreement for five (5) years for the total installed capacity. Similarly for domestic gas and RLNG.

c. Water: The Bidder shall have acquired approval for the quantity of water required for the power station.

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d. Environmental & Forest Clearance: The Bidder shall have submitted the requisite proposal, for the final environmental clearance approval.

Comments and suggestions: Land: A Bidder needs to meet the entire technical qualifying requirement listed above to qualify for the tender. This in turn means that the project developer needs to spend money upfront for acquiring 50% of the land when the financial closure of the project has not been achieved. Only bidder with deep pockets can meet the requirement. Another relevant issue here is that many developers plan a phased development of the project. However, they need to take environmental clearance for the entire planned capacity of the project. This implies that even if a bidder wishes to bid for the capacity being targeted in the first phase of the project or a part of the capacity being targeted in the first phase of the project, there may be a situation where he would need to show land acquisition for more than that phase. Therefore, it is suggested that the condition of land availability should be modified such that land acquisition is correlated with the phase of development of the project.

Fuel: As regards the fuel, most of the projects that have received the coal linkages do not meet the qualifying requirement of having fuel for the total installed capacity. They either do not have the quantity of fuel on normative basis or the linkage, if available, is only for one unit whereas the project is defined in environmental clearance as two units. This leads to the project getting disqualified under the qualifying requirements. The issue of fuel gets further compounded in case of coastal projects wherein as per the policy, the coal linkage is to be provided for only 70% of the requirement and the balance has to be tied-up by the developer through import. Thus effectively, if a coastal based project has only domestic coal linkage then as per the SBD document, the bid becomes nonresponsive and can get rejected if the imported coal is not tied for the balance installed capacity. In fact, the linkage available for non-coastal projects is also usually not sufficient when computed on normative availability basis, which has resulted in projects getting tagged as non-responsive in tender evaluation. /8 2

Therefore, it is suggested that the condition of fuel availability should be modified such that fuel availability or tie-up in case of coal based projects is correlated to 70% of the coal linkage according to the phased development of the project.

Environmental & Forest Clearance: The process of obtaining environmental clearance is time taking. Therefore, it is possible that at the time of bidding, the process of obtaining such clearance is in an initial or intermediate stage. While it is recognized that the process of public hearing and its outcome has a crucial bearing on the fate of the clearance, the condition of submitting the proposal for final environmental clearance approval is somewhat restrictive. Given that the process of bidding takes time to culminate, it is possible that the proposal for final environmental clearance may be submitted by the time of opening of the financial bid. Therefore, it is suggested that the condition of environmental and forest clearance should be modified such that the bidder is required to submit the requisite proposal, for the final environmental clearance approval by the time of opening of the financial bid. If at the time of opening of the financial bid, the bidder is not able to meet this requirement, the bid should be returned as unresponsive or disqualified.

Issue 2: Contract Performance Guarantee The successful bidder is required to provide a Contract Performance Guarantee within thirty days of issue of Letter of Intent (LoI) by the Procurer. This Guarantee is determined on the basis of Rs. 30 lakhs/MW of the total Contracted Capacity. The first issue here is that the level of Guarantee may turn out to be very high (for 1000 MW, Rs. 300 Crores) and a bidder without deep pockets may be unable to furnish such guarantee prior to the financial closure of the project. Therefore, it is suggested that the level of the Contract Performance Guarantee may be lowered. It may be argued that lowering the level of this guarantee may encourage non-serious bidders. To take care of such concerns, the termination cost of the PPA may be increased and kept at a very high level so that it prohibits non-serious bidders. /8 3

Another issue here is that under the bids, the Procurer recognizes the bidder and not the project developer. Therefore, the Bid Bond and Contract Performance Guarantee are provided by the Bidder. In case the Bidder is a Trader, then the developer provides the requisite Bank Guarantee to the trader on back-to-back basis. This leads to two Bank Guarantees for one single sale contract. submitted that the GoI take note of this point and evolve a way out. It is

Issue 3: Qualifying requirement and time period for meeting the Condition Subsequent It has been observed that although some of the projects have achieved Financial closure and have already awarded EPC contract and paid advance also but still they have not been found to be Technically responsive.

The SBD in the Power Purchase Agreement indicates various milestones under Condition Subsequent which needs to be fulfilled by the Bidder in minimum 10 months, some of the conditions to be fulfilled by the Bidder but not under the control are: (a) Execution of the Fuel Supply Agreement (b) Obtaining all the necessary permission for the long term open access (c) Obtaining all Consents, Clearances and Permits required for supply of power to the Procurer(s) The above listed milestones are quite critical for timely supply of power to the Procurer, however it may be mentioned that these are not directly under the control of the Bidder. The Bidder can only apply for the clearances and follow up regularly. As per the PPA, failure to meet the Condition Subsequent within the time line means payment of additional Bank Guarantee on weekly basis at the rate of Rs. 1.50 lakhs per MW of Contracted Capacity. The SBD limits the maximum liquidated damages to Rs. 40 lakhs/MW before encashing the Bank Guarantee and terminating the contract. This effectively means that the Bidder has less than 7 weeks time to achieve the milestones, which is a very stringent requirement.

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Comments and suggestions: As far as the qualifying requirements are concerned, it is suggested that these requirements be diluted keeping in view the ground realities / practical difficulties like reducing land acquisition requirement from present 50 % to 25-30 %, aligning fuel requirement with the Government policy of coal allocation including for coastal projects, keep TOR approval only as QR for Environment Clearance etc. Correspondingly, time period for meeting the condition subsequent may be increased to at least 18 months from the present 10 months.

As far as the PPA is concerned, though the Bidder intends to fulfill the obligations of the PPA which it has entered with the Procurer, the above listed Conditions are genuine concerns of the Bidder which the Procurer needs to understand and appreciate as the Procurer is also in major deficit of power and the encashed Bank Guarantee may suffice to purchase power on short term for a very short duration. Providing time frame of say 18 months as Condition Subsequent with regular monthly project progress review would be a win-win situation for the Procurer too as the Procurer would be able to get the base load power at a quite competitive tariff vis--vis the volatile short terms prices.

Issue 4: Application of Open Access As per the SBD, in case the power plant is located within the Procurer State than the project bus-bar becomes the Delivery Point and it is the Procurers responsibility to co-ordinate with the State transmission network for evacuation of power. However, in case the power plant is located outside the State than it is the responsibility of the Bidder to obtain Open Access. In case the signatory of the power transmission agreement is an IPP/Trader than POWERGRID as payment security mechanism demands in addition to Letter of Credit 6 months billable amount as Bank Guarantee but if the same Open Access is obtained by the Procurer than only Letter of Credit suffices for POWERGRID. Thus the Bidder obtaining the Open Access increases the tariff for the Procurer which can be easily avoided.

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Further, as per the SBD, the LC is provided to the Bidder only for the generation charges and not for the transmission charges. It only states that the transmission charges shall be reimbursed.

Comments and suggestions: As on date the Procurer already has a power transmission agreement with PGCIL, the contracted capacity is dedicated to the Procurer for 25 year period. It is advisable that the Procurer obtain the Open Access as (a) it would be in parity with the plant located with the State and (b) the loading of 6 months Bank Guarantee charges can be limited/reduced.

Issue 5: Escalation Rates (fuel, transportation, etc) On todays base cost, escalation rate used for evaluation is applied to find the base cost for the 1st year of operation. This 1st year base tariff becomes the basis on which the escalation for making payment is applied.

This means that if based on the present coal price the fuel charges works out to be Rs. 0.50 per kWh, and considering the present escalation rate for evaluation of bid as (say 5%), then the coal price for 1st year would be Re. 0.58 per kWh. This becomes the base price on which CERC escalation rates for payment will be applied for making payments. But in case the coal prices escalate by more than 5% during the 48 months of project commissioning then the Bidder has no protection under the present SBD.

Comments and suggestions: SBD may, therefore, be amended to take care of actual escalation in coal price including freight escalation rate during the construction period of 48 months to arrive at 1st year base tariff.

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Issues related to the regulatory framework

Issue 1: Regulatory Hurdles / Limitation In the earlier Case 1 bid, transmission charges (as applicable on date) was added to the levellised generation charge to evaluate the bids. However with the present SBD, even transmission charges have been escalated on annual basis in the same line as fuel transportation charges so that there could be parity between fuel transportation and power transmission charges for evaluating the tariff at the procurer periphery. Such frequent changes in evaluation criteria impede progress and finalization of bids.

Comments and suggestions Percentage increase of capacity addition in railway network vis--vis capacity addition in power transmission network is quite insignificant primarily because the railway network is already spread over nook and corner of the country whereas the major power transmission addition being undertaken is for evacuation of power. With large generation capacity additions there is need for corresponding increase in transmission capacity additions. Thus comparison of increase in freight charges and transmission charges for deriving the escalation rates are incomparable. This can be seen from the CERC escalation rates where in the maximum inland freight escalation rates is 2.48% and the power transmission escalation rates are 5.61%. These rates are to be applied on an annual compounding basis from the date of bid submission till the tenure of the contract. This makes the plant located at the pit head unviable compared to plant located within the State which has invited the bid, as the transmission charges would be ZERO. This necessitates revising the transmission escalation rates and fixing it at a more realistic level keeping in view the future growth of the Transmission system and estimated cost. Further, since transmission charges are to be paid by the procurer on an actual basis, it is suggested that there should be no loading of transmission charges for the purpose of evaluation of bids.

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For the sake of illustration to show the impact of transmission charges escalation, one single delivery State vis--vis plant located in various State has been compared below: Sr. Plant Location No. Delivery State Transmission charges Escalated transmission charges as considered during evaluation ZERO (CTU+STU)

1.

Maharashtra

Maharashtra

ZERO (CTU+STU)

2. 3. 4. 5.

Chhattisgarh (WR) Orissa (ER)

Maharashtra (WR) Maharashtra (WR)

Rs. 0.12 per kWh Rs. 0.28 per kWh Rs. 0.26 per kWh Rs. 0.33 per kWh

Rs. 0.256 per kWh Rs. 0.618 per kWh Rs. 0.577 per kWh Rs. 0.731 per kWh

Uttar Pradesh (NR) Maharashtra (WR) Karnataka (SR) Maharashtra (WR)

Thus if Maharashtra invites tender then it is a forgone conclusion as to who wins the bid in case a plant located within Maharashtra is qualified financially and technically. This clearly upsets the common understanding that carrying coal is more expensive than transmitting power. Additionally, for carrying coal you also burn diesel or use electricity, thus leaving more carbon footprint.

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