Private sector participation in the power sector started in the 1990s when the Indian government adopted a policy on Independent Power Producers (IPPs). However, IPPs were not selected on a competitive bidding basis and most MoUs were signed in an absolutely opaque manner. The general public was not informed about the impact of such contracts on consumer tariffs. Following the IPP policy, several MoUs for over 1,00,000 MW capacity were signed (at a lightning speed of 95 MW/day). However, in the next 10 years, less than 10,000 MW capacity (based on these MoUs) was actually added. Realising the drawbacks of MoU-based projects and their adverse impacts on consumer tariff, efforts were made to adopt a competitive bidding route since 1995. But these attempts failed to take off until the Electricity Act, 2003, provided a robust legal framework for capacity addition through the competitive bidding route.

After the enactment of the 2003 Act, the government also issued the notification of competitive bidding guidelines in 2005. Since then, the state electricity distribution companies have contracted over 42,000 MW capacities through the competitive bidding route. These contracted projects include four ultra-mega power projects as well as over 15 projects (over 16,000 MW) through Case-1, i.e., location non-specific; and over seven projects (over 10,000 MW) through Case-2, i.e., location specific project route. Most of these projects are using more efficient super-critical technology. Also, the recent policy changes have made it mandatory for distribution companies to enter into all-new long-term power purchase contracts through the competitive bidding route only. Considering the capacity already contracted and the recent policy changes, it is likely that over half the capacity addition in the upcoming 12th Five Year Plan would be through the competitive bidding route.

Recently, Prayas undertook a detailed analysis of the outcome of competitive bidding so far. This analysis shows that though many players are participating in the bidding process and have succeeded in bagging projects, over 50% of the capacity through the bidding route is being developed by two players, Reliance ADAG and Adani. Also, for over 50% capacity being built, EPC contracts are placed with Chinese companies. Prayas further analysed the tariffs and found that tariff discovered through the bidding process is quite competitive vis-?-vis projects coming up on a cost-plus basis. For example, the capacity charge of competitively bid Case-1 projects is equivalent to the capital cost of about R3.5 crore per MW to R4.5 crore per MW. However, many cost-plus projects coming up in the public as well as the private sector have capital costs between R4.5 crore per MW and R5.8 crore per MW.

In the case of fuel cost, too, competitively bid projects show a significant advantage, in terms of more predictability and certainty of fuel cost. Most Case-1 projects have quoted fuel charges less than R2 per unit (in nominal terms, after applying CERC?s escalation rates) even in the 10th or 15th year of the project. This certainly compares well with many cost-plus projects having even a current year fuel cost of over R2 per unit. Large capacity contracted through the competitive bidding route and the competitiveness of discovered tariff certainly demonstrates the success of the competitive bidding framework in attracting investment in the capital-starved power sector.

Thus, there is no doubt that the competitive bidding route has taken off well in the country. However, Prayas?s review of the bidding process in several states also highlights many governance lapses. It shows several instances and ways in which the integrity of the bidding framework could be compromised, leading to preferential treatment for a particular bidder or non-competitive tariff discovery. These include re-bidding, post-bidding or non-transparent changes in bidding documents, and changes in project nature/structure after the conclusion of bidding. It was also observed that many procurers have not been adhering to various transparency and accountability related provisions of the bidding guidelines, such as publishing bid evaluation and all contracts signed with successful bidders immediately after awarding contract.

Non-adherence to power purchase agreements by project developers is another cause of concern. There are already many cases before the regulatory commissions of Gujarat and Maharashtra on issues relating to the purported inability of project developers to comply with power purchase agreements, or for changing the terms of such agreements. With over half of the total generation cost being dependent on fuel cost, project developers? fuel supply strategy often plays a crucial role in determining tariff competitiveness. Constraints in the domestic fuel sector, such as lack of transparency and accountability in fuel (coal) allocation and supply, limited fuel availability, and transportation bottlenecks are a major hurdle in further optimising generation costs. Unless urgent steps are taken to address these problems, competition will remain restricted to a few players who can ?manage? these constraints.

The Prayas analysis Transition from MoU to Competitive Bidding: Good take-off but turbulence ahead*, thus, shows that the introduction of a robust competitive bidding framework based on uniform guidelines and standard bidding documents has not only taken off smoothly but has also been successful in attracting large investments and competitive tariffs. However, it warns that we should not turn complacent about this outcome. There remain several governance challenges that, unless addressed immediately and in a comprehensive manner, could lead to turbulence in the coming years, and that can negate the advantages of competitive processes. Problems may surface in the form of increased market power by few players, non-competitive tariff discovery, project delays or non-compliance with contract terms, etc. To avoid the negative outcomes of the bidding process, it is essential to continuously monitor bidding procedures and take timely remedial measures.

* Available at http://www.prayaspune.org/peg

The author works with Prayas Energy Group, a Pune-based policy research and advocacy group