New bidding norms to make power tariffs realistic

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SummaryPower ministry has notified the changed bidding provisions for both case-1 and case-2 projects that allow pass-through of additional fuel cost, which is expected to take care of the uncertainties associated with power projects

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 market’s 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

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