The Indian electricity sector has grown many times in size and capacity with the extensive expansion of the transmission & distribution network. There has also been progressive interconnection of power systems at the state as well as regional levels. However, we are still far from meeting our energy demand.

The power sector, therefore, offers promising opportunities for investment in generation and also adequate and safe returns for investors, particularly projects ripe to take off with land, water and fuel linkages and competitive tariff. It is estimated that an investment of about $200 billion would be required to finance generation and related infrastructure. Obviously, this calls for sizeable private sector investment over and above the public sector?s. Private players have offered to construct projects of more than 75,000 mw, leading to an investment prospect of more than $100 billion. PTC continues to act as a catalyst in attracting private investment.

IPPs that have to transact in this space are governed by the Electricity Act, 2003. Under this Act, power can be procured by the distribution licensee through two modes: that is Section 62, wherein the appropriate commission determines the tariff and under Section 63, wherein the tariff is determined through a transparent process of bidding.

As per the tariff policy of Union power ministry issued in January 2006, all requirement of distribution licensees should be procured competitively except for the expansion of the existing projects or where the project is state-controlled/owned. In April 2009, a standard bidding document (SBD) was issued to distribution utilities for procuring power on Case-I basis on the long or medium term. In accordance with these guidelines and the SBD, all regions except NER had come out with Case-I tender,. Some challenges being faced by developers during this process are technical qualifying requirements, documentation related issues, determination of tariff for fuel linkage, amounts of payable bid bonds and projects located at pit head and coastal areas.

Technical qualifying requirements are related to acquisition of land, fuel, water, environment & forest clearances, etc. In case of land, the developer has to have under its possession 50% of the land required to set the power station as mentioned in its filing for environment clearance. In practice, as the process of approvals and clearances are long-drawn, the developer obtains approval for the entire power station but implements the project in phases due to constraints being faced in setting up the project. It is suggested that the qualifying requirement of availability of land should be linked to the phase of the project, not the entire project.

Similarly, in the case of fuel linkage, the SBD states that firm arrangements should be in place to meet the fuel requirement of total installed capacity of power station at normative availability for the term of the PPA, which is 25 years for a thermal project. CERC, in its regulation dated January 2009, has fixed the normative availability at 85%, thus to qualify in the tender the thermal project developer needs to have an arrangement for supply of 85% fuel requirement to run the entire plant for a period of 25 years. However, the projects which apply for domestic coal linkage get the letter of assurance for about 75% of the unit size requirement. Thus, a plant with only coal tied up through coal linkage does not meet the requirement. The developer needs to tie up fuel for the balance 10% to meet the normative availability of 85% fuel requirement.

Post the letter of assurance after certain milestones is met, the fuel supply agreement (FSA) is executed between the project developer and the coal supplier. In this regard, the coal distribution policy introduced in October, 2007 assures quantum of coal supply to the extent of 50-60% of the LOA/linkage quantity. The developer who has structured his tariff based on domestic fuel linkage is now stuck with having to tie up the balance fuel through either e-auction or through imported coal.

This issue gets further aggravated for plants which are coastal based. As per policy, these plants are to be given domestic fuel linkage for 70% of the requirement, loading a factor of 50-60% assurance as indicated above, effectively making the supply as 35% of domestic coal. Balance 65% has to be tied up through imports.

In case the bidder fails to maintain the avaialability at 85%, he faces a penalty of 20% reduction in capacity charges. If in case the developer were to import the fuel then the additional cost, if any, incurred by developer is not reimbursable. In such a scenario, sometimes it is difficult for the developer to work out a predictable tariff as all contracts are for 25 years period.

The rail network in India is well entrenched and thus the cost escalation can only be incremental. Now compare this to the transmission network, where huge investments are being made due to the rapid capacity addition. It has been debated at various forums that pan-caking of the transmission charges need to be removed and the transmission charges should be made distance and direction sensitive.

Until the adoption of SBD, there were no transmission escalation charges that were added to the tariff. But since the adoption of SBD, transmission escalation charge has been introduced for the purpose of evaluation of the bid to maintain a level-playing field for freight escalation. However, the maximum escalation rate for transportation of coal is 2.48%, which corresponds to distance greater than 2,000 km, whereas the escalation rate for transmission charges is 5.61%. Thus, coal transported across from the pithead (say, Chhattisgarh) to the load centre (say, Punjab) has maximum freight escalation of 2.48%, whereas for evacuation of power from the project located at a pithead in Chhattisgarh to the neighboring Madhya Pradesh is 5.61% .

These issues need to be addressed on a priority basis through a pragmatic and flexible approach. Otherwise, power procurement through competitive bidding process will not achieve the desired results of meeting the rising energy demand.