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Case-I Bidding: Key to competitive tariff in power sector, Shri R V Shahi, Former Secretary, Ministry of Power

As we know, one of the objectives of Electricity Act 2003 is to create competitive market structure in the sector. There are several provisions in the Electricity Act and the related statutory Policies viz. National Electricity Policy (2005), Electricity Tariff Policy (2006), Rules on Captive Power etc. which all aim at facilitating development of competition in the market. Towards this end, one of very important provisions of the Act is that if the tariff for power supply to the distribution licensees has been determined on the basis of competition in accordance with the Guidelines issued by the Government of India, such tariff shall be accepted by the concerned Regulatory Commissions. It is in accordance with this provision that the Government of India formulated and notified two Guidelines - (a) Development of specific power projects offered by and on behalf of distribution utilities on the basis of competitive tariff offered by the project developer. Ultra Mega Power Project is a Scheme under this Guideline. This Guideline is called Guideline for Case-II Bidding, (b) Power project developers are offered opportunities to supply power to distribution utilities with reference to the Bids that they float and the selection is on the basis of the tariff that such Bidders offer. This process is regulated under the Guidelines issued by the Government of India and these Guidelines are for Case-I Bidding. In these cases it is the project developers who take all the pre-construction responsibilities and risks. In Case-II Bidding, substantial portion of pre-construction risks are addressed on behalf of the distribution utilities themselves and then the specific project is offered to developers. Obviously, the tariff under Case-II Bidding comes out to be much less as compared to the tariff under Case-I Bidding in which case the developer has to factor in a number of pre-construction risks.

Both these streams of competitive tariff have brought in major quantitative and qualitative transformation in the power sector. Just as we have a number of projects getting developed under Case-II Bidding, we have a number of developers who have launched development of power projects with the objectives that they would participate and win the bids to supply power under Case-I Guideline. From the same projects they would try to supply power to a number of distribution utilities in response to a number tenders. Part of the capacity of the project, as the general trend has emerged, would also be used for merchant power trading either through Trading Licensees or through Power Exchanges.

These are good developments in the sector. Though it is true that power sector has attracted a large number of developers, it is equally true that some of the emerging concerns might decelerate this momentum. Policy Planners, therefore, need to be fully alive to the emerging situations. It is of great importance for this sector that these interests continue. Any dilution in interests of developers would only slow down the process of growth in capacity additions. Secondly, Policy Planners also need to keep in view the experiences of working with the formulation of these Guidelines. In case genuine difficulties are experienced or it is recognized that the extent of competition is getting restricted, immediate response would be needed to re-visit the various provisions of the Guidelines. The revisions effected in these Guidelines by the Ministry of Power in the recent months have amply demonstrated the sensitiveness of the Policy Planners to the need of the industry, so that required degree of competition is facilitated.

It is in this context that Energy Advisory Board of IDFC tried to gather feedback from the project developers in relation to the Guidelines for Case-I Bidding. After thorough analysis of the feedback a set of suggestions were made to the Power Ministry. Response of the Ministry was prompt, a Workshop was organized and views of different stakeholders were ascertained in this workshop. It is gratifying that Ministry has already issued a few amendments to these Guidelines. I propose to highlight the changes made and the reasons thereof. I also propose to highlight discuss some of the these suggestions which have not been accepted:

(a)

The qualifying requirement for land provided in the earlier Guideline was that the Bidder should have acquired and taken possession of atleast 50% of the area of the land. In case of land to be acquired under the Land Acquisition Act, the Bidder was expected to submit the notification under Section 4 of the Act, and in other cases they were expected to furnish documentary evidence for registration etc. Obviously, these provisions were somewhat difficult at the stage when a developer is participating in the Bid. In the revised Guideline the condition requiring the Bidder to have acquired and taken possession of atleast 50% of the land has been dropped. The condition of land acquisition outside the Act has been further relaxed. Instead of the documentary evidence for the acquisition or ownership, the Bidder is required to give such evidence for atleast one third of the area of such land. These changes are practical and do address the genuine difficulties of developers.

(b)

As regards the qualifying requirements in respect of fuel linkage, the earlier provision meant that the fuel linkage should be available for the entire capacity of the project. For example, if a developer is proposing to set up a 1,000 MW project consisting of two units of 500 MW each, he was required to have the linkage for the entire capacity, even though the Bid is for 300 MW in response to a tender from a distribution utility. This has now been modified and the requirement is that the fuel linkage should be available only to the extent required for that phase of the project from which proposed amount of power is expected to be supplied. Of course, the minor problem that the linkage would be given by the coal company only to the extent of 70% of the requirement and balance has to be tied up through import, does create a disconnect. I am sure the provisions which relate to the projects which are primarily proposed to be developed on imported coal basis, would not be made applicable to the projects which are primarily on domestic fuel. However, if this technicality starts creating interpretational difficulty, another clarification would be necessary.

(c) The provision regarding environmental and forest clearance requires that the Bidder should have submitted the proposal for final Environmental Clearance. The suggestion was that this requirement should be made obligatory at the time when the Bidder is submitting the financial Bid and, if by the time the financial Bid is opened, the final proposal has not been submitted for Environmental Clearance the Bid could be declared unresponsive. This was a genuine suggestion, but in the amendments made by the Ministry, this has not been accepted. We need to recognize the process that is being followed by the Ministry of Environment and Forest. As a matter of fact, in recent months this process has seen even further problems. To be satisfied that Environmental Clearance will happen is one thing and to understand that it would happen at a different point of time, not necessarily at the time when we expect this to happen, is another. This suggestion needs to be reconsidered.
(d) The provision relating to the period of time necessary for meeting the conditions subsequent required that the Bidder should meet these conditions on execution of Fuel Supply Agreement, securing long term Open Access and obtaining all concerns and clearances within a period of 10 months. The suggestion was that the time frame is somewhat unrealistic and, therefore, needed to be reviewed. The modifications agreed and notified, though not in line with the suggestions made, do take care of the problem to a great extent. The time period has been increased to 12 months, and also some of the conditions viz. execution of Fuel Supply Agreement have been diluted and made more realistic.
(e) The provisions relating to securing Open Access requires that in case the power plant is located outside the state of the procuring distribution company, the responsibility for obtaining Open Access would lie with the Bidder. Also the LC provided to the Bidder relates only to generation charges and not transmission charges. These are somewhat difficult and unrealistic requirements. The suggestion was that when the procurer already has the Power Transmission Agreement with PGCIL, it could be expected to tie-up transmission with the Central Transmission Utility. The modification made by the Power Ministry does not recognize the need for change in this regard. Since the suggestions made are practical there is a case for revisiting this provision.
(f) The provision relating to the amount of Contract Performance Guarantee also needs to be revisited. The amount of Rs. 30 lakhs per MW appears too high. For a 500 MW supply, the CPG amount will be as high as Rs. 150 crores. There could be an argument that this provision is basically meeting the objective of getting only serious Bidders in the process. The suggestion was that such high amounts could be associated with PPA. The termination cost of the PPA could, in fact, be kept at even higher level, so that non serious Bidders are eliminated from the process.

While the recent modifications made by the Ministry of Power do address some of the important concerns and would definitely facilitate larger and better competition, a few other suggestions, mentioned above, which have not been fully appreciated, need to be re-visited.