New bidding norms to make power tariffs realistic

Written by Santosh Tiwari | Updated: Nov 22 2013, 09:59am hrs
Why are the new bidding norms so important for the power sector

Fuel uncertainty over the years has impacted power projects in a big way in the absence of a reasonable pass-through mechanism in the power purchase agreements (PPAs). This led to abnormally high tariff quotations in the PPAs, which the state distribution utilities battling with deteriorating financial health can't handle. The situation became so difficult that there was a PPA lull since 2010 and for those few that are under the process, or have been signed recently, in states like Rajasthan and UP, the tariff is abnormally high. Going by the PPAs signed recently in Rajasthan, Uttar Pradesh and Tamil Nadu, the developers have quoted prices as high as R5 per unit to the distribution companies and yet won the contracts. These exorbitant prices, apparently beyond the markets capacity to pay, are mainly due to the uncovered fuel risk in the existing case-1 bidding provisions. The new prices discovered for long-term, up to 25 years power supply, are significantly higher than the price level of R3-3.50/unit quoted by the developers in 2010.

How will the new bidding norms help in solving this problem

The new framework cleared by the government now allows pass-through of the additional cost of fuel and also safeguards any misuse of the fuel source linked to a power project. The new bidding norms will remove fuel uncertainties associated with quoting of tariff and, in turn, will allow bidders to project realistic tariffs.

Which are the different categories of projects covered by the new bidding norms

The power ministry has issued model RfQ, RfP and Power Supply Agreement for procurement of power through tariff-based competitive bidding for construction and operation of thermal power stations set up on design, built, finance, own and operate (DBFOO) basis by distribution licensees.

The new guidelines for procurement of power under these documents with effect from November 9, 2013, have also been notified. In terms of guidelines notified in 2006 and amended from time to time, procurement can be done under two categories:

* Case-1: Where location, technology or fuel is not specified by the procurer.

*Case-2: For hydro-power projects, load centre projects or other location-specific projects with specific fuel allocation such as captive mines available, which the procurer intends to set up under tariff-based bidding process.

Case-1 standard bidding documents (SBDs) were issued in 2009 in accordance with the guidelines for the procurement of power by the distribution licensees notified in 2006. In 2010, these SBDs were amended to allow blending option in coal and to incorporate other changes regarding the disqualification criteria.

What were the major problems in the earlier framework

Several issues were raised during the consultation process for modifying the bidding provisions, and for case-1 projects, main concerns included:

*Absence of level-playing field amongst bidders having different types of fuel sources.

*Fuel availability risk in domestic coal linkage based projects.

*Fuel price volatility risk in imported coal-based projects due to uncertainty/delays because of the absence of project milestones and consequent default/damage payment provisions applicable for both parties, lack of clarity regarding the use of concessional fuel upon termination, bidding framework involving multiple variables, and participation of bidders having different fuel sources, separate indices for evaluation and payment purposes by CERC in the bidding framework.

After elaborate discussions, the EGoM first cleared the bidding norms for case-2 projects in August and the two UMPPs in Tamil Nadu and Odisha are set to become the first two power projects bid under the new guidelines. The case-1 guidelines were cleared by the power ministry this month after the inter-ministerial group approval.

What are the main features of the new framework

There is further categorisation of case-1 projects to provide a level-playing field to bidders and to capture the relative efficiencies of different type of fuel sources. The categorisation is based on case-1 procurement done amongst the following categories, where the location of the power plant is not specified:

*Projects based on domestic coal linkage.

*Projects based on captive coal blocks located in India separately allotted to suppliers.

*Power projects based on imported coal with fuel charge based on international coal indices in the spot market.

*Projects based on imported coal with suppliers having captive mines abroad.

Then, there would be a two-stage process of competitive bidding on the lines of model documents issued by the ministry of finance with initial scrutiny of applications on the basis of project parameters and final selection on the basis of financial offer. The evaluation of bids has been shifted from levelised tariff to first year tariff in which financial offer for the unit charge made only for the initial year and actual tariff revised annually based on pre-determined indexation.

The fixed charge determined for each accounting year will be revised annually to reflect 30% of the variation in a composite index comprising WPI and CPI and annual reduction of 2% in fixed charge to pass on the benefit of depreciated asset to the consumers. The fuel availability and price risk has been addressed and fuel charge pass-through provisions are available subject to certain safeguards. The fuel supply agreement (FSA) has to be a condition precedent of the agreement. Then, there are pre-emptive rights on concessional fuel allowing revenue share to the utility in the case of sale of electricity to other buyers using concessional fuel. The new norms also include payment of fixed charge on the basis of availability of power station while fuel charge payment will be as per actual energy produced and provisions for penalties for mis-declaration of availability. Then, 20% of the contracted and committed capacities is made available to the suppliers for market sales as open capacity. There is also a provision for monitoring of major construction milestones and performance standards related to operation of generation system to be enforced. In terms of risk allocation, commercial and technical risks are with the supplier whereas direct and indirect political risks are to be borne by the utility. There is also the provision for dealing with unexpected events to ensure protection to the supplier against political actions having material adverse effect on the project. With this, there is clarity in termination and extension provisions, pre-determined termination payments in certain event of defaults, and monitoring and supervision has been kept at a bare minimum level through utility engineer.

What are the critical provisions in the new framework that will help bring certainty in project development and running

The critical features outlined by the power ministry under new bidding procedures are:

*Alternative formulations for determination of fuel costs depending on the source and pricing of fuel supplies

*In case fuel is procured from captive mines allotted to the suppliers, the cost of fuel may be fixed upfront with reference to the price charged by Coal India. Assuming a comparatively higher level of efficiency, the fuel cost payable to the supplier may be fixed at, say, 95% of the Coal India price prevailing at the time of bidding, with appropriate indexation over the contract period with an added option of allowing the bidders to quote an even lower fuel cost which may be further limited to the costs determined by the appropriate regulatory commission.

*When imported fuel is to be used, reliance should be placed on pre-selected coal indices used widely in international supplies of coal but always subject to the actual cost incurred by the supplier.

*However, if bids are invited from producers having captive mines abroad, a ceiling equivalent to between 80% and 90% of the prevailing price could be prescribed with appropriate indexation over the concession period. In all cases of imported fuel, the foreign exchange risk would have to be borne by the utility as the supplier would have no means to hedge such risk on a long-term basis.

*Contract period is fixed at 25 to 30 years including the construction period with one-time extension for 5 years upon notice of concessionaire/utility.

*The supplier will identify the additional sources of fuel supply in case of fuel shortage.

*Minimum stock of fuel sufficient for 10 days will be maintained by the supplier.

*Specification of technical parameters will be as per CEA technical regulations for the level of service.

*Financial close will have to be time-bound to the time-limit of 180 days, failing which bid security will be forfeited.