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: [email protected]; Website: http://www.prayaspune.org/peg

March, 2011

Authors: Gayatri Gadag, Ashwini Chitnis, Shantanu Dixit

Cover design: Aamod Karkhanis

http://www.prayaspune.org/peg

http://www.prayaspune.org/peg

Transition from MoU to Competitive Bidding:


Review of thermal capacity addition through competitive bidding in

India

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.

Transition from MoU to Competitive Bidding:


Review of thermal capacity addition through competitive bidding in India

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 2014-

15. 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.

1 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. Re-

bidding 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 non-

compliance 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 ERC’s

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 commission’s 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 committee’s 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 pre-

bid 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, CERC’s 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.

Admin

Line

Abbreviations

ATE: Appellate Tribunal for Electricity

BEC: Bid Evaluation Committee

BOO: Build Operate Own

CBG: Competitive Bidding Guidelines

CEA: Central Electricity Authority

CERC: Central Electricity Regulatory Commission

CLP: China Light and Power

CPI: Consumer Price Index

CSEB: Chhattisgarh State Electricity Board

Discom: Distribution Company

EGoM: Empowered Group of Ministers

EIA: Environmental Impact Assessment

EPC: Engineering Procurement and Construction

FoR: Forum of Regulators

Genco: Generation Company Ltd.

GERC: Gujarat Electricity Regulatory Commission

GMDC: Gujarat Mineral Development Corporation

GUVNL: Gujarat Urja Vikas Nigam Ltd.

IPP: Independent Power Producers

L&T: Larsen and Toubro

MERC: Maharashtra Electricity Regulatory Commission

MoP: Ministry of Power

MoU: Memorandum of Understanding

MSEDCL: Maharashtra State Electricity Distribution Co. Ltd.

MU: Million Units

MW: Mega Watt

PFC: Power Finance Corporation Ltd.

PPA: Power Purchase Agreement

PSEB: Punjab State Electricity Board

PSERC: Punjab State Electricity Regulatory Commission

RFP: Request for Proposal

RFQ: Request for Qualification

RVPN: Rajasthan Rajya Vidyut Prasaran Nigam Ltd.

SBD: Standard Bidding Documents

SEB: State Electricity Boards

SEBI: Securities and Exchange Board of India

SERC: State Electricity Regulatory Commission

STU: State Transmission Utility

UMPP: Ultra Mega Power Plant

UPERC: Uttar Pradesh Electricity Regulatory Commission

UPRVUNL: Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited

WPCL: Wardha Power Company Pvt Ltd

WPI: Wholesale Price Index

1 Prayas discussion paper on capacity addition through competitive bidding in India

Contents

List of Figures 2

List of Tables 2

1. Private sector participation in generation: From MoUs to Competitive bidding 3

2. Objective 6

3. Overview of capacity contracted through competitive bidding 8

3.1 Break-up of contracted capacity based on fuel source 10

3.2 Break-up of contracted capacity based on promoter/developer 10

3.3. Break-up of contracted capacity based on EPC contractor 11

4. Governance challenges: Experience from various states 13

4.1. Uttar Pradesh 13

4.2 Punjab 14

4.3 Gujarat 16

4.4 Chhattisgarh 18

4.5 Rajasthan 19

4.6 Maharashtra 20

4.7 Ultra mega power projects 23

5. Analysis of tariff discovered through competitive bidding 25

5.1 Tariff structure and streams of discovered tariffs 27

5.2 Total tariff 30

5.3 Capacity charge 31

5.4 Variable charge 34

6. Conclusions and way forward 37

Annexure I: Competitive bidding: policy and regulatory framework 44

Annexure II: Methodology used to estimate tariff for 2010-11 52

Annexure III: List of cost plus projects considered for analysis 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 9

Figure 3.2: Levelized tariff discovered through competitive bidding 9

Figure 3.3: Break-up of contracted capacity based on fuel source 10

Figure 3.4 Break-up of contracted capacity based on promoter/developer 11

Figure 3.5 Break-up of contracted capacity based on EPC contracting 11

Fig 5.1: Tariff streams for Case I projects 30

Figure 5.2: Tariff for 2010-11 for both competitively bid and cost-plus projects (COD after 2000) 31

Figure 5.3: Levelized capacity charge for competitively bid projects 32

Figure 5.4: Comparison of capital cost per MW for competitively bid and cost-plus projects 33

Figure 5.5: Break-up of energy charges for competitively bid projects for the year 2010-11 34

Figure 5.6: Variable charges over 25 years for competitively bid projects 35

Figure 5.7: Levelized variable charges over 25 years for bid projects and cost-plus projects 36

List of Tables Table 2.1: Capacity contracted in MW through competitive bidding since 2005 6

Table 3.1: State-wise capacity contracted through Case 1 and Case 2 bidding route 8

Table 4.1: Gujarat bidding round details 16

Table 4.2: UMPP project details 23

Table 5.1: Snap-shot of capacity contracted under Case 2 bidding route 25

Table 5.2: Sensitivity of coal prices and calorific value on levelized tariffs (Rs per unit) 26

Table 5.3: Snap-shot of capacity contracted under Case 1 bidding route 27

Table 5.4 Tariff Break-up for Case 1 Domestic Fuel based projects 28

Table 5.5 Tariff Break-up for Case 1 Imported Fuel based projects 28


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

Soon after India’s 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 country’s 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)

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 Bank’s 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 utility’s 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 commission’s 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* Case II** UMPP Total

16,265 10,340 16,000 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. Prayas’s 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)

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 Capacity contracted in MW

Case 1 Case 2 UMPP Total

Chhattisgarh 1320 1320

Gujarat 6800 6800

Haryana 1724 1320 3044

Maharashtra 4900 4900

Madhya Pradesh 1841 1841

Punjab 3300 3300

Rajasthan 1000 1000

Uttar Pradesh 4400 4400

Gujarat – UMPP 4000 4000

AP – UMPP 4000 4000

Jharkhand - UMPP 4000 4000

MP – UMPP 4000 4000

Total 16,265 10,340 16,000 42,605


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

3 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.

Figure 3.1: Capacity contracted through competitive bidding

Figure 3.2: Levelized tariff discovered through competitive bidding6

6 The levelized tariffs in Figure 3.2 are the ones discovered when the bids were opened and hence are not comparable

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Cap

acit

y in

MW

Domestic/ Captive Coal Imported Coal

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dis

cove

red

leve

lize

d t

arif

f (R

s./k

Wh

)

Domestic/Captive Coal Imported Coal


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.

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 .

Domestic Coal Linkage

70%

Imported

Coal17%

Captive

Mines/ Coal Blocks

13%

Excluding UMPP

Domestic Coal Linkage

43%

Imported Coal

30%

Captive Mines/Coal

Blocks

27%

Including UMPP


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.

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

Reliance

Power33%

Adani

Power17%

Tata Power10%

J.P. Associates

8%

Others

32%

Including UMPP

Adani

28%

JPA

13%

India bulls10%

Lanco10%

Other39%

Excluding UMPP

Chinese

51%Not identified

yet34%

Japan & Korea10%

Indian5%

Including UMPP

Chinese

67%

Not identified

yet25%

Indian8%

Excluding UMPP


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 sector’s 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.


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 Limited’s (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 UPERC’s 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.

7 UPERC’s Tariff Adoption order dated December 31, 2007 http://www.uperc.org/olduperc/pet.no.509-07%20order%20dated%20-31%20dec-07.pdf 8 UPERC’s Tariff Adoption order dated December 31, 2007 9 UPERC order dated September 14, 2007 (Petition 479/07)

http://www.uperc.org/olduperc/pet.no.509-07%20order%20dated%20-31%20dec-07.pdf

http://www.uperc.org/olduperc/pet.no.509-07%20order%20dated%20-31%20dec-07.pdf


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 Energy Policy 2009 (http://www.kesco.co.in/kesco/docs/pdf/UP%20Energy%20Policy%202009.pdf) 11 Anon 2008, UP government rejects Lanco’s bids, in Business Standard, http://www.business-standard.com/india/news/up-govt-rejects-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

http://www.kesco.co.in/kesco/docs/pdf/UP%20Energy%20Policy%202009.pdf


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 commission’s 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 commission’s 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 commission’s 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 Lanco’s

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 commission’s 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 commission’s 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 committee’s report before it and adjourned the case. Since the high court did not pass an

15 ATE order dated September 4, 2009


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 01/LTPP/2006 02/LTPP/2006 03/LTPP/2006

Max/Min Capacity

2000 MW/100MW 2000 MW/100 MW

2000 MW/500 MW

Fuel Coal/Lignite Unspecified Imported Coal

Term of PPA 25 years 15/25/35 years 25 years

Location Unspecified Unspecified Sarkhadi, Veera Sangat or any other Coastal location

Tariff No escalation or indexation in capacity or variable charge.

Capacity Charges: Partly Escalable and partly non-escalable 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 ATE order dated September 4, 2009 17 PSERC order dated July 14, 2010 (petition no. 8 of 2010)


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 India’s 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 company’s 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 GERC order dated December 20, 2007 19 Gujarat High Court order dated March 27, 2008 (SPECIAL CIVIL APPLICATION No. 2194 of 2008)


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 Adani’s 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.


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 commission’s 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 commission’s 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 procurer’s or the commission’s website.


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 government’s pre-

election policy and 2,000 MW from state GENCO’s 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

commission’s 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 Lanco’s 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

http://www.mercindia.org.in/pdf/Order%2058%2042/Order_no_39_of_2009.pdf


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

http://www.mercindia.org.in/pdf/Order%2058%2042/Order_53_of_2010.pdf


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 commission’s January 27, 2011 order scrapping the bidding process,

the procurer filed petition for adoption of tariff discovered from L2 bidder.


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 State Developer Fuel Year Levelized Tariff (Rs. per unit)

Coastal Gujarat Power Ltd.

Gujarat Tata Power Imported Coal Apr-07

2.26

Sasan Power Ltd. Madhya Pradesh

Reliance Power Ltd.

Pit head coal black

Aug-07

1.19

Coastal Andhra Power Ltd.

Andhra Pradesh

Reliance Power Ltd.

Imported Coal Jan-08 2.33

Jharkand Integrated Power Ltd.

Jharkand Reliance Power Ltd.

Pit head coal block

Aug-09

1.77


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


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.


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.

State Project Name Year Project

Type Capacity

(MW)

Levelized Tariff (Rs. per unit)

Project developer

Uttar Pradesh Prayagraj Power generation company

2009 Greenfield 1980 3.02 JP Associates

Uttar Pradesh Sangam Thermal Power Project

2009 Greenfield 1320 2.97 JP Associates

Uttar Pradesh Anpara C 2006 Brownfield 1100 1.56 Lanco

Punjab Rajpura Thermal Power Plant

2009 Greenfield 1320 2.89 L&T

Punjab Talwandi Sabo Power Limited

2008 Greenfield 1980 2.86 Sterilite Energy

Haryana Jhajjar Thermal Power Project

2008 Greenfield 1320 3.00 China Light and Power

Chhattisgarh Bhaiyathan thermal power project

2008 Greenfield 1320 0.81 India bulls

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.


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 4600

Rs. 1600/ ton 2.92 2.79

Rs. 2400/ ton 3.95 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 cost-

plus projects is compiled from tariff orders of respective SERCs. Finally, the paper analyses the capacity


charge component of CB projects tariff and that of the variable (energy) component of CB projects tariff.

State Round Year Developer Capacity

(MW) Fuel Used

Levelized tariff (Rs. per

unit)

Gujarat I 2006 Adani 1000 Domestic Coal 2.89

Gujarat I 2006 Adani 1000 Domestic Coal 2.35

Gujarat I 2006 Essar 1000 Imported Coal 2.25

Gujarat I 2006 Aryan 200 Domestic Coal 2.40

Gujarat II 2010 KSK Energy 1010 Domestic Coal - Coal Block

2.35

Gujarat II 2010 Essar 800 Imported Coal 2.80

Gujarat II 2010 Shapoorji Pallonji

800 Imported Coal 2.80

Maharashtra I 2008 Adani 1320 Domestic Coal 2.64

Maharashtra I 2008 Lanco 680 Domestic Coal 2.72

Maharashtra I 2009 JSW 300 Domestic Coal 3.21

Maharashtra II 2010 Adani 1320 Domestic Coal 3.28

Maharashtra II 2010 India Bulls 1200 Domestic Coal 3.26

Maharashtra II 2010 Emco 300 Domestic Coal 2.88

Haryana I 2008 Adani 1424 Imported Coal/Domestic Coal

2.94

Haryana I 2008 PTC - GMR 300 Domestic Coal 2.86

Madhya Pradesh

I 2007 Lanco 600 Domestic Coal 2.34

Madhya Pradesh

I 2007 Reliance 1241 Domestic Coal 2.45

Rajasthan I 2009 Adani 1000 Domestic Coal 3.24

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 non-

escalable 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


and Table 5.5 give an overview of the various components of the bid quoted by various bidders.

Project Name Capacity Charge Fuel Charge Inland Transportation

Non Escalable Escalable Non Escalable Escalable Non Escalable Escalable

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

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.

Project Name

Capacity Charge Fuel Charge Overseas/Inland Transportation

Fuel Handling

Non Escalable

Escalable Non

Escalable Escalable Non Escalable Escalable

Non Escalable

Escalable

GJ - Stage I - Essar

GJ - Stage II – SP

GJ - Stage II - Essar

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


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 developer’s 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, prima-facie it seems the tariffs being discovered through the bidding process are competitive.

23 The tariffs for April 2010 have been calculated as per the methodology in Annexure 1 24 Assuming the escalation rates as per CERC notification dated March 31, 2010


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.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rs.

/kW

hRJ - Stage I - Adani GJ - Stage I - Aryan GJ - Stage I - Adani

GJ - Stage II - KSK MH - Stage I - Adani MH - Stage II - Adani

MH - Stage I - Lanco MH - Stage II - IB MH - stage II - Emco

GJ - Stage I - Essar GJ - Stage II - Essar GJ - Stage II - SP


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 CERC’s 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 CERC’s 2009 generation tariff regulations so as to give same levelized

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Cost plus projects Competitively bid projects


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.

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

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

MH -Stage II

- IB

GJ -Stage I -

Essar

MH -Stage I -Adani

GJ -Stage I -Adani

GJ -Stage II

- SP

GJ -Stage II - Essar

MH -Stage II - Adani

MH -Stage II - Emco

RJ -Stage I -Adani

MH -Stage I -Lanco

GJ -Stage II

- KSK

GJ -Stage I -Aryan

Rs.

/kW

h

Non - Escalable Escalable


Project Capex (Rs.crores/MW)

Trombay Unit 8 4.53

JK LTPS 4.44

Parli Unit 6 4.62

Kothagudem TPS stage VI - Unit 11 4.65

GVK Govidval Sahib 4.86

North Chennai TPS - Stage II 5.15

Giral LTPS 5.72

Rayalaseema TPP St.III 5.80

Kakatiya ST-I TPP 5.90

Mettur TPS St-III 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

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

MH -Stage II -

IB


MH -Stage I -

Adani


GJ - Stage II - SP


MH -Stage II -

Adani

MH -Stage II -

Emco


MH -Stage I -Lanco

GJ - Stage II - KSK

GJ - Stage I - Aryan

Rs.

/kW

h

Rs. 4.5 crores/ MW

Rs. 3.5 crores/ MW


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 it’s break-up in different components (escalable and non-

escalable). 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.

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

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0




MH - Stage II - IB

MH - Stage II - Adani

MH - Stage II - Emco

GJ - Stage II - KSK

GJ - Stage II - SP


MH - Stage I - Adani

MH - Stage I - Lanco

GJ - Stage I - Aryan

Rs.

/kW

h

E Fuel NE Transportation E Transportation NE Fuel handling


Cost plus project Variable charge for year 2010-11 (Rs./kWh)

Cost plus project Variable charge for year 2010-11 (Rs./kWh)

Kota TPP VII 2.010 Parli Unit 6 1.430

STPS VI 2.460 Paras Unit 3 1.370

PTPS VII & VIII 2.028 NTTPS Stage IV 1.240

DCR TPP I & II 1.794 Kahalgaon II 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

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Rs.

/kW

h

Year

RJ - Adani I GJ - Aryan I GJ - Adani I GJ - Essar I

GJ - Essar II GJ - SP II GJ - KSK II MH Adani II

MH Adani I MH Lanco I MH India Bulls II MH Emco - II


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 CERC’s 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.

Source: Prayas analysis as per Annexure I

Figure 5.7: Levelized variable charges over 25 years for bid projects and cost-plus projects

27 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

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

RJ

-St

age

I -

Ad

ani

GJ

-St

age

I -

Ad

ani

GJ

-St

age

I -

Essa

r

MH

-St

age

II -

IB

MH

-St

age

II -

Ad

ani

MH

-St

age

II -

Emco

GJ

-St

age

II -

KSK

GJ

-St

age

II -

SP

GJ

-St

age

II -

Essa

r

MH

-St

age

I -

Ad

ani

MH

-St

age

I -

Lan

co

GJ

-St

age

I -

Ary

an

Rih

and

I

Rih

and

II

Sin

grau

li

NTP

C T

alch

er

II

NTT

PS

Stag

e I

V

Par

as U

nit

3

Par

li U

nit

6

Kah

alga

on

II

NC

TPS

Kah

alga

on

I

Un

chah

ar I

Un

chah

ar II

Un

chah

ar II

I

Ch

and

rap

ur

Ko

rad

i

Fara

kka

DC

R T

PP

I &

II

RTP

P S

tage

II

Kap

arkh

ed

a

MTP

S

ETP

S

TTP

S

kota

TP

P V

II

PTP

S V

II &

VIII

Bh

usa

wal

Nas

ik

STP

S V

I

Rs.

/kW

h

Competitively Bid Projects Cost Plus projects 50-50


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


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 on-

going 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 non-

compliance 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


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. Non-

compliance 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


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 ERC’s 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:

ERC’s 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


publication, deviations in bidding documents, respective commission’s 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 committee’s 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


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, CERC’s 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. Prayas’review 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


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----


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, 2003’s 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.


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 commission’s 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

1. Provides policy

directives

2. Publishes

bidding guidelines

and standard

bidding documents

Government

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)

In accordance with the EA 2003, Ministry of

power came up with the following:

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

1. Defines various

escalation rates for

the purpose of

bidding evaluation.

2. Acts as an

appropriate

commission when

multiple states are

procuring power

1. Forecasts the

state and national

demand forecasts,

monitors the status

of all ongoing

generation projects

1. Undertakes long

term power

purchase strategy

2. Gets the

approval for the

deviations in the

bidding documents

Ensure and certify

conformity to

bidding guidelines

and a fair and

transparent

process

1. Approves the

deviations from the

standard bidding

guidelines

2. Adopts the tariff

if due process has

been followed

CERC CEA DISCOM SERC Eval. Comm


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 commission’s

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. Commission’s 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 discom’s 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 commission’s 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

http://www.cercind.gov.in/escalation_rates.html


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.

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

Procurer intimates the RC and the

project preparatory activities as

specified by CBG are initiated

Initiation of the bidding process

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

RfQ 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.

RfP stage

The BEC shortlists the bidders based on

the lowest tariff and the capacity

offered. The PPA is then signed with

the successful bidder.

Selection of the bidder

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.

Adoption of the tariff


commission’s 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 non-

escalable 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

committee’s 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 company’s

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.


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 commission’s 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

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


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.


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 two-

stage 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.


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 paper’s

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 CERC’s 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 CERC’s 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.


Annexure III: List of cost plus projects considered for analysis

Name Short Name State Capacity COD

Ennore Thermal Power Station ETPS TN 450 1970s

TTPS TN 1050 Between 1979 and 1992

Mettur Thermal Power Station MTPS TN 840 Betwenn 1987 and 1990

North Chennai Thermal Power Station NCTPS TN 630 1990s

Kota Thermal Power Plant VII KTPP VII RJ 195 Dec-09

Suratgarh Thermal Power Station VI STPS VI RJ 250 Dec-09

Panipat Thermal Power Station VII & VIII PTPS VII & VIII HR 500 Sep-09

Deenbandhu Chhotu Ram Thermal Power Station I & II DCR TPP I & II HR 600 Nov 2007, Mar 2008

Parli Thermal Power Station Unit 6 Parli Unit 6 MH 250

Paras Thermal Power Station Unit 3 Paras Unit 3 MH 250

Kaparkheda Thermal Power Station Kaparkheda MH 840 Between 1989 and

January 2000

Bhusawal Thermal Power Station Bhusawal MH 470 Between 1968 ans 1982

Nashik Thermal Power Station Nasik MH 910 1970s

Koradi Thermal Power Station Koradi MH 1080 Between 1974 to 1983

Chandrapur State Thermal Power Station Chandrapur MH 2340 Between 1983 to 1997

Dr Narla Tatarao Thermal Power Station NTTPS Stage IV AP 500 Jan-10

Rayalaseema Thermal Power Plant Stage II RTPP Stage II AP 420 Aug 2007, Mar 2008

NTPC Singrauli Thermal Power Station Singrauli NTPC 2000 Between 1982 and 1994

NTPC Rihand Thermal Power Station Rihand I NTPC 1000 1980s

NTPC Rihand Thermal Power Station Rihand II NTPC 1000 Jan 2005, Sep 2005

Unchahar Thermal Power Project - Stage I Unchahar I NTPC 420 1980s

Unchahar Thermal Power Project - Stage II Unchahar II NTPC 420 1999

Unchahar Thermal Power Project - Stage III Unchahar III NTPC 210 Sep-06

Farakka Super Thermal Power Plant Farakka NTPC 1600 Between 1986 and 1994

Kahalgaon Super Thermal Power Project - Stage I Kahalgaon I NTPC 840 1990s

Kahalgaon Super Thermal Power Project - Stage II Kahalgaon II NTPC 1000 March 2007, July 2007

Talcher Thermal Power Station - Stage II NTPC Talcher II NTPC 2000 2003,2004 and 2005


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 of Contract Year

Quoted Non-Escalable Capacity Charges (Rs. per unit)

Quoted Escalable Capacity Charges (Rs. per unit)

Quoted Heat Rate (Kcal per unit)

1 Scheduled COD of first Unit

31-Mar 0.900 0.043 2385

2 01-Apr 31-Mar 0.895 Same as above Same as above
























26 01-Apr 25th anniversary of the Scheduled COD of first Unit

0.526 Same as above Same as above

Assumptions Annual escalation rate applicable to Quoted Escalable Capacity Charges

4.98%

Annual escalation rate applied to Energy Charges 6.77%

Discount Rate for Levelized Tariff 10.49%

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

Prayas Energy Group