The ministry of power is ready with the new tariff-based competitive bidding guidelines for Case 2 power generation projects—projects in which the location, fuel, fuel linkage and allocation are all specified by the procuring distribution company. One major change proposed in the new guidelines is related to the bid evaluation criteria. Broadly, the new guidelines propose to identify the winning bidder based on a single variable, namely the capacity cost/charge, provided the bidder meets the minimum heat rate value specified in the bid document. The new guidelines thus propose that the winning bidder will be the one who meets the standard heat rate (SHR) criterion and has the least level-adjusted capacity cost/charge among all the bidders. This bid evaluation criteria, however, will only help to identify a least-cost bidder for the specified level of heat rate, who may or may not be the least cost-bidder on the overall basis. Let us see why.
It is well recognised that the capital cost generally bears a direct functional relationship with the efficiency, i.e. the capital cost goes up as the efficiency increases. Similarly, it is also well recognised that the operating or running or energy cost usually exhibits an inverse relationship with efficiency, i.e. the operating/running or energy cost reduces as the efficiency increases. The total cost curve, which is the sum of capital and running/operating costs (discounted present value of the yearly operating costs over the life of the product), is generally a U-shaped curve. The total cost is lowest not at the highest or lowest efficiency levels but somewhere in between. The lowest total cost occurs corresponding to the efficiency level normally referred to as optimal efficiency level for a specified level of output. Because of the U-shaped nature of the total cost curve, for any other efficiency level, either on lower or higher side of this optimum efficiency level, the total cost is always higher. Consider now the bid evaluation criteria specified in the new guidelines for case 2 projects: winning bidder is the one who has the lowest level-adjusted capacity cost for a given minimum level of efficiency/SHR.