Competitive Bidding Review Prayas

Good take-off but turbulence ahead
About Prayas
Prayas (Initiatives in Health, Energy, Learning and Parenthood) is a nongovernmental, non-profit organization based in Pune, India. Members of Prayas are professionals working to protect and promote the public interest in general, and interests of the disadvantaged sections of the society, in particular. The Prayas Energy Group works on theoretical, conceptual and policy issues in the energy and electricity sectors. Activities cover research and intervention in policy and regulatory areas, as well as training, awareness, and support to civil society groups. The past work of the Prayas Energy Group includes an analysis of the power purchase agreement between the Dabhol Power Company and the Maharashtra State Electricity Board, an analysis of the Sardar Sarovar Project, the development of a least-cost, integrated resource plan (IRP) for the state of Maharashtra, an analysis of agricultural power consumption and subsidy, a critique of the activities of multilateral development banks in the energy sector in India, and the organization of numerous capability building workshops. Since the last few years, the group has focused mainly on issues relating to power sector reforms, renewable energy, energy efficiency and climate change. Its work in the area of power sector reforms includes a study of the regulatory aspects of the Orissa model of power sector reforms, several policy and regulatory interventions at the Central and State levels, a survey based report on Electricity Regulatory Commissions, a report on the privatization of distribution in Delhi, and a study of the Bhiwandi distribution franchisee model. All publications, presentations and reports by the Prayas Energy Group are available at the Prayas website: (www.prayaspune.org/peg)
Transition from MoU to Competitive Bidding: Good take-off but turbulence ahead
Review of thermal capacity addition through competitive bidding in India
Prayas Energy Group Athawale Corner, Karve Road, Deccan Gymkhana, Pune 411 004 Phone: 020 - 6520 5726; Fax : 020 - 2542 0337 E-mail: energy@prayaspune.org; Website: http://www.prayaspune.org/peg March, 2011 Authors: Gayatri Gadag, Ashwini Chitnis, Shantanu Dixit Cover design: Aamod Karkhanis
March, 2011
Prayas Energy Group Pune, India
Acknowledgements The authors would like to thank Shri. Surya Sethi, former Principal Adviser (Energy), Planning Commission of India, senior regulators Shri. J.L. Bajaj and Shri. V.S. Ailawadi, Shri. Alok Kumar from Central Electricity Regulatory Commission, Smt. Rupa Devi Singh from the Power Exchange of India, Prof. V. Ranganathan from IIM Bangalore, Smt. Geeta Gouri from the Competition Commission of India, Mr. Pankaj Kapoor from ABPS Infra, Dr. Partha Mukhopadhyay from Center for Policy Research and Shri. Udai Mehta, CUTS, for participating in the round table conference organized by Prayas at New Delhi on 2nd Sept. 2010 to discuss preliminary findings of this study and providing crucial inputs to shape this report. We would also like to thank Mr. Amulya Charan, MD, Tata Power Trading Company Ltd. for his helpful review. We also thank Nidhi Jamwal for language editing. As always, support of Prayas members, especially Ashok Sreenivas, Daljit Singh, Girish Sant, Sreekumar N. has been critical.
Summary
Capacity addition is a complex process influenced by policy decisions at various levels. Memorandum of Understanding (MoU) based contracts of the 1990s were the first major policy change that strived to attract private sector investment in generation. However, lack of transparency in signing the MoU, failure to plan capacity addition in a comprehensive manner and absence of competition in selection process were some of the primary governance failures that undermined any usefulness of the IPP policy. Learning from MoU fiasco, the Electricity Act 2003 (hereafter referred to as Act) rightly emphasizes on competitive bidding framework for encouraging private sector investment in generation. As per the section 63 of the Act, the regulatory commission has to adopt tariff discovered through bidding if due process as per guidelines has been followed. In line with the Act mandate the Ministry of Power notified competitive bidding guidelines in 2005, which lay out framework for bidding process as well as standard templates for bidding documents such as RFP, RFQ and PPA. In short span of 4-5 years the this competitive bidding framework has demonstrated significant potential in attracting investment as capacity of over 42,000 MW has already been contracted by various states through this route. Recently, since 5th January 2011, competitive bidding route for contracting new capacity has been made mandatory for all distribution companies. As such the importance of fair and rational process for this purpose has increased manifold. With this background, objectives of this Prayas study are: To provide broad overview of outcome of competitive bidding process till now To analyze competitive bidding processes undertaken in various states to understand key weaknesses and strengths of bidding framework for ensuring transparent, rational bidding process, and, To analyze competitiveness of the tariff discovered through bidding process undertaken so far. The paper analyzes only the coal based thermal capacity contracted on long term basis through bidding process. This study essentially relies on information and data that is publicly available through sources such as websites of the regulatory commissions, Central Electricity Authority (CEA), utilities, project developers websites, red herring prospectus from the exchange board (SEBI) and media reports. The review provides a broad overview of capacity contracted so far. For example, over 70 percent (17,730 MW) of contracted capacity, (excluding UMPPs), would be dependent on domestic coal linkages from public sector coal companies, and hence would be subjected to associated risks in terms of quality, availability and cost. This review also shows that over 50 percent of the capacity contracted through competitive bidding is concentrated with only two developers (Reliance and Adani). Also more than half of contracted capacity is being built through Chinese EPC contracting.
The paper presents the overview of tariff discovered through bidding process. and focuses on Case 1 (location non-specific) projects for analyzing competitiveness of the tariff discovered. Close to 16,000 MW of thermal capacity has been contracted through the Case 1 route, which is about 40 percent of the total capacity contracted through bidding process. The levelised tariffs discovered through the Case 1 route range from Rs. 2.25 per unit to Rs. 3.28 per unit. Out of ~16,000 MW capacity contracted through Case 1 route. To evaluate competitiveness of the tariff, we analyse tariff structure (capacity and variable components, fixed and indexed components etc.) and tariff streams over entire 25 years PPA term. We further compare discovered tariff vis-a-vis cost-plus projects tariff. Competitively Bid projects have different commissioning dates through 201415. Hence the FY 2010-11 tariff for these projects has been normalized based on bid tariff structure and accounting for escalation and index rate applicable. Details of this normalization are provided in Annexure II. FY 2010-11 tariff for existing cost-plus projects is compiled from tariff orders of respective SERCs. The analysis shows that levelized capacity charge for twelve Case 1 projects (~10,630 MW) has equivalent or embedded capital cost between Rs. 3.5 - 4.5 Cr/MW whereas capital cost of recent projects being developed through cost-plus route is Rs. 4.5 - 5.9 Cr/MW. Similarly analysis of variable charge (after being normalized to base year FY 2010-11) shows that for most projects, over the term of the PPA it falls between Rs. 1.50 - 3.50 per unit and is less than Rs. 2 per unit for first 15 years of the PPA term. As against this, the current variable charges of many of the cost-plus projects in states such as Maharashtra, Rajasthan and Tamil Nadu are well above Rs. 2 per unit for the year 2010 itself. Similarly it is interesting to note that nominal total tariff (including both fixed and variable charges) over the term of PPA does not exceed Rs. 4.20 per unit1 and all projects, barring a single exception, offer total nominal tariff of less than Rs. 3 per unit till the 15th year of PPA. This tariff is comparable to current tariff of many state Genco units today. For example tariff of the recently commissioned Paras and Parli units of Mahagenco is around Rs. 3 per unit. In Rajasthan, the recently commissioned units of Kota TPS and Suratgarh TPS have tariff of over Rs. 3 per unit. This shows that the tariffs discovered through the bidding process are competitive. Considering the fact that tariffs discovered through bidding process appear to be competitive than similar cost plus projects and that the process has succeeded in attracting investments on a large scale, implies that adopting bidding route for capacity addition is a step in the right direction. However closer analysis of bidding processes undertaken (both successfully concluded and abandoned) by various states raises new governance related challenges and concerns. To understand these issues the paper closely looks into bidding processes undertaken by six different states. Some of the important weaknesses/shortcomings of the bidding process that surface from the state experiences are as follows: Tweaking of bidding process: In some cases post bidding processes, post bidding changes have been made to bidding documents. In some cases under the pretext of customizations significant deviations from standard bidding documents without regulatory approval have been made.
Assuming the escalation rates as per CERC notification dated 31st March 2010
Similarly there are cases of post bidding changes in nature and/or character of the project. Rebidding also seems to be a common phenomenon. It is possible that due to prevailing sector scenario or unforeseen developments (e.g. land / environmental clearance not being available) changes in bidding process would be required. Still it is of utmost importance to ensure that such changes are not made for the benefit of a particular developer or at the cost of consumers. Limited regulatory oversight and scrutiny: Regulatory role in power purchase planning is very crucial. The guidelines do not mandate the Discoms to undertake a thorough demand forecast analysis before initiating the bidding process. It instead allows the discom to rely upon forecasts made by Central Electricity Authority (CEA) for this purpose. This limits the role of the commission in the crucial aspect of power purchase planning. Also the commissions at times perceive the discovered tariff as fait accompli and do not actively engage in verifying and satisfying themselves on whether the it is as per prevalent market rates and/or whether the bidding guidelines have been duly complied with. The regulatory scrutiny also needs to be more stringent in light of instances of post bidding or non transparent changes in bidding documents (including PPAs) observed in this review. Adherence to contracts by developers: The review highlights cases where developers have failed to or have claimed inability to comply with contractual commitments enshrined in PPA. Such a trend would negate benefits of competitive tariff discovered through bidding process and timely capacity addition. In case of domestic coal based projects, environmental or other issues with allocated captive mine, changes in coal linkages are some of the reasons leading to noncompliance with PPA terms. Similarly projects using imported coal, the ability / willingness of project developers to comply with PPA terms if international coal prices increase significantly, is matter of concern. This experience necessitates review of contractual commitments to ensure compliance with PPA terms and to safeguard interests of discoms / its consumers. Non-compliance with transparency and accountability related provisions: It has been observed that many procurers have not been adhering to various transparency and accountability related provisions of the guidelines. For example, many states have not uploaded anonymous comparison of bids or bidding documents, and all agreements signed with successful bidder on the website. Further even the tariff adoption orders could not be easily found on many ERC websites. Non-compliance with key transparency and accountability provisions again raises questions about integrity of bidding process undertaken.
The above issues highlight many areas of concern in the competitive bidding process. Addressing these concerns would require detailed techno-legal review of the guidelines and standard bidding documents, as well as discussions with project developers, financial institutions and other actors. This is beyond the scope of this study and we hope that either Ministry of Power or Forum of Regulators would undertake a detailed review of these documents and process so as to address the various concerns and shortcomings. None the less, since strengthening transparency and regulatory oversight, and incentivizing rational, transparent bidding are essential components of addressing the concerns mentioned above, our suggestions in this regard are discussed below.
1. Strengthening Transparency and Regulatory Oversight Best Practice Code for SERCs: To overcome such ambiguity and/or divergent regulatory approaches, it would be desirable if Forum of Regulators develops Best Practice Code for ERCs Oversight on Competitive Bidding Process. This will help develop uniform regulatory practice and will also strengthen governance of the bidding process. Central Information Repository (CIR): It is essential to have a central information repository that will compile all the important information and documents for each state and each bidding process, such as RFQ/RFP along with date of publication, deviations in bidding documents, respective commissions order in that matter, final signed PPA along with bid evaluation spreadsheet and anonymous comparison of bids. The repository should also maintain data about actual project status of all projects contracted under the bidding route. Transparent and consistent methodology for bid evaluation: Currently each distribution company based on its evaluation committees approach devises its own bid evaluation spreadsheet and at times underlying assumptions are either not clear or not transparent. To avoid such ambiguity or selective discretion in bid evaluation, MoP or CERC should publish standard bid evaluation spreadsheets along with all underlying assumptions and latest escalation rates. If any procurer to customize the standard bid evaluation spreadsheet then the same should be vetted / approved by regulatory commission. Amendments to bidding guidelines to make information accessible to public more easily and in timely manner: The guidelines should be amended to strengthen transparency related provisions. Similarly procurer should be mandated to upload following documents on the website and the same should be kept available to public for the complete term of the PPA. i. bidding documents (RfQ, RfP, any clarifications / modifications issued as part of prebid conference or otherwise) ii. bid evaluation spreadsheet and evaluation committee report / certificate, iii. all other agreements / correspondence with the successful bidder 2. Creating incentive for rational competitive bidding based contracting Along with policy changes such as mandating all discoms to procure new capacity only through bidding route, it would be desirable to also incentive. Two suggestions for such incentivization are discussed below. Central bidding management agency: A central agency could be tasked to undertake competitive bidding on behalf of the discoms. Certain coal blocks (which have been given preliminary environmental clearance) could be offered on priority basis to projects bid through this agency which can be a significant attraction for discoms to outsource bidding process to such an agency. Benchmarking tariff: CERC or FoR could develop benchmarks for long term tariff (for different types of projects) based on evolving experience of tariff discovered through competitive bidding process, CERCs tariff regulations and other market information. Distribution companies managing to discover tariff lower than such benchmark could be allowed some incentive in their Annual Revenue Requirement exercise.
3. Transparency and reforms in fuel (coal and gas) sector: The review highlights that developers fuel supply strategy often plays a critical role in discovering competitive tariff. Transparent, rational and sustainable fuel policy is another important policy change required for effective competitive bidding in generation sector. Unless urgent steps are taken in this regard competition will remain restricted to a few players who can manage the existing constraints, and hence would not be in the interest of consumers or economy at large. Thus, compared to the MoU era of 1990s India has made significant transition towards relying on competitive bidding route to allow private sector investment in capacity addition. Adopting competitive bidding route for capacity addition, though a step in the right direction, raises new challenges and concerns. Hence, this first ever detailed study of competitive bidding based capacity addition in India presents review of important trends in capacity contracted through bidding route and competitiveness of discovered tariff. At the same time, the study points out many governance related issues which unless addressed immediately and in a comprehensive manner, could lead to significant turbulence in coming years. This may surface in the form of increased market power by few players / equipment suppliers, non-competitive tariff discovery, project delays or non-compliance with contract terms. To avoid such negative outcome of bidding based capacity addition it is essential to continuously monitor the outcome of bidding process and take timely remedial measures. We hope this paper would contribute to this process and would initiate further rigorous analysis and debate to strengthen bidding framework.
Abbreviations
ATE: BEC: BOO: CBG: CEA: CERC: CLP: CPI: CSEB: Discom: EGoM: EIA: EPC: FoR: Genco: GERC: GMDC: GUVNL: IPP: L&T: MERC: MoP: MoU: MSEDCL: MU: MW: PFC: PPA: PSEB: PSERC: RFP: RFQ: RVPN: SBD: SEB: SEBI: SERC: STU: UMPP: UPERC: UPRVUNL: WPCL: WPI: Appellate Tribunal for Electricity Bid Evaluation Committee Build Operate Own Competitive Bidding Guidelines Central Electricity Authority Central Electricity Regulatory Commission China Light and Power Consumer Price Index Chhattisgarh State Electricity Board Distribution Company Empowered Group of Ministers Environmental Impact Assessment Engineering Procurement and Construction Forum of Regulators Generation Company Ltd. Gujarat Electricity Regulatory Commission Gujarat Mineral Development Corporation Gujarat Urja Vikas Nigam Ltd. Independent Power Producers Larsen and Toubro Maharashtra Electricity Regulatory Commission Ministry of Power Memorandum of Understanding Maharashtra State Electricity Distribution Co. Ltd. Million Units Mega Watt Power Finance Corporation Ltd. Power Purchase Agreement Punjab State Electricity Board Punjab State Electricity Regulatory Commission Request for Proposal Request for Qualification Rajasthan Rajya Vidyut Prasaran Nigam Ltd. Standard Bidding Documents State Electricity Boards Securities and Exchange Board of India State Electricity Regulatory Commission State Transmission Utility Ultra Mega Power Plant Uttar Pradesh Electricity Regulatory Commission Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited Wardha Power Company Pvt Ltd Wholesale Price Index
Prayas discussion paper on capacity addition through competitive bidding in India
Contents
List of Figures List of Tables 1. Private sector participation in generation: From MoUs to Competitive bidding 2. Objective 3. Overview of capacity contracted through competitive bidding 3.1 Break-up of contracted capacity based on fuel source 3.2 Break-up of contracted capacity based on promoter/developer 3.3. Break-up of contracted capacity based on EPC contractor 4. Governance challenges: Experience from various states 4.1. Uttar Pradesh 4.2 Punjab 4.3 Gujarat 4.4 Chhattisgarh 4.5 Rajasthan 4.6 Maharashtra 4.7 Ultra mega power projects 5. Analysis of tariff discovered through competitive bidding 5.1 Tariff structure and streams of discovered tariffs 5.2 Total tariff 5.3 Capacity charge 5.4 Variable charge 6. Conclusions and way forward Annexure I: Competitive bidding: policy and regulatory framework Annexure II: Methodology used to estimate tariff for 2010-11 Annexure III: List of cost plus projects considered for analysis 2 2 3 6 8 10 10 11 13 13 14 16 18 19 20 23 25 27 30 31 34 37 44 52 53
Annexure IV: Sensitivity analysis of assumptions made during the bid-evaluation of case II projects 54
List of Figures
Figure 3.1: Capacity contracted through competitive bidding Figure 3.2: Levelized tariff discovered through competitive bidding Figure 3.3: Break-up of contracted capacity based on fuel source Figure 3.4 Break-up of contracted capacity based on promoter/developer Figure 3.5 Break-up of contracted capacity based on EPC contracting Fig 5.1: Tariff streams for Case I projects Figure 5.2: Tariff for 2010-11 for both competitively bid and cost-plus projects (COD after 2000) Figure 5.3: Levelized capacity charge for competitively bid projects Figure 5.4: Comparison of capital cost per MW for competitively bid and cost-plus projects Figure 5.5: Break-up of energy charges for competitively bid projects for the year 2010-11 Figure 5.6: Variable charges over 25 years for competitively bid projects Figure 5.7: Levelized variable charges over 25 years for bid projects and cost-plus projects 9 9 10 11 11 30 31 32 33 34 35 36
List of Tables
Table 2.1: Capacity contracted in MW through competitive bidding since 2005 Table 3.1: State-wise capacity contracted through Case 1 and Case 2 bidding route Table 4.1: Gujarat bidding round details Table 4.2: UMPP project details Table 5.1: Snap-shot of capacity contracted under Case 2 bidding route Table 5.2: Sensitivity of coal prices and calorific value on levelized tariffs (Rs per unit) Table 5.3: Snap-shot of capacity contracted under Case 1 bidding route Table 5.4 Tariff Break-up for Case 1 Domestic Fuel based projects Table 5.5 Tariff Break-up for Case 1 Imported Fuel based projects 6 8 16 23 25 26 27 28 28
1. Private sector participation in generation: From MoUs to Competitive bidding

Soon after Indias independence, the Electricity (Supply) Act, 1948 was enacted under which vertically integrated State Electricity Boards (SEBs) were established. To increase the electricity access to rural, especially agricultural consumers, the network infrastructure was expanded significantly in the subsequent years. During this period, the capacity addition was largely undertaken by SEBs with financial assistance from state governments. However, in most states capacity addition did not keep pace with the growing electricity demand, largely due to limitation of government finances and inadequate revenue of SEBs. To bridge the gap between demand and supply, the Central Government set up National Thermal Power Corporation (NTPC) and National Hydroelectric Power Corporation (NHPC) in 1975. The aim was rapid capacity addition in the countrys power sector. Various states are allocated capacity share based on their demand and other socio-economic aspects. This helped in improving demand-supply situation to some extent. Today NTPC and NHPC have an installed generation capacity of over 31,000 mega watts (MW) and 5,000 MW respectively. However, the demand-supply gap that was eased by both these corporations, started to grow again in late 1980s. In 1990s, Indian economy was liberalised and another attempt was made to accelerate capacity addition. Reforms were brought in allowing private and foreign investment in power generation through Independent Power Producers (IPP) policy. IPPs were allowed to set up plants in various states by signing Memorandum of Understanding (MoU) with the respective state governments. IPP selection was not done on competitive basis and most MoUs were signed in a non-transparent manner. The controversial Dabhol Power Corporation set up by Enron in Maharashtra is a classic example of governance crisis during the IPP era. Although hundreds of MoUs for power projects were signed during this time (as per one estimate at the rate of 90 MW per working day), only a handful become operational and that too after long delays. Hence, IPP process not only resulted in high project cost, but also failed to bridge the growing demand-supply gap. For instance, despite a decade of policy focus, the IPPs contributed barely 3 per cent of national generation (15,000 MU) in 2002. Whereas, the improved plant performance (PLF) of state and central government owned generation plants during this decade contributed 3.5 times more than IPPs1. Lack of transparency in signing the MoU, failure to plan capacity addition in a comprehensive manner and absence of competition in selection process undermined any usefulness of the IPP policy. Public agitation and dismal performance of most IPPs forced the government to abandon this route of capacity addition altogether. Mega power policy was another initiative embarked upon by the central government to promote private sector participation in generation. The main objective of this policy was to facilitate setting up of large power projects at pithead and in coastal areas. This way the government hoped to achieve most economical tariff by utilizing economies of scale, location advantages, and fiscal and other benefits. Under the mega power policy, Power Trading Corporation of India Ltd (PTC) was set-up as a nodal agency to identify promoters, on behalf of the interested SEBs, to set-up power projects based on competitive bidding. However, this policy failed to attract many new projects because of lack of enthusiasm on part of SEBs to add capacity through competitive route. Many projects initiated under
1
Prayas booklet Know your Electricity Act 2003 (http://www.prayaspune.org/peg/publications/item/54.html)
this policy in the 1990s never achieved financial and/or technical completion as per the schedule. This policy, however, continues till date, with some revisions mostly in the form of various tax exemptions for private power projects. The year of 1998 was a watershed in Indian power sector. In this year the crucial Electricity Regulatory Commissions Act was enacted. Since 1996, independent regulatory authorities were set up in states which had adopted the World Banks proposed reform and restructuring model, e.g. Orissa. However, it was not until the enactment of 1998 Act that the framework for establishing independent regulatory institutions at central and state level got defined. The main intention behind setting-up such institutions was to delink political interference from techno-economic decision making. The 1998 Act gave regulatory commissions wide ranging authority to control and regulate the sector and to protect consumer interest. The commissions primary role was to evaluate utilitys costs and performance and decide consumer tariff. As far as generation was concerned, the commissions were mandated to regulate and approve investments in generation, to collect and publish data related to demand forecasts, and to determine generation tariff based on performance norms and regulations defined by it. The commissions were also empowered to act as an adjudicator in case of disputes between distribution and generation companies. The Electricity Act, 2003 was the next important step in structural and ownership changes unleashed in 1990s. This Act retained all the powers of regulatory commission mentioned under the 1998 Act, and further strengthened and broadened the commissions role. Overriding all the preceding acts, the Electricity Act made generation a completely de-licensed activity. Any company with appropriate financial, fuel resources and approvals and clearances (mainly for land acquisition and environment) could set-up a generating station anywhere in the country. The Act, applicable at present, allows industries to set-up captive plants and also gives consumers a choice to select power generator through open access mechanism. In addition, it empowers regulatory commissions to award license for trading of electricity. Thus, under the current regime, capacity addition can take place by the following four ways or a combination of these: Utilities inviting bids for power procurement contracted capacity (i.e. based on PPA) Private generators setting up generation capacity with a hope to sell it in short term market merchant capacity Industries or large users setting up generation capacity for their own use - captive capacity and lastly Capacity addition by public sector companies/SEBs (typically for supply to state owned distribution companies).
Learning from the 1990s IPP fiasco, the Electricity Act 2003 emphasises on capacity addition through competitive bidding route. In order to facilitate competition and market operation, the Act mandates regulatory commissions to adopt tariff discovered through competitive bidding conducted in accordance with guidelines issued by the central government. The National Tariff Policy, year also encourages distribution companies (discoms) to undertake all new capacity addition through competitive bidding route. These legal and policy initiatives have had profound impact on the way distribution companies
plan for new generation capacity. Since the enactment of Electricity Act, 2003, capacity of more than 42,000 MW has already been contracted through the competitive bidding process. In the last two decades, the role and mechanism of private sector participation in power generation has steadily evolved.
2. Objective
Efficient and affordable generation is indispensible for a sound power sector. Indeed many issues plaguing the sector today, such as load shedding, cross-subsidy, high tariffs can be addressed, if not completely eliminated by undertaking adequate and economical cost capacity addition. Capacity addition through competitive bidding is considered a key mechanism to ensure reasonable cost capacity addition. As shown in Table 2.1, distribution licensees have contracted significant capacity through competitive bidding route and many more bidding processes are underway.
Case I* 16,265
Case II** 10,340
UMPP 16,000
Total 42,605
Source: Prayas compilation from various sources * Location non-specific projects **Location specific projects Table 2.1: Capacity contracted in MW through competitive bidding since 2005
With recent policy changes, mandating all new capacity contracting by distribution companies through competitive bidding route only, importance of rational competitive bidding process has increased manifold. In spite of over 42,000 MW capacity being added through competitive bidding process, no comprehensive studies have been carried out to analyze the bidding process and its outcomes. Only one study has been undertaken by the Central Electricity Regulatory Commission (CERC) in September 20102. This CERC study compares levelized tariffs discovered for 14 competitively bid projects vis-a-vis the cost-plus tariffs computed for the same projects based on CERC tariff regulations. Whereas the discussion paper concludes that in most cases tariff discovered through bidding is lower than the corresponding tariff based on cost-plus method, it does not comment on any other aspect of the bidding process or the guidelines themselves. Keeping this scenario in mind, the Prayas Energy Group undertook the present study. Prayass discussion paper looks at the larger issues of governance and evaluates the tariff discovered through bidding process and hence it in fact supplements the CERC report. The objectives of Prayas study are: To provide broad overview of outcome of competitive bidding process To analyse competitive bidding processes undertaken in various states and understand key weaknesses and strengths of bidding framework for ensuring transparent, rational bidding
2
Statutory advice of CERC regarding timeframe for tariff based competitive bidding (http://www.cercind.gov.in/2010/Advice_Gov/timeframe_tariff_based_16-09-2010.pdf)
process, and, To analyze competitiveness of the tariff discovered through bidding process undertaken so far.
This discussion paper analyses only the coal-capacity contracted through long-term bidding processes. It essentially relies on information and data publicly available through sources such as websites of the regulatory commissions, Central Electricity Authority (CEA), utilities, project developers websites, red herring prospectus from the exchange board (SEBI) and media reports. Before bringing out the final discussion paper, the preliminary results of the study were presented at a roundtable held in New Delhi on September 2, 2010. The paper is divided into various chapters. The following chapter provides a broad overview of the outcome of competitive bidding processes undertaken so far. The next chapter on Governance Challenges provides insights into the bidding processes undertaken by various states. Thereafter, one chapter provides analysis of tariff discovered through bidding. And finally the last chapter presents key conclusions and way forward. Towards the end of the paper, there are annexures. Annexure-I provides a broad overview of policy and regulatory framework for competitive bidding in India. Readers who are not very familiar with the Indian competitive bidding framework are advised to read this annexure before proceeding to the other sections of the paper. Annexure-II is about the methodology adopted for normalising tariff of competitive bidding undertaken in different years to financial year 2010-11 (which has been considered as reference year for tariff comparison in this paper). Annexure-III lists the projects with tariffs discovered through the cost-plus methodology that have been considered for comparison. Annexure-IV provides a sample bid used to bring out the sensitivity of the assumptions used for bid evaluation.
3. Overview of capacity contracted through competitive bidding

In the Ninth-Five Year Plan (years), the share of private sector in capacity addition was 26 per cent3. This reduced to 13 per cent in the Tenth Plan (years)4. However, the share of private sector is set to increase greatly in the Eleventh Plan (years). Initially the Eleventh Plan envisaged 19 per cent (i.e. 15,043 MW) of the planned 78,000 MW capacity to be developed by the private sector. However, the overall target was revised to 62,000 MW. As per the latest data of the Planning Commission, the private sector is expected to add about 32 per cent (19,797 MW) of this capacity5. Interestingly, both in terms of absolute capacity and the share of the capacity to be added, the revised targets see an increase in private sector participation as compared to the original Eleventh Plan targets. However, it must be noted that not all of the capacity added by private sector is being contracted through competitive bidding. Some of it will be used for trading in short-term markets, while some could be contracted through the MoU route. Table 3.1 shows that from the commencement of the bidding process, about 26,000 MW capacity has been contracted. Apart from this, around 16,000 MW has been contracted through the Ultra Mega Power Projects (UMPP). Thus, in the Eleventh and Twelfth Plan a significant capacity will be added through competitive bidding route. State Chhattisgarh Gujarat Haryana Maharashtra Madhya Pradesh Punjab Rajasthan Uttar Pradesh Gujarat UMPP AP UMPP Jharkhand - UMPP MP UMPP Total Capacity contracted in MW Case 2 UMPP 1320 1320
Case 1 6800 1724 4900 1841 1000
3300 4400 4000 4000 4000 4000 16,000
16,265
10,340
Total 1320 6800 3044 4900 1841 3300 1000 4400 4000 4000 4000 4000 42,605
Source: Prayas compilation from various sources Note: This table may not include some recently bid projects or the projects for which all information is not available in the public domain Table 3.1: State-wise capacity contracted through Case 1 and Case 2 bidding route
Annual report on The Working of State Electricity Boards & Electricity Departments (2001-02), Planning Commission of India, New Delhi 4 White Paper on Strategy for 11th Plan, Central Electricity Authority, New Delhi 5 Presentation by CEA on projects targeted for commissioning in 2010-11 and 2011-12, 26 May 2010
Figure 3.1 and 3.2 show the capacity and tariff respectively for 29 projects contracted through competitive bidding process. Typical project size is between 1,000 MW and 1,500 MW, and the levelized tariff for most projects lies between Rs 2 per unit and Rs 3 per unit.
Domestic/ Captive Coal
4500
Imported Coal
4000 3500
Capacity in MW
3000
2500
2000 1500 1000

500
Figure 3.1: Capacity contracted through competitive bidding
Domestic/Captive Coal
Imported Coal
3.5
Discovered levelized tariff (Rs./kWh)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Figure 3.2: Levelized tariff discovered through competitive bidding
The levelized tariffs in Figure 3.2 are the ones discovered when the bids were opened and hence are not comparable
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3.1 Break-up of contracted capacity based on fuel source

Of the 42,605 MW (including 16,000 MW of UMPPs) capacity contracted so far, about 30 per cent is based on imported coal, 27 per cent on domestic captive coal mines, and 43 per cent on domestic coal linkages. If the UMPPs are excluded, then about 17 per cent (4,324 MW) of capacity will use imported coal, while about 70 per cent (17,730 MW) will depend upon domestic coal linkage. Thus, it is essential to note that excluding UMPPs, a large portion of capacity contracted through bidding is dependent on performance of government owned coal companies. Such projects will also be subjected to price, quantity and quality risks of fuel supply, similar to the existing public sector generation projects.
Including UMPP
Captive Mines/Coal Blocks 27%
Captive Mines/ Coal Domestic Coal Blocks 13% Linkage 43%
Excluding UMPP
Imported Coal 17% Imported Coal 30%
Domestic Coal Linkage 70%
Figure 3.3: Break-up of contracted capacity based on fuel source
3.2 Break-up of contracted capacity based on promoter/developer

The Figure 3.4 shows that out of all the capacity being contracted including UMPPs, about 50 per cent is being developed by only two promoters, namely, Reliance ADA Group and Adani Power Ltd. Reliance alone has bagged 13,201 MW capacity projects (including three UMPPs and one other project). Even if the UMPPs are excluded, the situation does not change much as in this case Adani Power has contracted 30 per cent of the remaining overall capacity. Some of the new players in the domestic power sector, such as Sterlite Energy Ltd, L&T Power Ltd, and China Light and Power Holdings (CLP) have also been able to secure contracts for 1,980 MW and 1,320 MW (both L&T and CLP) respectively CLP .
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Including UMPP
Others 32%
Excluding UMPP
Other Reliance 39% Power 33%
Adani 28%
J.P. Associates 8% Tata Power 10%
Adani Power 17%
JPA 13%
Lanco 10%
India bulls 10%
Figure 3.4 Break-up of contracted capacity based on promoter/developer
3.3. Break-up of contracted capacity based on EPC contractor

The situation in EPC contracting for competitive bidding based projects is no different from contracted capacity based on contractor/developer. EPC contracting for competitive bidding based projects is also concentrated with players in a few countries, mostly Chinese, Japanese and Korean. As shown in Figure 3.5, over 50 per cent of the contracted capacity is being built through Chinese EPC contracts. If one excludes the UMPPs, then this number goes up to a whopping 67 per cent. Recently some Indian companies have succeeded in winning EPC contracts for competitively bid projects (L&T Power Ltd, Lanco Infratech Ltd, etc), but their market share still remains very low. It is important to carefully assess the implications of this trend from the perspective of energy security, strengthening domestic manufacturing industry and technology capacity. It is interesting to note that almost all projects coming up through the bidding route are using 600 MW / 660 MW / 800 MW super-critical units.
Including UMPP
Japan & Korea 10%
Indian 5%
Indian 8%
Not identified yet 25%
Excluding UMPP
Not identified yet 34%
Chinese 51% Chinese 67%
Figure 3.5 Break-up of contracted capacity based on EPC contracting
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This brief overview of capacity contracted through bidding process indicates that bidding framework and guidelines have at least succeeded in attracting large investment in generation sector, thereby significantly increasing private sectors role in capacity addition. This overview also highlights that over 70 per cent (17,730 MW) of non-UMPP capacity would still be dependent on domestic coal linkages from public sector coal companies, over 50 per cent of the capacity contracted is concentrated with only two developers (Reliance and Adani), and also over 50 per cent of this capacity is being built through Chinese EPC contracting.
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4. Governance challenges: Experience from various states

The previous chapter provides a broad overview of the outcome of competitive bidding processes undertaken so for. This section of the paper delves deeper into those processes and analyses competitive bidding exercises underway in various states. The aim of this chapter is to understand key weaknesses and strengths of bidding framework for ensuring transparent and rational bidding process. The paper reviews bidding processes, both successfully concluded and abandoned, in six Indian states Uttar Pradesh, Punjab, Gujarat, Rajasthan, Chhattisgarh, and Maharashtra. It also analyses UMPP processes.
4.1. Uttar Pradesh

With privatization of Anpara C Uttar Pradesh (UP) became the first Indian state to embark upon competitive bidding post the Electricity Act, 2003,. Anpara C is a brown-field, pit-head project with linkages from the Northern Coal fields. The project shares some facilities with Uttar Pradesh Rajya Vidyut Utpadan Nigam Limiteds (UPRVUVNL, state owned generation company) Anpara A (630 MW) and Anpara B (1,000 MW) projects. Amidst massive protests over privatization of Anpara C, UPRVUNL initiated the competitive bidding process in November 2004. Hyderabad-based Lanco Kondapalli Power Pvt Ltd quoted the lowest levelized tariff of Rs 1.56 per unit, followed by Reliance Energy Generation Ltd at Rs 1.81 per unit and Essar Power Ltd at Rs 2.53 per unit. The generation cost of Anpara A and Anpara B for the year 2009-10 as per UPERCs tariff order is Rs1.54 per unit and Rs 1.96 per unit.7 After the tariff discovery process, Lanco Kondapalli Power Pvt Ltd was issued the Letter of Acceptance (LoA) on September 29, 2006. Lanco then formed a company called Lanco Anpara Power Pvt Ltd and signed a power purchase agreement (PPA) with the procurers on November 12, 2006. Meanwhile the Union ministry of power (MoP) had published the bidding guidelines in February 2005. UP Power Corporation Ltd submitted a petition before the commission to approve the PPA. On December 31, 2007 the UPERC adopted the tariff discovered through bidding process (i.e. Rs 1.56 per unit) for 2 x 500 MW Anpara C project and approved the signed PPA.8 In the meantime, about nine months after signing the PPA for Anpara C, the Uttar Pradesh government in July 24, 2007 allowed all the existing and future thermal power plants in the state to vary their unit size by 20 per cent. In the light of this order, Lanco sought consent to increase capacity of its power plant from the existing 1,000 MW to 1,200 MW. Interestingly, both Lanco and UPRVUNL were against an increase in capacity (+/- 20 per cent) at the RFP Stage. They believed it could create problems in gaining environmental and transmission clearances, delay project timelines and could also prove unfair to the parties who had participated at the RFQ Stage, but could not make it to the RFP stage9.
UPERCs Tariff Adoption order dated December 31, 2007 http://www.uperc.org/olduperc/pet.no.509-07%20order%20dated%2031%20dec-07.pdf 8 UPERCs Tariff Adoption order dated December 31, 2007 9 UPERC order dated September 14, 2007 (Petition 479/07)
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Later, the UP government came up with an energy policy10 in October 2009 allowing the open market sale of fifty of optimized generation (increased capacity). Based on this policy, the state regulatory commission allowed Lanco Infratech Limited to sell 100 MW of the additional 200 MW outside UP, whereas the remaining 100 MW of power would be sold within the state as per the competitively discovered tariff of Rs 1.56 per unit. Uttar Pradesh also initiated Case 2 (location specific) bidding process for 3,300 MW at Bara (1,980 MW) through the shell company named the Prayagraj Power Generation Company Ltd, and at Karchana (1,320 MW) through the shell company Sangam Power Generation Co Ltd. As per media reports, the first round of bidding was opened in April 2008, when Lanco emerged as the lowest bidder for both the projects quoting Rs 2.88 per unit and Rs 2.838 per unit for the Praygraj and Sangam power projects respectively11. The bids were however cancelled on the grounds of high tariff. Therefore, a second round of bidding for the same projects was conducted and concluded in June 2008. Reliance Power emerged as the lowest bidder for both the projects by quoting a tariff of Rs 2.64 per unit and Rs 2.60 per unit for Prayagraj and the Sangam projects respectively12. This round of bidding was again cancelled on the grounds of discovery of high tariffs. This was followed by another round of bidding in early 2009. This time, JP Associates emerged as the lowest bidder, quoting Rs 3.02 per unit and Rs 2.97 per unit for the two projects. Finally, this third round of bidding was approved and the tariff was adopted by the UPERC in August 201013.
4.2 Punjab
Punjab initiated the process of competitive bidding for procurement of 3,300 MW electricity through the Case 2 (location specific) route. Talwandi Sabo, a greenfield project located in the Mansa district of Punjab, with contracted capacity of 1,800 MW (+10 per cent). The project was developed based on build, own and operate (BOO) basis through Case-2 bidding route. In context of this bidding process, Punjab State Electricity Regulatory Commission (PSERC) noted that RFQ was issued to the bidders in haste just before the amendment of the bidding guidelines in September 27, 200714. These amendments made it mandatory for the procurer to submit the Environmental Impact Assessment (EIA) before the issuance of the RFPs. While the RFPs were issued in November 2007, Talwandi Sabo Power Ltd (shell company formed for this project) proposed to submit the EIA report only in February 2008. The financial bids were opened in June 2008 and Sterlite Energy Limited (SEL) quoted the lowest levelized tariff of Rs 2.8643 per unit. Letter of Intent (LoI) was issued to SEL on July 4, 2008. SEL and the procurers signed a PPA for a quantum of 1,841 MW in September 2008. The discovered tariff was adopted by the PSERC in January 2009. According to Sterlite, it has been allotted a provisional coal linkage for 1,800 MW. The company has also signed an EPC contract and the construction work is in progress as per the Project Monitoring system of CEA.
10 11
Energy Policy 2009 (http://www.kesco.co.in/kesco/docs/pdf/UP%20Energy%20Policy%202009.pdf) Anon 2008, UP government rejects Lancos bids, in Business Standard, http://www.business-standard.com/india/news/up-govtrejects-lanco%5Cs-bids/38432/on 12 Virendra Nath Bhat 2008, Reliance outbids Lanco for UP power projects, in The Indian Express, http://www.indianexpress.com/news/reliance-outbids-lanco-for-up-power-projects/322702/ 13 UPERC order dated August 27, 2010 (Petition number 645 of 2010 and 646 of 2010) 14 PSERC order Petition 29 of 2007
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The competitive bidding process for the 1,320 MW Rajpura Thermal Power project began in January 2008. Thirteen bidders participated at the RFQ stage, of which nine proceeded to the RFP stage and eventually only Lanco Infratech Ltd submitted the bid. As per Clause 5.7 of the bidding guidelines, if the number of bidders is less than two and the procurer wants to proceed with the bidding process, then approval from the concerned commission is required. Consequently, the PSERC gave conditional approval on December 8, 2008 stating the tariff would be considered for adoption only if evaluation committee finds the discovered tariff to be acceptable. Lanco quoted a levelized tariff of Rs 3.386 per unit. The evaluation committee opined the tariff to be on the higher side and referred the matter back to PSEB for negotiation and final decision. PSEB then requested the state government to form a negotiation committee. Latter was successful in reducing tariff to Rs 3.309 per unit, a decrease of eight paise per unit. This revised tariff was accepted by the PSEB and petition seeking adoption of the new tariff was filed before the PSERC. The commission then sought the opinion of evaluation committee on the negotiated tariff. But instead of giving any certification, the evaluation committee submitted a report to the commission stating the committee does not want to comment on the decision taken by the Council of Ministers to accept the price quoted by the bidder. Since the evaluation committee did not clearly certify the tariff to be in line with market rate, PSERC rejected the petition15. Aggrieved by the order, Lanco filed a petition before the Appellate Tribunal for Electricity (ATE) challenging the commissions jurisdiction to comment on the competitively discovered tariff if the bidding process had been transparent. Lanco contended it had the right to get the bid accepted as it was the only bidder and that there were no allegations of lack of transparency in the bidding process. The ATE, however, ruled against Lanco and upheld the commissions jurisdiction in rejecting the discovered tariff as well as its conditional approval to the process. ATE said that when only one player participates in bidding process, it becomes the commissions duty to ensure tariff discovered is competitive and in line with prevalent market rates. ATE further ruled that if the commission has jurisdiction to grant approval, then it also has jurisdiction to grant conditional approval, thereby rejecting Lancos contentions of lack of regulatory jurisdiction. ATE also noted the evaluation committee had not abided with the bidding guidelines. The committee was aware the discovered tariff was on the higher side, but it still failed to give a clear opinion on the matter or investigate it further. This behaviour of the evaluation committee, as per the ATE, amounted to violation of the bidding guidelines and hence made the state commissions role of evaluating competitiveness of discovered tariff more critical. Prior to approaching the ATE, Lanco had also filed a writ petition before the Punjab and the Haryana High court year. The company had challenged the commissions order and sought a stay order in the matter. After considering the appeal, High court opined that the matter was not urgent and could be adjourned, however it was granted that if the Punjab State Electricity Board publishes a notification for re-bidding, Lanco can approach again. When PSEB initiated the process of re-bidding, Lanco rushed to the High Court seeking interim order to stop the process. The court asked Lanco to place the bid evaluation committees report before it and adjourned the case. Since the high court did not pass an
15
ATE order dated September 4, 2009
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interim order, Lanco rushed to the ATE during the vacation, without withdrawing the writ petition and without complying with the directions of the high court to place the bid evaluation committee report before it. Lanco justified approaching the high court on the ground that Tribunal would be on summer vacation and hence its case may not be heard before procurer undertakes re-bidding. ATE shot down this justification saying a vacation bench was constituted for hearing urgent matters during the vacation. This conduct of Lanco was termed as reprehensible by the ATE and the appeal was stated to be devoid of any merits. Hence, it was dismissed16. Subsequently, PSEB initiated the bidding process for the Rajpura Thermal Power project again in 2009. L&T quoted a tariff of Rs 2.89 per unit and won the bid. The revised bid is about 40 paise per unit less than earlier bid by Lanco (L1). This tariff was adopted by the PSERC17. However, as the parameters used for the bid evaluation are not known, it is not possible to comment on the reasons for such significant decrease in discovered tariff.
4.3 Gujarat
Gujarat also forayed into the process of competitive bidding at the early stages. The Gujarat Urja Vikas Nigam Limited (GUVNL) floated three separate tenders, 01/LTPP/2006, 02/LTPP/2006, 03/LTPP/2006, for procuring power through Case 1 bidding route. The specifications of the bids were as following: Bidding round Max/Min Capacity Fuel Term of PPA Location Tariff 01/LTPP/2006 2000 MW/100MW Coal/Lignite 25 years Unspecified No escalation or indexation in capacity or variable charge. 02/LTPP/2006 2000 MW/100 MW Unspecified 15/25/35 years Unspecified 03/LTPP/2006 2000 MW/500 MW
Imported Coal 25 years Sarkhadi, Veera Sangat or any other Coastal location Capacity Charges: Partly Escalable and partly nonescalable Variable charges linked to indices. The indices for this purpose are notified by CERC every six months. Therefore the variable part of tariff may change accordingly.
Source: Presentation by GERC at I.I.T. Kanpur, 2nd Capacity Building Programme for Officers of Electricity Regulatory Commissions, 3-8 August, 2009 Table 4.1: Gujarat bidding round details
The bidding process was initiated in February 2006. In the first round, PTC India Ltd offered a capacity of 190 MW from Latehar, Jharkhand quoted the lowest tariff of Rs 3.25 per unit. This was followed by Jindal Power Ltd offering 150 MW at Rs 3.48 per unit, PTC India offering 250 MW from Ratnagiri at Rs 3.49 per unit and Adani Enterprises Ltd offering 500 MW at Rs 3.70 per unit. After examining bids, the evaluation committee recommended financial re-bidding. Consequently, Jindal Power Ltd quoted the
16 17
ATE order dated September 4, 2009 PSERC order dated July 14, 2010 (petition no. 8 of 2010)
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lowest tariff of Rs 3.25 per unit, followed by PTC India offering 190 MW at Rs 3.25 per unit and 250 MW at Rs 3.36 per unit. Adani increased the quantum of power supply to 1,000 MW and offered it at Rs 3.29 per unit. Bidders were asked to match tariffs quoted by Jindal Power Ltd and all the bidders agreed to revise the levelized tariff to match the lowest tariff. On December 8, 2006, GUVNL issued the LoI to all the bidders. Meanwhile the financial bids for 02/LTPP/2006 and 03/LTPP/2006 were opened and the tariffs quoted were found to be lower than the tariffs quoted for 01/LTPP/2006. This encouraged the procurers to engage in further negotiations with Adani to reduce the tariff. The negotiations were successful in reducing the tariff to Rs 2.89 per unit for procurement of 1,000 MW for a period of 25 years. This was a sharp decline of 81 paise per unit from the initial quoted tariff of Rs 3.70 per unit18. Immediately after this development, the LoIs issued to Jindal Power Ltd and PTC India were cancelled . This cancellation of LoIs lead to a lot of controversy. According to the tariff adoption order dated Deecember 20, 2007, only Adani submitted the enhanced bank guarantee within the stipulated time frame of 30 days due to which the LoIs of Jindal and PTC India were cancelled. According to an order by the Gujarat High Court19, Jindal and PTC India approached the Gujarat High Court against the cancellation of LoI. Jindal expressed its inability to provide power at Rs 2.89 per unit and thus its petition was dismissed. The high-court admitted PTC Indias application, but declined to grant interim relief after affirmation from the advocate of GUVNL that PTC India would be accommodated if the judgment is passed in the companys favour. PTC India, however, carried the matter to the apex court , which dismissed the petition saying if the high court judgement was passed in favour of PTC India Ltd, it would be allowed to sign a PPA with GUVNL. The Supreme Court also directed the high court to expedite the matter and dispose the case within six months. In its September 2007 order, the high court held that GUVNL favoured Adani Power Limited over other bidders and tried to eliminate other players even while the demand for power in Gujarat far exceeded the offered capacity. After the high court order, PTC India decided to source the entire 440 MW (190 MW + 250 MW) from the Chitrapur power plant at Rs 2.89 per unit. However, GUVNL rejected the PPA for 250 MW saying change in location was not as per RFP. It further rejected the PPA for 190 MW stating even though the levelized tariff was Rs 2.89 per unit, the tariff stream was not as per the PPA signed with Adani. Following this, the PTC India filed another petition with the high court. As a result, the high court observed GUVNL favoured Adani over other bidders. .... the Court finds considerable substance in the submissions of the petitioners and particularly PTC India that the decisions of the respondent Corporation impugned in these petitions were not bona fide, but were made with a view to engineer an appearance of default so as to weed out the other successful bidders like M/s PTC India Ltd. from the arena. Yes, 'from the arena', and not 'from the competition',
18 19
GERC order dated December 20, 2007 Gujarat High Court order dated March 27, 2008 (SPECIAL CIVIL APPLICATION No. 2194 of 2008)
18
because there is no competition. There was and is enough power demand " to accept the power offered by the respondent " Adanis as well as by the petitioners. The court, thus, directed GUVNL to sign a PPA with PTC India Ltd for 440 MW of power supply at Rs 2.89 per unit and on the same PPA terms and conditions as ssigned with Adani Power Ltd. GUVNL challenged this order of the high court in the Supreme Court and latter dismissed the order. In the case of 02/LTPP/2006 bid, Aryan Consortium quoted the lowest levelized tariff of Rs 2.25 per unit and offered 250 MW, followed by Adani Consortium offering 1,000 MW at a levelized tariff of Rs 2.35 per unit. Other bidders -- Lanco Consortium, Essar Power, Monnet Ispat and Jindal Power Ltd -- offered the levelized tariff of Rs 2.65 per unit, Rs 2.80 per unit, Rs 3.15 per unit, and Rs 3.25 per unit respectively. Regarding the bid 03/LTPP/2006, Essar Power Ltd quoted the lowest levelized tariff of Rs 2.40 per unit and offered 1,000 MW of electricity from its imported coal-based power plant at Vadinar, Gujarat. The PPAs were signed with the winning parties in February 2007 and the Gujarat Electricity Regulatory Commission approved those PPAs and adopted the tariff in December 2007. Thus, with the conclusion of the first phase of bidding, Gujarat was able to contract 3,200 MW of electricity at tariffs varying between Rs 2.25 per unit and Rs 2.89 per unit. In February 2010, Adani called for termination of the PPA (02/LTPP/2006) with GUVNL saying it was unable to acquire a coal block from Gujarat Mineral Development Corporation. GUVNL approached the state commission, insisting on Adanis compliance with the PPA. GERC passed a judgement in favour of GUVNL delinking the execution FSA (for the GMDC coal block) from the execution of PPA by Adani Power Ltd and directed Adani to supply power to GUVNL as per the PPA. GUVNL initiated the second round of bidding in June 2007 through the Case 1 route. It received four bids offering a total of 1,900 MW with tariffs ranging from Rs 3.24 per unit to Rs 3.79 per unit. GUVNL decided not to go ahead with the bidding process in view of very high tariffs. It initiated a third round of competitive bidding for procurement of 3,000 MW through the Case 1 route in 2009. In this round, GUVNL succeeded in contracting about 2,600 MW of power.KSK Energy Ventures Ltd emerged as the lowest bidder by quoting a tariff of Rs 2.345 per unit. Both Shapoorji Pallonji Energy (Gujarat) Pvt Ltd and Essar Power emerged as second lowest by quoting a bid of Rs 2.80 per unit.
4.4 Chhattisgarh
So far Chhattisgarh has got the lowest tariff of 81 paise per unit for the 858 MW capacity Bhaiyathan thermal power project through Case 2 bidding process initiated in March 2007. This low tariff has resulted because of a different business strategy adopted by the state. In view of the captive mining guidelines, the Chhattisgarh State Electricity Board (CSEB) put in 26 per cent equity in the development of coal block for mining and transportation company. In lieu of such equity, CSEB gave developers a freedom to sell 35 percent of the power generated to a third party, while the 65 per cent had to be supplied to the CSEB at the competitively bid rates. The electricity board was also expected to provide administrative support to the developer company to help latter get the status of mega power plant. India Bulls Power Limited, which emerged as the lowest bidder, is responsible for developing the coal mine as well as setting up the 1,320 MW capacity power station. However, the status of the project completion activities for the power plant has not been reported in the CEA database.
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4.5 Rajasthan
Rajasthan Rajya Vidyut Prasaran Nigam Ltd (RVPN) undertook the long term Case 1 (non-location specific) bidding process for procurement of power for 25 years on behalf of the three procurers -Jaipur Vidyut Vitran Nigam Ltd, Ajmer Vidyut Vitran Nigam Ltd, and Jodhpur Vidyut Vitran Nigam Ltd. RVPN filed a petition before the Rajasthan Electricity Regulatory Commission to approve procurement of 1500 MW power through competitive bidding process. The commission allowed RVPN to go ahead with the bidding process for 1,000 MW as against 1,500 MW. RVPN initiated one stage bidding process in February 2009 with the commencement in the sale of RFPs. The RFPs were further revised to incorporate amendments made to the Standard Bidding Documents in March 2009. Of the seven parties who purchased the RFP documents, six submitted their bids by August 2009. Along with the bid evaluation committee (BEC), the Power Finance Commission (PFC) was appointed as a consultant to evaluate the bids. After the evaluation of bidders w.r.t. the qualification criteria, only one bidder -- RKP Powergen Pvt Ltd supplying 300 MW -- met the qualifying requirements. Keeping in mind the prevailing situation, the bid evaluation committee submitted following options to proceed with the single bid offering 300 MW of power consider minor deviations and deficiencies as recommended by the consultant PFC to increase the number of qualifying bidders cancel the bidding process and re-invite the bids.
The BEC recommended relaxing the qualifying criteria. RVPN followed the recommendation and four bidders were qualified. Whereas the committee recommended minor changes in the qualifying requirements, an order approving such deviations was not found on the commissions website. The financial bids of the four bidders were opened in December 2009 and Adani Power Rajasthan Limited was recommended by the BEC as it offered the lowest tariff of Rs 3.2483 per unit for 1,000 MW plus 200 MW with the commissions approval. Further negotiations lead to Adani Power Ltd lowering the levelized tariff by one paisa and bringing it down to Rs 3.2383 per unit. LoI was issued to Adani in December 2009 and a PPA was signed with the procurers in January 2010. As per the agreement, the power will be procured from a coal-fired power plant to be set up by Adani Power Ltd in Baran district of Rajasthan. It is a greenfield project with a five year fuel suply agreement (FSA) for imported coal. While the FSA used for qualification is for imported coal, the bids were quoted based on the escalation rates for domestic coal. Reliance, one of the qualified bidders, objected to this. RVPN responded in the tariff adoption order saying while Adani Power Ltd was qualified for the bidding process as it had a fuel agreement for imported coal, the quoted tariff for domestic coal was considered as it has a lower escalation rate as compared to its imported counterpart. RVPN also mentioned an undertaking has been taken from Adani that a lower escalation in two situations i.e. domestic coal or imported coal would be applied in tariff and hence resulting in a lower fuel escalation rate. The tariff of Rs 3.2383 per unit was adopted by the state regulatory commission in May 2010. However, the undertaking has not been uploaded on either the procurers or the commissions website.
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4.6 Maharashtra
In November 2006, the Maharashtra State Electricity Distribution Company Ltd (MSEDCL) invited bids for procurement of 2,000 MW capacity for long term on case-1 basis. Within one month, MSEDCL filed a fresh petition claiming that case-1 may not be too reliable, hence it plans to procure another 4,000 MW through case-2 bidding process. The sites proposed by MSEDCL for developing the 4,000 MW capacity under case-2 bidding were based at Uran and Talegoan to set-up around 3000 MW gas based generation and 1000 MW imported coal based thermal generation at Dhopave respectively. However, there was no assurance of gas availability for Uran and Talegoan (3,000 MW) projects. Even the existing capacity at Uran was mostly idle on account of lack of gas availability. MSEDCL or the state government had been unable to demonstrate firm gas availability even while filing the petition. In light of the large-scale load shedding in the state, the commission did not outright reject the petition but gave a conditional approval to this proposal. It also directed MSEDCL to submit detailed project reports (DPR) for these projects. However, on account of limitations in ensuring fuel supply, MSEDCL failed to prepare and submit the required DPR for Uran and Talegoan, thereby stalling any progress in these projects. MSEDCL proceeded with case-2 bidding for Dhopave and even short listed a bidder. However, subsequently the bid was scrapped on account of possible non-viability of the discovered tariff. In September 2007, MSEDCL submitted another petition seeking approval for 5,200 MW power via both case-1 and case 2 processes. The commission once again asked for the rationale behind the said quantum in absence of demand forecast. Also the commission had already approved 6,000 MW capacity addition (excluding another 6,000 MW which was supposed to come from the governments preelection policy and 2,000 MW from state GENCOs expansion projects20). MSEDCL alleged that as per the revised bidding guidelines, the commission had no jurisdiction to object to the quantum as long as it was within the next three years additional demand as predicted in CEA forecast. However, approval was still necessary if any deviations were sought from the standard bidding documents. Thus, commission directed MSEDCL to seek its approval only for deviations. Under first stage of case-1 bidding process, MSEDCL has contracted 1,320 MW at a levelized tariff of Rs 2.642 per unit from M/s Adani Power limited, and 680 MW at a levelized tariff of Rs 2.70 per unit from M/s Lanco Kondapalli Power Ltd. PPAs for these projects were signed in October 2008. What needs to be noted is that both the above-mentioned bids are of fixed nature, i.e. there are no escalable components in fixed or variable charges. In September 2009, during proceeding for adoption of tariff from L3 bidder JSW Energy Ltd in the first stage of case-1 bidding, the commission directed MSEDCL to undertake site visit of both Adani and Lanco projects and report their status. According to the commissions order dated November 27, 2009 in case no 39 of 200921, MSEDCL gave the following status report for Lanco project: MSEDCL team visited the site of M/s Lancos plant at Mandava, Dist Wardha on 20.09.2009. As per the PPA, the project location was in Chhattisgarh. However, M/s Lanco informed that the proposed site is now changed to Mandva, Dist Wardha in Maharashtra. M/s Lanco requested MSEDCL to accord approval to the changed site. As per the PPA, the scheduled COD is 04.09.2012. It was
20
In 2005, the state government signed MoUs with eight private companies to build a capacity of 12,500 MW. Half of this proposed capacity addition was meant for the state, whereas the companies were free to sell the rest in the market. The government claimed that with this revolutionary scheme of capacity addition, load shedding will be completely eliminated from the state by 2010 (Government of Maharashtra, Press Release dated April 4, 2005). 21 http://www.mercindia.org.in/pdf/Order%2058%2042/Order_no_39_of_2009.pdf
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noted by MSEDCL team that as on date, the proposed land at Mandva was not in possession of M/s Lanco and no construction activity had been initiated. The fuel supply agreement was not in place. In view of the above observations, MSEDCL concluded that the project progress was not satisfactory. In light of the uncertainty of Lanco project and increasing power shortage, MSEDCL decided to contract the 300 MW to M/s JSW Energy Ltd at levelized tariff of Rs 2.716 per unit with escalable components. Through its order dated November 27, 2009, the commission adopted this tariff and approved the PPA. In case of capacity contracted to Adani, there are issues related to coal linkage, and even though project construction may complete on time, it still remains uncertain whether supply will become available as per the agreed tariff and from scheduled delivery date as per the contract. Competitive bidding process in Maharashtra highlights another crucial aspect of bidding process. Under stage-2 of case-1 bidding process, MSEDCL has contracted another 2,600 MW to four suppliers at levelized tariff ranging from Rs2.879 per unit to Rs3.28 per unit. Analysis of the PPAs signed between MSEDCL and the selected bidders (i.e. EMCO Energy Ltd, Indiabulls Power Ltd, Adani Enterprises) revealed difference in certain important clauses in the PPAs. For instance, there is a difference in scheduled delivery dates for different sellers. For Indiabulls and EMCO, the scheduled delivery date is mentioned as not less than four years from the PPA being effective . However, for Adani it is four years from effective date. This is a serious deviation, as standard bidding guidelines require the procurer to clearly mention the scheduled delivery date in the PPA. Such differences may assume significant importance later, in case any disputes related to agreement emerge between MSEDCL and the sellers. This underscores the need for much thorough scrutiny of bidding process and all agreements by SERCs. Apart from MSEDCL, Reliance Infrastructure Limited (RInfra), is a private sector distribution licensee in sub-urban area of Mumbai, also initiated bidding process for procuring 1,500 MW under case-1 (single stage) in July 2009. Wardha Power Company Pvt Ltd (WPCL) emerged as the L1 with a bid of 320 MW at levelized tariff of Rs 3.421 per unit. Reliance Power (Chitrangi, Madhya Pradesh), the procurer's sister company, emerged as the L-2 bidder with a quoted levelized tariff of Rs 3.690 per unit. As per the RFP requirements, WPCL had submitted bid valid till July 1, 2010 along with bid bond of Rs 9.60 crore valid till July 31, 2010 with claims being eligible till August 30, 201022. WPCL informed MERC the procurer had contacted the bidder several times during the bid evaluation period, an act prohibited as per the RFP clause 3.5.9. There was no request from procurer to WPCL to extend the bid validity in writing. However, WPCL received a LoI on July 21, 2010 to be unconditionally accepted within seven days of its receipt. According to WPCL, as the bid validity had lapsed on July 1, 2010, neither the bid nor the LoI had any legal status. WPCL communicated the same to the procurer and requested its bid bond to be returned. However the procurer invoked the bank guarantee on September 7, 2010. Aggrieved by the conduct of the procurer, WPCL filed a petition before MERC on September 28, 2010 under Section 86(1) (e) (f) and (k) of the Electricity Act, 2003 for adjudication of dispute between a generating company and the distribution licensee. During the proceedings before MERC, the procurer contended that para 5.17 of the guidelines excludes
22
MERC order dated January 27, 2011 in case no 53 of 2010, http://www.mercindia.org.in/pdf/Order%2058%2042/Order_53_of_2010.pdf
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the jurisdiction of commission in respect of any disputes other than those regarding determination of tariff or matters which partly or wholly could result in change in the tariff and other disputes are required to be solved by arbitration. It also stated that the provisions of Section 86(1) (b) & Section 86(1) (f) were not at all applicable in the context of present matter. Further procurer claimed that a representative of WPCL during his personal visit to the procurer on July 9, 2010 had orally assured bid validity would be extended beyond July 1, 2010. However it was contended by WPCL that any oral communication cannot extend bid validity period under commercial arrangement and such allegation would be contrary to the Indian Evidence Act ,1872. In its January 27, 2011 order on the above matter, the commission said: The Commission notes that actions of the Respondent RInfra, in this case violate several fundamental aspects of Competitive Bidding which are as under: (i) Uncertainty of bid opening date, (ii) Continuous attempts to negotiate the prices of L1 bidder. (iii) Persuading the bidder to extend the bid validity against their willingness. (iv) Issue of LoI despite a clear understanding that bidder is unwilling to extend the validity. (v) Not returning the bid bond. (vi) Invoking the bid bond and encashing the bank guarantee. The commission through the same order directed the procurer to scrap the said bidding process and return entire sum of bid bond along with interest at prevailing bank rate from the date of encashment. The procurer filed a review petition against the above mentioned order before the commission. Hearings on this review petition are yet to be conducted. In its January 2011 order, the commission also observed that: The Commission has noted that there is an uncertainty about the status of the bid, after L1 has been eliminated, as RInfra is silent about placing the order on L2 bidder and it has not approached the Commission. However the procurer in its review petition has claimed that it had issued letter of intent to the L2 bidder RPower/ Chitrangi Power Private Limited (which is its sister company) on December 2, 2010 and had signed a PPA on January 21, 2011 at levelized tariff of Rs 3.26 per unit. Interestingly, on the same day as commissions January 27, 2011 order scrapping the bidding process, the procurer filed petition for adoption of tariff discovered from L2 bidder.
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4.7 Ultra mega power projects

The ultra mega power projects (UMPPs) were envisaged with the aim of the reducing power shortage in the country and achieving higher fuel efficiency. They fall under a special case of Case-2 type bidding. The UMPPs are 4,000 MW large-scale coal fired super critical power plants, with an investment of about Rs 16,000 crore per project. While some UMPPs will be pit head stations with a dedicated coal block allocated, the coastal projects are expected to use imported coal. For each UMPP a separate special purpose vehicle (SPV) has been set up. These SPVs are the wholly owned subsidiaries of the Power Finance Corporation (PFC). Each SPV has the responsibility to undertake project preparatory activities and to facilitate the tie-ups of various linkages such as land, water and fuel. The SPV is then handed over to the winning bidder selected through the process of competitive bidding and in accordance with the bidding guidelines. So far, bidding process for four UMPPs has been completed. These are Mundra, Sasan, Krishnapatnam and Tilaiya. A brief summary of tariffs discovered is presented in the Table 4.2 . The tariffs discovered have been considered one of the lowest benchmarks set in the power sector. Such low tariffs may be attributed to the many unique characteristics of UMPP scheme, such as economies of scale resulting in lower capacity charges, allocation of coal blocks for the UMPPs resulting in low energy charges, and increased transparency and competition.
Name Coastal Gujarat Power Ltd. Sasan Power Ltd. Coastal Andhra Power Ltd. Jharkand Integrated Power Ltd.
State Gujarat Madhya Pradesh Andhra Pradesh Jharkand
Developer Tata Power Reliance Power Ltd. Reliance Power Ltd. Reliance Power Ltd.
Fuel Imported Coal Pit head coal black Imported Coal Pit head coal block
Year Apr07 Aug07 Jan-08 Aug09
Levelized Tariff (Rs. per unit) 2.26 1.19 2.33 1.77
Source: Prayas compilation from various sources Table 4.2: UMPP project details
Even though the tariffs discovered are on the lower side of the spectrum, the execution of UMPP scheme has not been smooth. The Sasan UMPP is engulfed in a controversy. The initial winning bid by the consortium led by Lanco Infratech was annulled on account of changes in bidding consortium post bidding, and without approval. An empowered group of ministers (EGoM) was formed to look into the issue that declared the Lanco bid as void. EGoM directed Sasan Power Ltd to ask other bidders to submit fresh bids. While other bidders refused to change their bids, Reliance reduced its tariff from Rs 1.29 per unit to Rs 1.19 per unit (i.e. tariff offered by Lanco), and bagged the project. Another controversy cropped up after Reliance received permission to utilise surplus coal from the Sasan captive mine for
24
other projects. Reliance has already won a bid to supply Madhya Pradesh with power from this power plant at a tariff of Rs 2.45 per unit. Tata Power, another bidder for the Sasan UMPP, has challenged this decision of allowing the use of surplus coal. A litigation on this matter is at present on at the Supreme Court of India.
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5. Analysis of tariff discovered through competitive bidding

The six-state review in the previous chapter shows the key strengths and weaknesses in the bidding framework in India. The present chapter goes one step further to present an analysis of tariff discovered through bidding process. To begin with, here is a quick overview of tariffs discovered by various states through both Case 1 (non-location specific) and Case 2 (location specific) bidding processes. Table 5.1 provides a snapshot of such capacity, in terms of the state, developer, fuel linkage and the levelized tariff offered for Case 2 projects.
Project Type Greenfield Greenfield Brownfield Greenfield Greenfield Greenfield Greenfield Capacity (MW) 1980 1320 1100 1320 1980 1320 1320 Levelized Tariff (Rs. per unit) 3.02 2.97 1.56 2.89 2.86 3.00 0.81 Project developer JP Associates JP Associates Lanco L&T Sterilite Energy China Light and Power India bulls
State Uttar Pradesh Uttar Pradesh Uttar Pradesh Punjab Punjab Haryana Chhattisgarh
Project Name Prayagraj Power generation company Sangam Thermal Power Project Anpara C Rajpura Thermal Power Plant Talwandi Sabo Power Limited Jhajjar Thermal Power Project Bhaiyathan thermal power project
Year 2009 2009 2006 2009 2008 2008 2008
Source: Prayas compilation from various sources such as tariff adoption orders, utility websites and media reports Table 5.1: Snap-shot of capacity contracted under Case 2 bidding route
As can be seen from Table 5.1 above, the tariffs discovered through the Case 2 range between Rs. 2.80 per unit and Rs 3 per unit. The only two exceptions are the tariff discovered for the Bhaiyathan projects at 81 paise per unit and the tariff discovered for the Anpara C project at Rs 1.56 per unit. This difference can be attributed to different strategies used and peculiar aspects of these projects. For instance, the 81 paise per unit tariff for Bhaiyathan project in Chhattisgarh can be attributed to the fact that the state has allocated a captive mine block for the project to the procurer with the discretion to sell up to 35 per cent of total installed capacity of 1,320 MW through market mechanism. Thus, revenue from merchant sales is expected to enable the developer to offer low tariff for this pit-head project to distribution company. The relatively low tariff for the Anpara C project may be attributed to the fact that Anpara C is a brownfield pit-head project that will share some infrastructure with existing Anpara units. Another critical factor in Case 2 projects is underlying assumptions for bid evaluation and computation of levelized tariff. Assumptions while evaluating the bids, such as landed coal price and gross calorific value, have an impact on discovered levelized tariff. For instance, assuming landed coal prices that are low, could lead to artificially low tariffs that may not reflect the reality.
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Consider a bid quoted as per Annexure IV. Different assumptions related to landed coal price and calorific value of the coal could lead to tariffs as shown by the table 5.2
GCV (kCal/kg) 4300 Rs. 1600/ ton Rs. 2400/ ton 2.92 3.95 4600 2.79 3.75
Table 5.2: Sensitivity of coal prices and calorific value on levelized tariffs (Rs per unit)
This shows that in Case 2 projects, tariff could vary significantly due to location specific factors, specific structure of contracts, assumed price and calorific value of coal while bid evaluation and extent of risks bourn by procurer (fuel, land etc.). Evaluation or comparison of such specific factors would require much detailed information that is not easily available in public domain and is beyond the scope of this study. Hence, subsequent part of this study by Prayas focuses on Case 1 (non-location specific) projects for analysing the tariff discovered through bidding process. Close to 16,000 MW of thermal capacity has been contracted through the Case 1 route, which is about 40 per cent of the total capacity contracted through bidding process. Table 5.3 below an overview of the tariff discovered through the Case 1 process. The tariffs discovered through the Case 1 route range from Rs 2.25 per unit to Rs 3.28 per unit. It is observed that while the tariffs offered in Gujarat form the lower end of the spectrum, the tariffs discovered in Maharashtra are on the higher end. As a pointer, the weighted average tariff discovered through the Case 1 route for the projects in Table 5.3 is Rs 2.77 per unit. Thus, the average tariff for Gujarat is about 25 paise lower than the overall Case 1 average tariff, whereas average tariff discovered by Maharashtra is about 25 paise higher. It should be noted that these tariffs only indicate the levelized tariff offered at the time when the bids were opened and hence do not give full insight into how the tariff streams compare over the term of PPA. Also, it does not reveal what percentage of this tariff depends on the fuel price fluctuation and how much of it would be passed on to the consumers in the future. Therefore, to get an understanding of these factors and to see how the case-1 projects compare with the other cost-plus projects, a detailed analysis was carried out by the Prayas team. Out of the 16,000 MW capacity contracted through Case 1 route, data related to bidding documents and bids submitted is available for only 12,000 MW capacity in public domain. This paper has analysed the tariff structure (capacity and variable components, fixed and indexed components etc) and tariff streams over the entire 25 years PPA term. In order to assess tariff competitiveness of bidding projects with cost-plus projects, the paper first compares FY 2010-11 tariff of CB projects with cost-plus projects. CB projects have different commissioning dates through 2014-15. Hence, the paper has normalised FY 2010-11 tariff for these projects based on bid tariff structure and changes in various escalation and index rate. Details of this normalisation are provided in Annexure II. FY 2010-11 tariff for existing costplus projects is compiled from tariff orders of respective SERCs. Finally, the paper analyses the capacity
27
charge component of CB projects tariff and that of the variable (energy) component of CB projects tariff.
State Gujarat Gujarat Gujarat Gujarat Gujarat Gujarat Gujarat Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Haryana Haryana Madhya Pradesh Madhya Pradesh Rajasthan
Round I I I I II II II I I I II II II I I I I I
Year 2006 2006 2006 2006
Developer Adani Adani Essar Aryan
Capacity (MW) 1000 1000 1000 200 1010 800 800 1320 680 300 1320 1200 300 1424 300 600 1241 1000
Fuel Used Domestic Coal Domestic Coal Imported Coal Domestic Coal Domestic Coal Coal Block Imported Coal Imported Coal Domestic Coal Domestic Coal Domestic Coal Domestic Coal Domestic Coal Domestic Coal Imported Coal/Domestic Coal Domestic Coal Domestic Coal Domestic Coal Domestic Coal
Levelized tariff (Rs. per unit) 2.89 2.35 2.25 2.40 2.35 2.80 2.80 2.64 2.72 3.21 3.28 3.26 2.88 2.94 2.86 2.34 2.45 3.24
2010 KSK Energy 2010 Essar Shapoorji 2010 Pallonji 2008 Adani 2008 Lanco 2009 JSW 2010 Adani 2010 India Bulls 2010 Emco 2008 Adani 2008 PTC - GMR 2007 Lanco 2007 Reliance 2009 Adani
Source: Prayas compilation from various sources such as tariff adoption orders, utility websites and media reports Table 5.3: Snap-shot of capacity contracted under Case 1 bidding route
5.1 Tariff structure and streams of discovered tariffs

As mentioned earlier, the bidding guidelines mandate multi-part tariff comprising of both capacity charge and variable charge, with further escalable and non-escalable sub-components. The discretion of including or excluding the sub-components rests with the promoter/developer. This gives the bidder enough flexibility in planning internal operations, while at the same time ensures visibility for the procurer in estimating tariff impact of all such arrangements. The proportion of the escalable and nonescalable components immensely affects the levelized tariff, as it decides the proportion of the risks that would be passed through to consumers versus those that would be borne by the developer. Table 5.4
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and Table 5.5 give an overview of the various components of the bid quoted by various bidders.
Project Name RJ - Stage I - Adani GJ - Stage I - Adani GJ - Stage I Aryan GJ - Stage II KSK MH - Stage I - Adani MH - Stage I - Lanco MH - Stage II IB MH - Stage II - Adani MH - Stage II - Emco Capacity Charge Fuel Charge Non Escalable Escalable Non Escalable Escalable Inland Transportation Non Escalable Escalable
Source: Prayas compilation from various sources such as orders by the regulatory commissions and utility websites Table 5.4 Tariff Break-up for Case 1 Domestic Fuel based projects
As can be seen from the Table 5.4 and 5.5, most bidders quote only the non-escalable component for capacity. Of about 12,000 MW contracted through the Case 1 route, projects with a cumulative capacity of about 10,000 MW do not have an escalable component for the capacity charge, thereby ensuring some certainty for at least capacity charge over the term of PPA. Even when the capacity charge includes escalable component, the escalation rate is specified by CERC, leading to certainty of tariff and avoiding possibility of high escalation in later years.
Capacity Charge Project Name GJ - Stage I Essar GJ - Stage II SP GJ - Stage II Essar Non Escalable Escalable Fuel Charge Overseas/Inland Transportation Fuel Handling Escalable
Non Non Escalable Non Escalable Escalable Escalable Escalable
Source: Prayas compilation from various sources such as orders by the regulatory commissions and utility websites Table 5.5 Tariff Break-up for Case 1 Imported Fuel based projects
Many bidders also quote non-escalable components for variable charges, thus, any escalation in fuel costs is applicable only to a part of the variable charge. This again provides a degree of certainty even in case of variable charges. As can be seen, tariff for around 6,000 MW of the capacity contracted through the Case 1 route does not have an escalable fuel charge component. Surprisingly, even for the imported fuel based bids, fuel charge is quoted as non-escalable, thus only the risk of the foreign exchange is passed through to consumers. This could be attributed to a variety of reasons, like securing stake/ownership in coal mines abroad, having long term contracts for procurement, as well as various
29
processes in the supply chain (shipping contracts, access to ports etc). For instance, Adani Power Ltd. has recently acquired stake in coal mines in Australia, and according to media reports is also investing in building railways in Indonesia for transportation of coal from its coal mines there. The same group has also built a port at Mundra. Similarly Lanco Infratech, Reliance and Essar too have acquired coal mines abroad. Such arrangements/contracts help cushion the developers risk to certain extent from the fluctuations in international coal prices or overseas transportation that may help such firms in quoting competitive tariffs in the bidding process. However, a trend like this was not seen for the Mundra UMPP that is based on imported fuel and is being developed by TPC. This could be because the escalation rates of imported coal were at around 5.5 percent when the Mundra bids were opened, which is closer to the current escalation rates for domestic coal. However, the escalation rates for imported coal had soared to around 15 percent when the bids for Gujarat were opened. This difference in the escalation rates changed the levelized tariffs of the Mundra UMPP by about Re 1 per unit and has had a significant impact on the competitiveness of the developers in the bidding process. Using the current escalation rates for imported coal, a project that quotes escalable fuel charge components for imported coal will not be competitive (assuming no restrictions on the fuel to be used). The paper now assesses tariff streams over 25 year term of PPAs. In order to have a like-to-like comparison, the quoted tariffs have been normalised of all projects to make FY 2010-11 as first year of operation23. As mentioned earlier, the escalable components of the quoted tariff are to be escalated using the component wise escalation rate specified by the CERC. The CERC publishes these rates every six months. Accordingly escalation rates are applied to the tariff streams quoted for respective project by successful bidder. Fig 5.1 shows these 25 year tariff streams for CB projects. Interestingly, the nominal tariff for even the 25th year of the PPA does not exceed Rs 4.20 per unit24 and all projects, but one, offer the nominal tariff of less than Rs 3 per unit till the 15th year of PPA. This tariff, as explained in the later sections, is comparable to current tariff of many state Genco units today. For example, tariff of the recently commissioned Paras and Parli units of Mahagenco is around Rs 3 per unit. In Rajasthan, the recently commissioned units of Kota TPS and Suratgarh TPS have tariff of over Rs 3 per unit. Thus, primafacie it seems the tariffs being discovered through the bidding process are competitive.
23 24
The tariffs for April 2010 have been calculated as per the methodology in Annexure 1 Assuming the escalation rates as per CERC notification dated March 31, 2010
30
RJ - Stage I - Adani GJ - Stage II - KSK MH - Stage I - Lanco GJ - Stage I - Essar 4.5
GJ - Stage I - Aryan MH - Stage I - Adani MH - Stage II - IB GJ - Stage II - Essar
GJ - Stage I - Adani MH - Stage II - Adani MH - stage II - Emco GJ - Stage II - SP
4.0
3.5
3.0
Rs./kWh
2.5
2.0
1.5
1.0
0.5
0.0
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Source: Prayas analysis as per Annexure II Fig 5.1: Tariff streams for Case I projects
5.2 Total tariff

This sub-section compares first year (i.e. normalised to FY 2010-11) total tariff (capacity plus variable) quoted by bidders with the total tariff of several existing projects (mostly based on cost-plus methodology) for FY 2010-11. For this comparison, cost-plus projects with a cumulative capacity of about 22,000 MW have been considered. These projects have varied unit sizes, with about 9,000 MW capacity based on 500 MW sized units and about 11,000 MW capacity based on unit sizes of 210 MW or lower. The remaining capacity is based on units sizes of 250 MW and 300 MW. The projects have varying vintage ranging from few commissioned in 1970s or 1980s to others that have been recently commissioned. Of these projects, about 7,000 MW have been commissioned after 2003-04. FY 2010-11, tariff for existing cost-plus projects commissioned after the year 2000 is compiled from tariff orders of respective SERCs. This analysis is summarised in Figure 5.2. The analysis of Figure 5.2 shows, FY 2010-11 tariffs of competitively bid projects is not-too different from FY 2010-11 tariffs of existing cost-plus projects. Comparing the total tariff for a single year does not yield a complete understanding of the competitiveness of the CB projects, since the effects on tariff due to changing coal prices, transportation costs, operating efficiencies, financing, front or back-loaded tariff etc. reflect over the term of the PPA through different tariff components discussed in earlier sub-section 5.1. Hence, next sub-sections analyse capacity charges and variable charges in detail.
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Cost plus projects 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
Competitively bid projects
Source: Prayas compilation from various sources such as orders of various regulatory commissions, data from utilities websites and media reports Figure 5.2: Tariff for 2010-11 for both competitively bid and cost-plus projects (COD after 2000)
5.3 Capacity charge

As explained earlier, most bidders quote the capacity charge as almost entirely non-escalable, thus ensuring some certainty for the capacity charge component of the tariff. This trend can be seen in Figure 5.3, where the non-escalable components form the major part of the fixed charges as against the escalable charges that form a small proportion of the same for a few projects. Levelized capacity charge shown in Figure 5.3 is calculated with FY 2010-11 as first year of the project (methodology explained in Annexure 2) and applying escalation rates as per CERCs March 31, 2010 notification. Next, we compare competitiveness of levelized capacity charges of CB projects with respect to projects being developed on cost-plus basis. This has been done by comparing equivalent or embedded capital cost of CB projects with capital cost of cost plus projects. Equivalent or embedded capital cost of CB projects is calculated based on CERCs 2009 generation tariff regulations so as to give same levelized
32
capacity charge as particular CB project25. In case of projects with capital cost of Rs 3.5 crore per MW based on CERC regulations, levelized capacity charges would be Rs 1.1 per unit and for project with capital cost of Rs 4.5 crore per MW, the same would be Rs. 1.3 per unit. Figure 5.4 shows the levelized capacity charge for twelve Case 1 CB projects (totalling 10,630 MW) analysed for this study.
Non - Escalable 1.6 1.4 1.2 1.0

Rs./kWh
Escalable
0.8 0.6 0.4 0.2 0.0

MH GJ MH GJ GJ GJ MH MH RJ MH GJ GJ Stage II Stage I - Stage I - Stage I - Stage II Stage II Stage II Stage II Stage I - Stage I - Stage II Stage I - IB Essar Adani Adani - SP - Essar - Adani - Emco Adani Lanco - KSK Aryan
Source: Prayas analysis as per Annexure II
Figure 5.3: Levelized capacity charge for competitively bid projects Figure 5.4 shows that except two CB projects, most CB projects have equivalent or embedded capital cost between Rs 3.5 crore per MW to Rs 4.5 crore per MW. This does not necessarily imply that the actual capital cost is less than Rs 4.5 crore per MW. Developers would be able to reduce levelized capacity charge by adopting more economical O&M and efficient, innovative financing mechanisms, different project development strategies, etc. As compared to this, the Fig. 6.4 shows, capital cost of recent projects being developed through cost-plus route to be Rs 4.5 crore per MW to Rs 5.9 crore per MW. This clearly shows the competitiveness of capacity charge component of CB based projects.
25
Rate of borrowing 12 per cent, Tenure of loan - 10 years, Inflation for O&M charges 6 per cent, RoE - 15.5 per cent
33
1.6 1.4
1.2
Rs. 4.5 crores/ MW
Rs. 3.5 crores/ MW

1.0
Rs./kWh
0.8 0.6
0.4 0.2 0.0 MH - GJ - Stage MH - GJ - Stage GJ - Stage GJ - Stage MH MH - RJ - Stage MH - GJ - Stage GJ - Stage Stage II - I - Essar Stage I - I - Adani II - SP II - Essar Stage II - Stage II - I - Adani Stage I - II - KSK I - Aryan IB Adani Adani Emco Lanco
Project Trombay Unit 8 JK LTPS Parli Unit 6 Kothagudem TPS stage VI - Unit 11 GVK Govidval Sahib North Chennai TPS - Stage II Giral LTPS Rayalaseema TPP St.III Kakatiya ST-I TPP Mettur TPS St-III
Capex (Rs.crores/MW) 4.53 4.44 4.62 4.65 4.86 5.15 5.72 5.80 5.90 5.91
Source: Data for cost-plus projects is from the CEA project monitoring database and the MERC order dated January 19, 2010 (Petition 35 of 2009) Figure 5.4: Comparison of capital cost per MW for competitively bid and cost-plus projects
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5.4 Variable charge

While the previous section highlighted that competitively bid projects do have a relatively lower capacity charge as compared to cost plus projects, the comparison of variable charges, which is equally important as variable costs form a major part of the total tariff. Similar to the capacity charges, the variable charges can be quoted in terms of non-escalable and escalable components. Figure 5.5 shows variable charges for the year 2010-11 and its break-up in different components (escalable and nonescalable). It also shows how many developers only quote non-escalable components for the variable charges. Thus, any fluctuation in fuel prices, inefficiencies in the plant operation or losses in fuel is, as per contract, not an entire pass through for competitively bid projects. Even in case of projects that have escalable components under variable charge, it still does not imply a complete pass through mechanism of such costs, but the tariff impact to the consumers is linked to the escalation rates published by CERC every six months. These escalations for the fuel and fuel transportation are based on historical data. Therefore, structuring the variable costs into escalable and non-escalable components in a way ensures the fuel price fluctuation risk is not completely passed on to the consumers. To see how the variable cost tariff stream emerges over the next 25 years for the Case 1 projects, based on the past trends for fuel and transportation prices, escalation indices specified by the CERC have been applied to the quoted escalable components. On applying such an escalation rates26 to the variable charge (2010-11) and adding the non-escalable component to it, the tariff streams for the entire variable charge emerge as shown in Figure 5.6. The resulting variable charges for the CB projects fall between Rs 1.50 per unit and Rs 3.50 per unit and are less than Rs 2 per unit until 2025. As shown in Figure 5.6, the current variable charges of many cost-plus projects, such as some recent SEB thermal units in Maharashtra, Rajasthan and Tamil Nadu, are well above Rs 2 per unit for the year 2010 itself.
2.0
E Fuel
NE Transportation
E Transportation
NE Fuel handling
1.8 1.6
1.4
1.2
Rs./kWh
1.0
0.8
0.6 0.4 0.2 0.0
RJ - Stage I GJ - Stage I GJ - Stage I MH - Stage MH - Stage MH - Stage GJ - Stage GJ - Stage GJ - Stage MH - Stage MH - Stage GJ - Stage I - Adani - Adani - Essar II - IB II - Adani II - Emco II - KSK II - SP II - Essar I - Adani I - Lanco - Aryan
Figure 5.5: Break-up of variable charges for competitively bid projects for the year 2010-11
26
Escalation rates as per the CERC notification of March 31, 2010
35
3.50 RJ - Adani I
3.00
GJ - Aryan I GJ - SP II
MH Lanco I
GJ - Adani I GJ - KSK II
MH India Bulls II
GJ - Essar I MH Adani II
MH Emco - II
GJ - Essar II
MH Adani I
2.50
Rs./kWh
2.00
1.50
1.00
0.50
0.00
10
11
Year
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cost plus project Kota TPP VII STPS VI PTPS VII & VIII DCR TPP I & II
Variable charge for year 2010-11 (Rs./kWh) 2.010 2.460 2.028 1.794
Cost plus project Parli Unit 6 Paras Unit 3 NTTPS Stage IV Kahalgaon II
Variable charge for year 2010-11 (Rs./kWh) 1.430 1.370 1.240 1.442
Source: Prayas analysis as per Annexure I Note: Table shows the levelized variable cost of the cost-plus projects commissioned after 2007
Figure 5.6: Variable charges over 25 years for competitively bid projects
However, to fully understand if the competitive bidding process has led to a discovery of tariff which is more economical than the cost-plus projects, the levelized variable cost of CB projects should be compared with that of cost-plus projects. Fuel and transportation cost form the two major components of variable charge and will have different growth trajectory. As such break-up of variable charges into fuel and transport charges is crucial to understand levelized variable charges over 25 years. While the data for this break-up of two components is available for the Case 1 projects through the details of bids quoted, sufficient data is not available to ascertain this break-up for the cost plus projects. Nonetheless, to develop an idea of levelized variable charges of cost-plus projects, we assume that the basic fuel cost
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and transportation cost constitute the variable cost in a 50:50 ratio respectively, for the year 2010-1127. This is a conservative estimate (realistic estimate 70-30) as the transportation component of the fuel has a lower escalation rate. After escalating both the components for 25 years (as per CERCs escalation rates), i.e. 2010-2035, the levelized variable cost for the CP projects has been calculated. Figure 5.7 shows levelized variable cost for CB projects as well as CP projects. The Figure 5.7 shows that the levelized variable costs for the CB projects form the lower end of the spectrum of variable charge spanning from a little less than a rupee per unit to over Rs 2 per unit. Even if one assumes that all the CP projects have a variable cost divided into 70 percent fuel charges and 30 percent transportation charges, the difference in the levelized tariff differs only by about 6.5 per cent, i.e. a difference of about 10-23 paise over various projects, as compared to the scenario where the ratio of the fuel and the transportation components is 50:50. This analysis also demonstrates competitiveness of CB projects in terms of variable charges.
Competitively Bid Projects 4.0 3.5 3.0 2.5

Rs./kWh
Cost Plus projects 50-50
2.0 1.5 1.0 0.5

0.0
Figure 5.7: Levelized variable charges over 25 years for bid projects and cost-plus projects
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The variable costs of various Cost plus projects are from the utility petitions and ERC orders. The detailed list of source has been given in Annexure III
RJ - Stage I - Adani GJ - Stage I - Adani GJ - Stage I - Essar MH - Stage II - IB MH - Stage II - Adani MH - Stage II - Emco GJ - Stage II - KSK GJ - Stage II - SP GJ - Stage II - Essar MH - Stage I - Adani MH - Stage I - Lanco GJ - Stage I - Aryan Rihand I Rihand II Singrauli NTPC Talcher II NTTPS Stage IV Paras Unit 3 Parli Unit 6 Kahalgaon II NCTPS Kahalgaon I Unchahar I Unchahar II Unchahar III Chandrapur Koradi Farakka DCR TPP I & II RTPP Stage II Kaparkheda MTPS ETPS TTPS kota TPP VII PTPS VII & VIII Bhusawal Nasik STPS VI
Source: Prayas analysis as per Annexure I
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6. Conclusions and way forward

Post the Electricity Act, 2003, policy and regulatory framework for private investment in capacity generation has evolved immensely as compared to the 1990s ad-hoc, non-transparent, memorandum of understanding (MoU) based mechanism. Legal framework enshrined in the 2003 Act, Competitive Bidding Guidelines and the Standard Bidding Documents developed by the Union Ministry of Power have provided a robust bidding framework that emphasizes on complete transparency at each stage. For example, important documents including bid solicitations (RfQ and RfP), power purchase agreements and payment security agreements are standardized and publicly available. Similarly, post bidding it is mandatory to publish comparison of all bids received and all agreements signed with the successful bidder. Bidding framework also provides specific timelines, clear roles and mandate for different bodies such as regulatory commissions and bid evaluation committees. Flexibility, without compromising transparency and level playing field for different developers, is another notable feature of bidding framework. For example, the framework allows bidding for specific project (Case 2 - where location, fuel source etc. are determined by the procurer) or only for specified capacity (Case 1 - where developer is free to choose location, fuel etc.). The framework also allows flexibility in tariff structure by allowing multi-part tariff (capacity, fuel, transportation, escalable and non-escalable etc.). As the review by this paper shows, this flexibility has allowed project promoters to develop different strategies to optimize their bids. This review of the bidding framework, which in many ways has evolved since 2003, highlights some important positive outcomes of such policy change that can be summarized as below: Large capacity contracted through competitive bidding route: Prayas review shows that over 42,000 MW of capacity has been already been contracted through competitive bidding route. This demonstrates the success of using competitive bidding route for attracting investment in the sector. It is likely that over half of the total thermal capacity addition in the coming decade will be through competitive bidding route. Competitive tariff: In electricity sector over 60 per cent of consumer tariff is dependent on the generation cost. As the analysis in sections five shows, tariff discovered through competitive bidding route is competitive with respect to projects based on MoU or cost-plus route. Depending on the fuel source, fuel cost component of the tariff discovered through competitive bidding route is either fixed for the entire PPA duration or is indexed to fuel price changes in domestic / global markets (CERC specified fuel price index). Hence, it is not dependent on changing fuel sourcing strategies, or inefficiency of the project developer. The discovered tariff is also not dependent on plant performance (heat rate, auxiliary consumption, maintenance cost etc.). Thus, competitive bidding route also offers more predictable tariff.
The bidding framework and policies have made significant contribution to achieving twin objectives of facilitating large capacity addition and discovery of competitive tariff. But, the detailed review in this paper of several bidding processes in the country also points towards many important governance weaknesses/shortcomings that could severely compromise benefits of competitive bidding. With recent policy change mandating all new capacity procurement by distribution companies through the bidding
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route only, capacity contracted through this process is likely to increase further. This makes it essential to analyze and address weaknesses / shortcomings in the bidding framework. Some crucial shortcomings observed in this review of CB processes in different states (section four) are as following I. Tweaking of bidding process Prayas review shows several instances and ways in which integrity of bidding framework could be compromised leading to preferential treatment for particular bidder or non-competitive tariff discovery. Re-bidding - As discussed in section four on various state experiences, re-bidding seems to be a common phenomenon. At times it has led to discovery of lower tariff whereas at other times the tariff discovered (and contracted) after re-bidding is significantly higher than the original bid (which was cancelled under the pretext of discovered tariff being too high). Post bidding or non-transparent alterations in bidding documents: In case of some states, it is observed that significant clauses in bidding documents have been altered after bidding process is completed. In some instances procurers have modified bidding documents in the name of customisation (which is permitted), but it actually amounts to deviations as per the guidelines. These deviations may not always be brought to the notice of regulator explicitly. Such non- transparent or post bidding changes amount to non-compliance of guidelines and may assume significant importance later, in case any disputes related to the agreement emerge between the procurer and the seller. Such changes may also favour particular bidder and compromise level playing field for all bidders. Post bidding changes in nature and character of projects: Allowing changes in overall project structure is another way of tweaking the bidding process. In some cases, capacity expansion and partial merchant sales has been allowed after bidding is completed and PPA has been signed. Such practice again compromises level playing field and competitive outcome. It is important to prevent such tweaking of the bidding framework. It is also possible that due to prevailing sector scenario or unforeseen developments (e.g. land / environmental clearance not being available), changes in bidding process would be required. But to ensure such changes are not made for the benefit of a particular developer or at the cost of consumers, a more rigorous process needs to be mandated for approving any deviations. This may include measures, such as periodic reporting of ongoing bidding exercise to the concerned regulatory commission (in standard format and at pre-defined intervals), mandatory public hearings before undertaking certain kind of changes for competitively bid projects (e.g. when projects are re-bid or capacity is enhanced, extension of timelines and such other major changes). II. Adherence to contract by developers Prayas review also highlights cases where developers have failed to or have claimed inability to comply with contractual commitments enshrined in PPA. Such a trend can negate benefits of competitive tariff discovered through bidding process and timely capacity addition. Delays/failure in securing land, environmental clearance or water linkage are some of the reasons cited by developers for noncompliance with PPA commitments. At times, developers have sought to change the proposed project location or have sought extension of commercial operation date to address such issues. Uncertainty/risk
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related to fuel supply is another major reason for project delays or non-compliance with PPA terms. In case of domestic coal-based projects, environmental or other issues with allocated captive mine, changes in coal linkages are some of the reasons leading to non-compliance with PPA terms. Few projects using imported coal have quoted fixed prices over entire PPA term of 25 years. Ability/willingness of these project developers to comply with PPA terms if international coal prices increase significantly is another major concern. This experience necessitates review of contractual commitments to ensure compliance with PPA terms and to safeguard interests of discoms / its consumers. For this purpose, provisions like multi-stage bid bonds (bid-bond changing as per project development milestones), stronger provisions to ensure procurer rights over the generation plant in case of defaults by developer, could be considered. III. Non-compliance with transparency and accountability related provisions It is observed that many procurers have not been adhering to various transparency and accountability related provisions of the guidelines. For example, many states have not uploaded anonymous comparison of bids or bidding documents and/or all agreements signed with successful bidder on the website. Further, even the tariff adoption orders could not be easily found on many ERC websites. Noncompliance with key transparency and accountability provisions again raises questions about integrity of bidding process undertaken. Reports of bid evaluation committee that play a crucial role in determining if the discovered tariff is in line with prevalent market rates are also not available to the public. This limits independent analytical scrutiny of the process outcome, which is one of the objectives of mandatory transparency requirements. IV. Concentration of few developers and EPC contractors The current review shows large part of capacity being contracted to be concentrated among players in a few countries. For instance, Chinese EPC contractors are constructing over half of competitively bid capacity. With increasing domestic manufacturing capacity, this trend might change, but implications of outcome of competitive bidding process for energy security and efficient functioning of electricity markets need to be reviewed continuously. V. Limited regulatory oversight and scrutiny As highlighted earlier, regulatory role in power purchase planning is very crucial. The guidelines do not mandate the discoms to undertake a thorough demand forecast analysis before initiating the bidding process. Instead it allows the discom to rely upon forecasts made by Central Electricity Authority (CEA). As such the framework offers no role for regulatory commissions to ensure that: Licensee is actually undertaking bidding process for required capacity (i.e. is taking advance steps to meet demand supply gap), and, Licensee is ensuring appropriate power purchase strategy (i.e. base v/s peak capacity procurement, medium v/s long term procurement etc.)
This limits the role of the commission in the crucial aspect of power purchase planning. Also, the
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commissions at times perceive the discovered tariff as fait accompli and do not actively engage in verifying and satisfying themselves on whether the tariff discovered is as per prevalent market rates and/or whether the bidding guidelines have been duly complied with. The regulatory scrutiny also needs to be more stringent in light of instances of post bidding or non-transparent changes in bidding documents (including PPAs) as highlighted in this review. The above discussion highlights many areas of concern in the competitive bidding process. Addressing these concerns would require detailed techno-legal review of the guidelines and standard bidding documents, as well as discussions with project developers, financial institutions and other players. This is beyond the scope of Prayas study and authors hope the Union Ministry of Power or Forum of Regulators (FoR) would undertake a detailed review of these documents and processes in order to address the various concerns and shortcomings. None the less, since strengthening transparency and regulatory oversight, and incentivising rational, transparent bidding are essential components of addressing the concerns mentioned above, our suggestions in this regard are discussed below. I. Strengthening Transparency and Regulatory Oversight i. Best Practice Code for SERCs: The present review reveals divergent regulatory approaches and perspectives on regulatory role in competitive bidding process. For example, what is the role of ERCs in ensuring compliance with the guidelines; which aspects to be analysed / reviewed in tariff adoption order; etc. To overcome such ambiguity it would be desirable if Forum of Regulators develops Best Practice Code for ERCs Oversight on Competitive Bidding Process. This will help develop a uniform regulatory practice and will also strengthen the governance of bidding process. Such a best practice code can include/clarify: ERCs role in establishing rational bidding based capacity procurement practice (i.e. procurement to ensure correct demand supply balance, case 1 v/s case 2 projects, peak v/s base load procurement, medium v/s long term procurement etc.) Format/template for petition seeking deviations from standard bidding documents, such that list of all deviations along with the reasoning can be easily available Checklist of various documents (such as deviations in bidding documents, bid evaluation spreadsheet along with underlying assumptions, details of all correspondence undertaken with bidders, final RFP/RFQ, signed PPA, evaluation committee certificate regarding the discovered tariff etc) to be submitted on affidavit by the discom along with any tariff adoption petition to the commission Scope of regulatory scrutiny of tariff adoption petition Template/guidelines for tariff adoption order Encouraging regulatory commissions to undertake public hearing for all tariff adoption matters and publishing all the above mentioned information on their respective websites.
ii. Central Information Repository (CIR): As highlighted in this study, the most important data related to the bidding processes is not easily available in public domain. It is essential to have a central information repository to compile all the important information and documents for each state and each bidding process, such as RFQ/RFP along with date of
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publication, deviations in bidding documents, respective commissions order in that matter, final signed PPA along with bid evaluation spreadsheet and anonymous comparison of bids. The repository should also maintain data about actual project status of all projects contracted under the bidding route. Such a central information repository is essential to ensure complete transparency in the bidding process. It would also prevent tweaking of bidding process by procurer or bidder and help overcome information asymmetry amongst different stakeholders / actors. Under section 73 and 74 of the 2003 Act, CEA has the mandate / jurisdiction to compile and publish such information. To prevent any dispute / confusion about veracity of different documents forming parts of bidding process, only documents filed in this CIR should be considered as authentic. This will also help make all players accountable and would reduce possibilities of manipulation. iii. Transparent and consistent methodology for bid evaluation: Currently each distribution company based on its evaluation committees approach devises its own bid evaluation spreadsheet. Sometimes the underlying assumptions considered in this process are either not clear or are not transparent. As discussed in section five of this paper, assumptions of bid evaluation have significant impact on the discovered tariff. Hence, it is essential to avoid uncertainty and procurers discretion in bid evaluation. To ensure this, MoP or CERC should publish standard bid evaluation spreadsheets along with all underlying assumptions and latest escalation rates. If any procurer needs to modify/amend the bid evaluation spreadsheet for particular case, then the same should be vetted/approved by the regulatory commission. iv. Amendments to bidding guidelines for easy and timely access to information by the public : As mentioned earlier, even though bidding guidelines emphasise on transparency, many regulatory commissions and procurers do not comply with such requirements. To address such non-compliance, the guidelines should be amended and made more explicit. For example, clause 6.3 of the bidding guidelines states: For the purpose of transparency, the procurer shall make the bids public by indicating all the components of tariff quoted by all the bidders, after signing of the PPA or PPA becoming effective, whichever is later. The clause should be modified to make disclosure within a week after procurer issues LoI to the successful bidder. Similarly, procurer should be mandated to upload following documents on its website and the same should be made available to public till the duration of the PPA: Bidding documents (RfQ, RfP, any clarifications/modifications issued as part of pre-bid conference or otherwise) Bid evaluation spreadsheet and evaluation committee report/certificate, all other agreements/correspondence with the successful bidder II. Creating incentive for rational competitive bidding-based contracting Recent policy changes have mandated all discoms to procure new capacity only through competitive bidding route. Such explicit mandate to undertake bidding is certainly desirable, but there will always be creative ways and means to compromise rational competitive outcomes. Hence, along with such policy changes, it would be desirable to create incentive for discoms to adopt rational bidding process. Two
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suggestions for such incentives are discussed below: i. Central bidding management agency: Availability of coal, especially captive mine, is a major contributor to accelerating project development. It also helps in reducing the tariff. This can be leveraged on the lines of UMPP to facilitate rational bidding process by discoms. Under this model, a central agency could be tasked to undertake competitive bidding on behalf of the discoms. Certain coal blocks (which have been given preliminary environmental clearance) could be offered on priority basis to projects bid through this agency. Priority availability of captive coal mine could be a significant attraction for discoms to outsource bidding process to such an agency. This approach can also ensure most economical and efficient utilisation of the scarce natural resource like coal. ii. Benchmarking tariff: CERC or FoR could develop benchmarks for long-term tariff (for different types of projects) based on evolving experience of tariff discovered through competitive bidding process, CERCs tariff regulations and other market information. Distribution companies managing to discover tariff through bidding lower than such benchmark tariff could be allowed some incentive in their Annual Revenue Requirement exercise. This could incentivise discoms to explore more efficient discovery of generation tariff and would help set new benchmarks. iii. Transparency and reforms in fuel (coal and gas) sector: Variable cost is the major component (60-70 per cent) of generation tariff. Prayasreview of several competitive bidding processes highlights that developers fuel supply strategy often plays a critical role in discovering competitive tariff. Constraints in domestic fuel sector (coal, oil as well as gas), such as limited availability, transportation bottlenecks, inefficient mining practices, etc. are a major hurdle in further optimizing generation cost. Hence, transparent, rational and sustainable fuel policy is another important policy change required for effective competitive bidding in generation sector. Unless urgent steps are taken in this regard, competition will remain restricted to a few players who can manage the existing constraints. This would also not be in the interest of consumers or economy at large. Capacity addition is a complex process influenced by various policy decisions related not only to power sector but also other important resources such as land, water, fuel and environment. Compared to the MoU era of 1990s, India has made significant transition towards relying on competitive bidding route to allow private sector investment in capacity addition. As highlighted before, recent policy change of mandatory requirement on distribution companies to procure all new capacity through bidding route will have great impact on capacity addition. Adopting competitive bidding route for capacity addition, though a step in the right direction, raises new challenges and concerns. Hence, this first ever detailed study of competitive bidding based capacity addition in India presents review of important trends in capacity contracted through bidding route and competitiveness of discovered tariff. The present study also highlights key strengths and weaknesses in the bidding framework from governance perspective. It shows that with over 42,000 MW of capacity contracted through CB route and competitive discovered tariff, CB based capacity addition has taken off smoothly and is at a significant scale. At the same time, the study points out many governance challenges, which, unless
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addressed immediately and in a comprehensive manner, could lead to significant turbulence in the coming years. Problems may surface in the form of increased market power by few players/equipment suppliers, non-competitive tariff discovery, project delays or non-compliance with contract terms, etc. To avoid such negative outcome of CB based capacity addition, it is essential to continuously monitor the outcome of CB process and take timely remedial measures. Authors hope this study by Prayas will contribute to this monitoring process and would initiate further rigorous analysis and debate to strengthen CB framework. ----x----
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Annexure I: Competitive bidding: policy and regulatory framework

The Electricity Act, 2003 (further referred to as EA, 2003) stresses on increasing the role of competition in the power sctor. The section 62 of the Act mentions that the determination of tariff for the supply of electricity by a generating company to a distribution company is under the jurisdiction of the Electricity Regulatory Commission. However, section 63 (Determination of tariff by bidding process) states that: Notwithstanding anything contained in section 62, 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. Following EA, 2003s mandate, the Ministry of Power (MoP) first issued the Competitive Bidding Guidelines (CBG) on January 19, 2005. The guidelines aimed at achieving the following objectives: promote competition in procurement of power by distribution licensees; facilitate transparency and fairness in such procurement; reduce the information asymmetries for various bidders and encourage competition; expedite the process of materialization of projects; and provide flexibility to suppliers in managing internal operations, while ensuring the availability of power at predictable rates and thus protecting consumer interests. The guidelines enlist roles and responsibilities for each agency involved in the bidding process (refer Figure A-1) and have been broadly divided into four parts. The first part talks about various project preparatory activities, such as obtaining necessary clearances and linkages by the procurer and the bidder. The second part describes the overall tariff structure of the bids, the normative availability of the plants and the payment mechanism. In most cases the multi-part tariff structure consisting of the fixed and variable charges would ordinarily form the basis of the bidding process. The third and the fourth part lay down rules for the bidding process and awarding of the contract respectively, both of which are discussed in detail in the following chapters of this paper. A) Role of various agencies and the bidding process As per the section 63 of EA, 2003, MoP is entrusted with the responsibility of notifying the bidding guidelines. Accordingly, the guidelines have been framed for medium (1-7 years) and long term (>7 years) procurement of base, peak and seasonal-load. As per the guidelines, bidding can be undertaken through two ways viz; Case 1 and Case 2. Under Case I type of bidding the location, technology or fuel is not specified by the procurer and hence the developer has full freedom to decid these factors. Case 2 is location and fuel specific bidding i.e. the procurer specifies the location and/or fuel and is also responsible for arranging of the same. Ultra Mega Power Plants (UMPP) are an example of Case 2 type of bidding. Similarly, large hydro power plants and load centre projects also come under this category. As a part of the guidelines, MoP also notifies the Standard Bidding Documents (SBD) such as the Request for Qualification (RfQ), Request for Proposal (RfP) and Power Purchase Agreements (PPA) for both Case1 and Case 2 bidding processes. This is a very important feature of the guidelines that helps in ensuring transparency and reducing information asymmetry for all the bidders.
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In accordance with the EA 2003, Ministry of power came up with the following: Section 63 of the Electricity Act 2003 mandated that the regulatory commissions shall adopt the tariff if the tariff is determined through competitive bidding, subject to compliance with the guidelines issued by the Central Government (Ministry of Power) Competitive Bidding Guidelines which defines a. Overall bidding process b. Role of different agencies in the bidding process c. Bid formats and the evaluation criteria d. Standard Bidding Documents such as i. Request for Qualification ii. Request for Proposal iii. Power Purchase Agreement iv. Escrow agreement
Government
1. Provides policy directives 2. Publishes bidding guidelines and standard bidding documents
CERC
1. Defines various escalation rates for the purpose of bidding evaluation. 2. Acts as an appropriate commission when multiple states are procuring power
CEA
1. Forecasts the state and national demand forecasts, monitors the status of all ongoing generation projects
DISCOM
1. Undertakes long term power purchase strategy 2. Gets the approval for the deviations in the bidding documents
SERC
1. Approves the deviations from the standard bidding guidelines 2. Adopts the tariff if due process has been followed
Eval. Comm
Ensure and certify conformity to bidding guidelines and a fair and transparent process
Figure A-1: Various agencies involved in the bidding process
The guidelines do not mandate the discom to undertake a thorough demand forecast analysis before initiating any bidding process. It instead allows the discom to rely upon forecasts made by Central Electricity Authority (CEA) for this purpose. CEA is the nodal agency responsible for forecasting the national and the state demand. As per the guidelines, if the quantum to be procured exceeds CEA projected additional demand for next three years, following the expected year of commissioning, only in such case the procurer needs to take appropriate commissions approval for the quantum proposed. Therefore, CEA plays an important role in deciding the quantum of procurement. The guidelines necessitate the procurer to set up a committee that would monitor adherence to the bidding guidelines, as well as evaluate the bids and decide if the discovered tariff is in line with prevalent market rates. The committee should have at least one independent/external member who has proven expertise in bid evaluation and/or financial analysis of bids and does not have any financial or other interest in the bidding process. The committee has the right to reject all price bids if it is not satisfied with the competitiveness of discovered bids. Further, the regulatory commission would adopt the
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discovered tariff only after the procurer submits a certificate of compliance with the bidding guidelines and report from the committee approving the discovered tariff. This, again, is an important provision that needs to be strengthened to improve the overall governance of the process and accountability of the procurer towards its consumers, who will ultimately bear the cost. The state (or appropriate) regulatory commission28 plays the most important role of adopting the discovered tariff, if it is satisfied that due processes as per the guidelines have been followed and if the evaluation committee approves of the tariff being discovered. The procurer needs commissions approval in case any deviations from standard bidding documents are to be undertaken, thereby ensuring transparency. The guidelines mandate that the number of bidders at each stage of bidding should to be at least more than one. Commissions approval is also need if the number of bidders is less than two and the procurer still wants to proceed with the bidding process. As power purchase constitutes more than 60-70 per cent of the discoms expenditure, the commission has an important role to play in ensuring appropriate quantum of power (depending upon nature of demand base, peak or seasonal) is procured at reasonable cost. Hence, as argued in the concluding section, there is scope as well as need to enhance commissions role beyond the stated functions as per the guidelines, as regulatory oversight is extremely crucial in ensuring sound and rational power purchase planning of a discom. Apart from the above mentioned institutions, the Central Electricity Regulatory Commission (CERC) has an important role to play in the bidding process. The guidelines mandate two part tariff structure comprised of fixed and variable charges for long term power purchase. These two components can further have escalable and non-escalable sub-components. The escalation rates, used to compute these escalable components (both for the purpose of bid evaluation as well as actual payment), are to be published by CERC29 and updated every six months. As discussed further, the escalable components play a crucial role in determining tariff impact as well as competitiveness of a given tariff. Apart from these agencies, two other stakeholders involved in the process are the procurers i.e. discoms and sellers or the bidders. Bidding Process The bidding process begins with the discom intimating the appropriate commission about its intention of procuring power through bidding process. Following the consent from regulator, the procurer then publishes notice for the issuance of RFQ (RFP in case of single stage process) in at least two national dailies and discom website. The bidding guidelines also recommend publishing of the RFQ/RFP notice in trade magazines to accord appropriate publicity. The day when the RFQ is made public is considered to be the zero-date and all the milestones of the bidding process are decided with respect to it. Figure A-2 shows block diagram of important steps involved in the bidding process. For Case 2 type of bidding, the procurer must have initiated certain important project development activities such site identification, land acquisition, securing rapid environmental impact assessment report, forest clearance, water & fuel
28
In case discoms from two or more states jointly undertake bidding process, the appropriate commission in such a case is CERC. Otherwise the respective state regulatory commission 29 http://www.cercind.gov.in/escalation_rates.html
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arrangements/linkages etc before issuing of RFP. The RFQ typically contains the qualifying criteria for the bidders in terms of net-worth, experience in project development; quantum to be procured; term of the contract; normative availability to be met by the developer; expected date of commencement, etc. In addition to this, the RFQ should also contain model PPA, period of validity of the offer of the bidder, details of the transfer if required, of assets by the selected bidder to the procurer at the end of the contract and so on. As mentioned before, the procurer should set up a committee for the purpose of bid evaluation and to ensure adherence to bidding guidelines. In case any deviations from the standard RFQ document are to be taken, the same have to be approved by the commission. Similarly, if any changes to an already published document are to be made, the same shall be informed to all bidders and time frame of at least two months should be given to bidders to respond to the modified bidding documents.
Initiation of the bidding process Procurer intimates the RC and the project preparatory activities as specified by CBG are initiated
RfQ stage Procurer publishes the notice for the RfQ issuance constitutes the Bid Evaluation Committee (BEC) and issues RfQ to the bidders. Bidders response to RfQ is evaluated by the BEC
Adoption of the tariff The regulatory commission then adopts the tariff as per section 63 of EA 2003, after ensuring the a fair and a transparent bidding process has been followed.
Selection of the bidder The BEC shortlists the bidders based on the lowest tariff and the capacity offered. The PPA is then signed with the successful bidder.
RfP stage Bidders qualifying the RfQ stage are issued the RfPs. In response to the RfPs the bidders submit a technical and a price bid which are further evaluated by the BEC.
Figure A-2 Important steps involved in bidding process After RFQ, RFP is next bidding document that is to be published by the procurer in a two stage bidding process. Once all the bids are received, the committee evaluates the RFQs and lists the bidders who meet the qualifying criteria for the issuance of the RFPs. Typically, RFP includes the tariff structure which bidder should submit. As stated before, multi-part tariff structure comprising of capacity and energy components is mandated for long term power purchase. More importantly, all components of tariff should be expressed in Indian rupees, even if they are linked to imported fuel. In case of the medium term power procurement, the procurer can adopt single part tariff structure. RFP should have model PPA, details of payment security mechanism along with the bid evaluation methodology based on which the price bids would be evaluated and the maximum period from the signing of the PPA within which the developer/supplier must start supplying power. After the issuance of the RFP, a pre-bid conference is generally held to clarify doubts of the bidders and to incorporate changes in bidding documents if required. In case any changes in the bidding documents are to be made, it is essential to get
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commissions approval for the same. At the RFP stage the bidders are required to furnish two bids, i.e. the technical bid and a price bid. The technical bids are opened first and only bids that meet the minimum technical criteria are considered for evaluation of price bids. The price bids may also contain the final value required to be payable by the procurer for the transfer of assets if any, after the expiration of the PPA. For evaluation of the price bids, the methodology mentioned in the RFP document should be used. The bids are evaluated based on the levelized tariff comprising of both fixed and variable charges (along with their escalable and nonescalable sub components). The levelized tariff may be quoted at the generating station bus-bar or at the interface point with the STU (State Transmission Utility). For the purpose of standardization, the bids are evaluated at the interface point with the STU. The winning bid(s) is/are shortlisted on the basis of the lowest levelized tariff and capacity offered subject to the evaluation committee certifying that the tariffs discovered are in line with prevalent market rate and that bidding process has been conducted in accordance with the guidelines. Subject to committees approval, Letter of Intent (LoI) is issued to selected bidder(s) in stipulated time frame as per the guidelines. Following this, the bidder(s) is expected to submit contract performance guarantee as specified in the bidding documents after which PPA is signed with the selected bidder in due time. For the purpose of transparency, the procurer must publish all the financial bids on its website after the PPA has been signed or when it becomes effective, whichever is later. The procurer is also required to publish notice with details of the PPA in at least two national dailies and also publish it on the companys website. The final signed PPA along with the certification of the procurer and evaluation committee report is to be submitted to the regulatory commission for the adoption of the tariffs B) Tariff Structure A multi-tariff structure with separate capacity and energy charges in general, forms the basis of the bidding process. However for Case 2 projects where the procurer provides the fuel linkage, the bidder is mandated to submit the capacity charges along with the net heat rate. At the discretion of the bidder, both the capacity and the energy charges can have escalable and non-escalable components (refer to figure A-3). The secondary fuel costs are factored into the capacity charges. The energy charge based on the type fuel used consists of the fuel charges, transportation charges (can include both inland and overseas) and fuel handling charges. The case of imported fuel, fuel charge and the overseas transportation can be quoted in USD per unit. However, all other components must be quoted by the bidder in Rs per unit. Based on the escalation rates and the USD to INR conversion norms laid down by CERC, the levelized tariff is calculated in Rs per unit.
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Levelized Tariff
Capacity Charges
Energy Charges
Escalable
Non-Escalable
Non-Escalable Energy Charge -Fuel Charge (Domestic and/or Imported) - Transportation (Inland and/or overseas) - Fuel handling charges
Escalable Energy Charge -Fuel Charge (Domestic and/or Imported) - Transportation (Inland and/or overseas) - Fuel handling charges
Figure A-3: Components of the quoted tariff
C) Evolution of bidding process Since its notification in January 2005, the bidding guidelines as well as the standard bidding documents have undergone many amendments, the latest being in July 2010. This section tries to capture some important amendments. The guidelines of 2005 vested the important role of approving quantum of capacity to be procured in the hands of the regulatory commission. The amendment of September 2007, allowed discoms to decide quantum of procurement based on the demand forecast projections published by CEA. As mentioned before, if the quantum to be procured exceeds CEA projected additional demand for next three years, following the expected year of commissioning, in such case the procurer needs to take appropriate commissions approval. The guidelines call for project preparedness milestones to ensure serious participation of bidders as well as the procurers in bidding process. The January 2005 version of guidelines only talked about the Case 2 projects in this respect thus, laying all the onus of project preparedness in terms of obtaining necessary linkages and clearances on the procurer. However, the amendments of March 2009 made project preparedness requirements stringent for bidders in Case 1 type of bidding process as well. There has been an argument that forcing greater project preparedness hinders competition as it restricts the number of player who can participate. Apart from the project preparedness, the way in which the bidders quote the bids also impacts the tariff. According to August 2006 amendments for the Case 2 bidding where the procurer assigns a captive fuel source for development as well as power procurement, it was stated that the tariff structure should be a multi-part tariff consisting of separate capacity and energy components. In the original guidelines, for Case 2 the bids were invited for capacity charges and the net quoted heat rate. The capacity and the energy charges may further have escalable and non-escalable components. Tariffs in the 2005 guidelines were designated in Indian rupees only and the bidder was expected to bear the foreign exchange risks. But the amendment in August 2006 allowed the foreign exchange rate variation to be pass-through if the procurer mandates use of imported fuel in Case 2. Further the amendment in March 2009 allowed the foreign exchange rate to be a pass-through if the bidder chooses to use
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imported coal. The amendments of July 2010 permitted the foreign exchange risks to be a pass through if the developer uses domestic gas. To avoid the back-loading or the front-loading of the tariff stream, the guidelines specify the ratio of the minimum capacity charge to the maximum capacity charge should not be less than 0.7. The amendments also specified that for the power projects where the procurer mandates the use of imported coal, the energy charges should have three components which are, a) Imported fuel component in US Dollars/unit, b) Transportation of fuel component in US Dollars/unit and c) Inland Fuel handling component in Indian Rupees/unit. It also specified that the ratio of minimum to the maximum energy charges inclusive of the escalable and the non-escalable components should not be less than 0.5. The amendments of July 2010 specified that in case the bidder uses blended coal in the power plant, the energy component of the tariff quoted could have five components comprising of a) Domestic Fuel component in Rs/unit, b) Inland transportation component in Rs/unit, c) Imported fuel component in US Dollars/unit, d) Transportation of fuel component in US Dollars/unit, and e) Inland Fuel handling component in Indian Rupees/unit. In case the procurer is procuring peak or seasonal load, which is different from the base load, then differential rates need to be specified and evaluated. In case the bidder does not specify firm energy charges for the term of the contract, then the energy charges payable during the term of the contract should be related to a base energy charge and suitable escalation is to be applied to the same. The 2005 bidding guidelines mandated the use of the median escalation rate of the relevant fuel index in the international market for the last 30 years for coal and 15 years for gas/LNG for escalation the energy component. For situations when the data for 30/15 years could not be available, the August 2006 amendments introduced a safety net by stating that the median escalation rate for the maximum available years should be used. As far as the escalable capacity component is concerned, the 2005 guidelines adopted the wholesale price index (WPI) or the consumer price index (CPI) for escalation. The base year to be used has to be specified in the bid document. The discount rate to be used to calculate the levelized tariff was the prevailing rate for the 10 year Government of India securities. The escalation indices and the discount rates are updated by the CERC every six months. The amendment of August 2006 further enunciates that the CERC should notify escalation indices both for evaluation of bids as well as for payments every six months. The term of contract for the Case 2 power projects as per original guidelines was to coincide with the useful life of the plant. The amendments of March 2009, however, only recommended the coinciding of the life of the power plant with the term of the contract, without making such a requirement mandatory. The amendments of September 2007 mandated the procurer to issue a certificate of compliance with the guidelines and bidding process, before signing the PPA. The procurer is required to make the bidding documents and winning bid public along with an anonymous comparison with all the other price bids. The amendment of September 2007 also made it compulsory for the procurer to publish this information on the website for a minimum of 30 days and to publish this notice for the same in at least two national dailies. It further refined the clause to specify that the all the components of the tariff need to be made public on the website along with the signed PPA.
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The timelines differ based on if the bidding process is single stage or two stage. As per the original guidelines, the final signing of the PPA should conclude within 425 days from the zero-date for the twostage bidding process, and within 240 days for the single-stage bidding process. These timelines, however, underwent many amendments. The amendment which came in March 2006, laid stress on the bidding process conducted by the Central Government for the distribution licensees from more than one state. In such a case, the timelines for a two-stage process was compressed from 425 days to 270 days.
52
Annexure II: Methodology used to estimate tariff for 2010-11

To enable rational comparison of tariff discovered through competitive bidding process, it is essential to normalise the tariffs for the first year of operation of these projects. For the purpose of this paper, the authors assume first year of operation as FY 2010-11, i.e. commercial operation date as April 1, 2010. This annexure explains the methodology used to normalise tariff for FY 2010-11 as first year of operation for all competitive bid projects. As per CBG and standard documents, capacity charge (both escalable and non-escalable) quoted by bidders is for the first year of operation. Hence, irrespective of actual first year of operation, the authors use quoted first year capacity charges as capacity charges for FY 2010-11, which is the discussion papers normalised first year for all projects. In case of variable charges, as per CBG and standard bidding documents, such charges are escalated from the date of PPA signing to first year of commercial operation using CERCs escalation rates. Hence, first normalised year (FY 2010-11) fuel/variable charges are derived by either increasing or decreasing first year quoted variable charges depending on date of PPA signing, using CERCs escalation rates. This is explained below. The date of signing the PPA is considered as zero date. For projects whose zero date falls before April 2010, the escalable fuel components of the bid, for the first year, quoted by the bidders have been escalated as per the escalation rate for payment, based on the series of escalation rates that CERC publishes every six months. For the projects having a zero date after April 2010, the escalable fuel components have been deflated as per the escalation rates for payment as per the CERC notification of March 31, 2010. The final rate thus arrived at forms the escalable fuel component for April 2010. Escalation rates for bid evaluation as per March 31, 2010 CERC notification are further applied to the first year fuel charge to get the 25 year tariff stream. For the non-escalable fuel components, the tariff streams have been assumed to start in April 2010. Further, to obtain the 25 year tariff stream, for both capacity and variable charges, escalation rates have been applied as per the CERC notification of March 31, 2010. This is depicted in graphical form below.
53
Annexure III: List of cost plus projects considered for analysis

Name Ennore Thermal Power Station Mettur Thermal Power Station North Chennai Thermal Power Station Kota Thermal Power Plant VII Suratgarh Thermal Power Station VI Panipat Thermal Power Station VII & VIII Deenbandhu Chhotu Ram Thermal Power Station I & II Parli Thermal Power Station Unit 6 Paras Thermal Power Station Unit 3 Kaparkheda Thermal Power Station Bhusawal Thermal Power Station Nashik Thermal Power Station Koradi Thermal Power Station Chandrapur State Thermal Power Station Dr Narla Tatarao Thermal Power Station Rayalaseema Thermal Power Plant Stage II NTPC Singrauli Thermal Power Station NTPC Rihand Thermal Power Station NTPC Rihand Thermal Power Station Unchahar Thermal Power Project Stage I Unchahar Thermal Power Project Stage II Unchahar Thermal Power Project Stage III Farakka Super Thermal Power Plant Kahalgaon Super Thermal Power Project - Stage I Kahalgaon Super Thermal Power Project - Stage II Talcher Thermal Power Station - Stage II Short Name ETPS TTPS MTPS NCTPS KTPP VII STPS VI PTPS VII & VIII DCR TPP I & II Parli Unit 6 Paras Unit 3 Kaparkheda Bhusawal Nasik Koradi Chandrapur NTTPS Stage IV RTPP Stage II Singrauli Rihand I Rihand II Unchahar I Unchahar II Unchahar III Farakka Kahalgaon I Kahalgaon II NTPC Talcher II State TN TN TN TN RJ RJ HR HR MH MH MH MH MH MH MH AP AP NTPC NTPC NTPC NTPC NTPC NTPC NTPC NTPC NTPC NTPC Capacity 450 1050 840 630 195 250 500 600 250 250 840 470 910 1080 2340 500 420 2000 1000 1000 420 420 210 1600 840 1000 2000 COD 1970s Between 1979 and 1992 Betwenn 1987 and 1990 1990s Dec-09 Dec-09 Sep-09 Nov 2007, Mar 2008
Between 1989 and January 2000 Between 1968 ans 1982 1970s Between 1974 to 1983 Between 1983 to 1997 Jan-10 Aug 2007, Mar 2008 Between 1982 and 1994 1980s Jan 2005, Sep 2005 1980s 1999 Sep-06 Between 1986 and 1994 1990s March 2007, July 2007 2003,2004 and 2005
54
Annexure IV: Sensitivity analysis of assumptions made during the bid-evaluation of case II projects
Sample Bid
Contract Year Commencement Date of Contract Year End Date Contract Year of Quoted NonEscalable Capacity Charges (Rs. per unit) 0.900 Quoted Escalable Capacity Charges (Rs. per unit) Quoted Heat Rate (Kcal per unit)
Scheduled COD of first Unit 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr 01-Apr
31-Mar
0.043
2385
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 25th anniversary of the Scheduled COD of first Unit
0.895 0.800 0.800 0.800 0.800 0.772 0.772 0.772 0.772 0.772 0.772 0.772 0.770 0.836 0.832 0.828 0.824 0.819 0.550 0.545 0.540 0.534 0.533 0.533 0.526
Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above
Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above Same as above
Assumptions
Annual escalation rate applicable to Quoted Escalable Capacity Charges Annual escalation rate applied to Energy Charges Discount Rate for Levelized Tariff 4.98% 6.77% 10.49%
55
Selected Publications of Prayas Energy Group

1. Electricity for All: Ten Ideas towards Turning Rhetoric into Reality Discussion Paper by Prayas Energy group, May 2010 2. Need to realign India's national solar mission, Economic & Political Weekly, 20/03/2010 3. An overview of Indian Energy Trends: Low Carbon Growth and Development Challenges, Prayas, 2009 4. Review of the Distribution Franchisee model implemented by MSEDCL in the Bhiwandi circle, Prayas, 2009 5. Proceedings of the National Conference on 'Regulation and Electricity Service to the Poor', Prayas, 2009 6. Shortcomings in Governance of the Natural Gas Sector, Economic & Political Weekly,25/07/2009 7. Climate Change: Separating the Wheat from the Chaff, Economic & Political Weekly, 31/01/2009 8. Electricity Governance Initiative a) The Electricity Governance toolkit : Benchmarking Best Practice and Promoting Accountability in the Electricity Sector, 2007 b) Empowering People: A Governance Analysis of Electricity, India, Indonesia, Philippines, Thailand 2007 9. Know Your Power: A Citizens' Primer on the Electricity Sector, Prayas, 2006 10. A Critical Review of the Performance of Delhi's Privatized Distribution Companies and the Regulatory Process Prayas Occasional Report - 1/2006, 2006 11. Restarting Dabhol: Who Will Bear the Cost? And Why?, Economic & Political Weekly, 28/06/2005 12. A Good Beginning but Challenges Galore, Report based on detailed survey of 12 electricity regulatory commissions in India, 2003 13. Electricity Sector Reforms in Asia: Experiences and Strategies - a compilation of selected papers prepared for the Asia Power Sector Reforms Workshop organised by Prayas, (India), Transnational Institute (The Netherlands) and Focus on the Global South (Thailand), 2002 14. Bujagali Power Purchase Agreement -An Independent Review, A study of technoeconomic aspects of power purchase agreement of the Bujagali project in Uganda, 2002. 15. Least-Cost Power Planning: Case Study of Maharashtra State - Energy For Sustainable Development, The Journal of International Energy Initiative, Vol. IV, No 1, June 2000. 16. WB-Orissa Model of Power Sector Reforms: Cure Worse Than Disease, Economic and Political Weekly, May 1, 1998 17. The Enron Controversy: Techno-Economic Analysis and Policy Implications, Prayas Monograph, 1995 18. Power Purchase Agreement (PPA) Between Dabhol Power Company and Maharashtra State Electricity Board: Structure and Implications, Economic and Political Weekly, June 17, 1995
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Good take-off but turbulence ahead

Prayas Energy Group Pune, India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

1. Private sector participation in generation: From MoUs to Competitive bidding

Prayas booklet Know your Electricity Act 2003 (http://www.prayaspune.org/peg/publications/item/54.html)

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Case II** 10,340

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

3. Overview of capacity contracted through competitive bidding

Case 1 6800 1724 4900 1841 1000

3300 4400 4000 4000 4000 4000 16,000

Prayas discussion paper on capacity addition through competitive bidding in India

2000 1500 1000

Figure 3.1: Capacity contracted through competitive bidding

Discovered levelized tariff (Rs./kWh)

Figure 3.2: Levelized tariff discovered through competitive bidding

Prayas discussion paper on capacity addition through competitive bidding in India

3.1 Break-up of contracted capacity based on fuel source

Captive Mines/ Coal Domestic Coal Blocks 13% Linkage 43%

Imported Coal 17% Imported Coal 30%

Domestic Coal Linkage 70%

Figure 3.3: Break-up of contracted capacity based on fuel source

3.2 Break-up of contracted capacity based on promoter/developer

Prayas discussion paper on capacity addition through competitive bidding in India

J.P. Associates 8% Tata Power 10%

Adani Power 17%

India bulls 10%

Figure 3.4 Break-up of contracted capacity based on promoter/developer

3.3. Break-up of contracted capacity based on EPC contractor

Not identified yet 34%

Chinese 51% Chinese 67%

Figure 3.5 Break-up of contracted capacity based on EPC contracting

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

4. Governance challenges: Experience from various states

4.1. Uttar Pradesh

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

ATE order dated September 4, 2009

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

MERC order dated January 27, 2011 in case no 53 of 2010, http://www.mercindia.org.in/pdf/Order%2058%2042/Order_53_of_2010.pdf

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

4.7 Ultra mega power projects

State Gujarat Madhya Pradesh Andhra Pradesh Jharkand

Year Apr07 Aug07 Jan-08 Aug09

Levelized Tariff (Rs. per unit) 2.26 1.19 2.33 1.77

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India

5. Analysis of tariff discovered through competitive bidding

Year 2009 2009 2006 2009 2008 2008 2008

Prayas discussion paper on capacity addition through competitive bidding in India

Prayas discussion paper on capacity addition through competitive bidding in India