Written by Arun Mehta, pursuing Certificate Course in Electricity and Renewable Energy Laws offered by Lawsikho as part of his coursework.  Arun works as a Specialist in Scheduling and Forecasting at Rewa Ultra Mega Solar Limited, Bhopal. Additionally, he has a MBA degree in Power Management.

Introduction

Prior to the Electricity Act, 2003, the entire electricity sector business was primarily confined to the government owned generation companies and state government owned electricity boards. The Act ushered in an era of liberalization, privatization, transparency and competition in the sector. Gradually, the sector witnessed a series of reforms such as unbundling of state utilities, privatization of generation, entry of private players in transmission and increasing competition in generation as well as retail supply of electricity. Increasing competition has yielded significant benefits in terms of capital costs and operational efficiency resulting in more cost effective power for consumers.

Earlier, since the State Electricity Boards handled the entire gamut of activities, power was procured either from state owned generating plants or central generating stations operated by CPSUs such as NTPC, NHPC and the tariff of electricity was mainly decided by the State Governments. Later, the task determining tariffs for procurement of electricity was given to the Central and State Regulatory Commissions through the Regulatory Commissions Act, 1998[1].

With the advent of Electricity Act, the sector witnessed immense private sector participation. Eventually, the sector has become so competitive that even the regulators (CERC and SERC) are gradually distancing themselves from tariff determination and adopting tariff discovered through market principles, i.e. though competitive bidding of power.

This article discusses the regulatory background, power market structure in India, various modes of power procurement and key features of the guidelines issued by the government for competitive procurement of power.

Throughout the article, the words “Act” and “discom” are synonymously used with Electricity Act, 2003 and distribution companies, respectively.

Regulatory Background

Relevant Provisions in the Electricity Act, 2003

The Electricity Act introduced key enabling provisions that have facilitated procurement of power through competitive bidding. As per Section 61 and 62 of the Act tariff determination is under the ambit of Central or State Regulatory Commission. However, the Act gives precedence to tariff determined through competitive bidding under Section 63, reproduced below:

“Section 63. Determination of tariff by bidding process

Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government.”

Further, in Section 61, the following provisions support procurement of power through competitive bidding:

“Section 61. (Tariff regulations):

The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely: –

(b) the generation, transmission, distribution and supply of electricity are conducted on commercial principles

(c) the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments;

(e) the principles rewarding efficiency in performance;

(i) the National Electricity Policy and tariff policy “

The Act has also introduced various measures for opening up of the power market, which act as enablers in moving towards an electricity market based on commercial principles. Some of key measures that have encouraged a competitive power market are:

  • Delicensing of generation under Section 7 of the Act, with the exceptionof hydro projects, thereby encouraging private sector participation in generation.
  • Introduction of open access through which any entity, viz. generator, discom or industrial consumer can buy or sell power through the use of transmission or distribution network. Open access has been instrumental in bringing the sector from a monopoly operated by the State Electricity Boards to a vibrant and competitive sector. The Act gives the right of open access to industrial consumers for procurement of electricity from their own captive plants through the interstate or intrastate transmission network and also mandates the Central & State transmission utility or any transmission licensee to provide open accessto generators (above 250 MW for thermal, 50 MW for hydro and 5 MW for renewable sources)[2] or consumer above 1 MW[3]
  • Unbundling of state electricity boards into separate generation, transmission and distribution companies, thereby uncovering inefficiencies, promoting transparency and private sector participation in all the three segments. As per Section 172(c) of the Act, the assets, rights, liabilities etc. of State Electricity Boards established under the Electricity (Supply) Act, 1948 are transferred to the State Government, which prepares a transfer scheme as per Section 131 of the Act, through which the SEBs are unbundled.

National Electricity Policy and National Tariff Policy

The National Electricity Policy stipulates competition in the power market aimed at consumer benefits[4] and the National Tariff Policy aims to provide electricity to consumers at reasonable and competitive rates, ensure financial viability of the sector and attract investments and Promote competition, efficiency in operations and improvement in quality of supply[5].

Under its general approach to tariff, The National Tariff Policy of 2016 mandates procurement of power through competitive bidding. The relevant sections are quoted below:

“ 5.1 Introducing competition in different segments of the electricity industry is one of the key features of the Electricity Act, 2003. Competition will lead to significant benefits to consumers through reduction in capital costs and also efficiency of operations. It will also facilitate the price to be determined competitively. The Central Government has already issued detailed guidelines for tariff based bidding process for procurement of electricity by distribution licensees.

5.2 All future requirement of power should continue to be procured competitively by distribution licensees except in cases of expansion of existing projects or where there is a company owned or controlled by the State Government as an identified developer and where regulators will need to resort to tariff determination based on norms provided that expansion of generating capacity by private developers for this purpose would be restricted to one time addition of not more than 100% of the existing capacity.

5.3 The tariff of all new generation and transmission projects of company owned or controlled by the CentralGovernment shall continue to be determined on the basis of competitive bidding as per the Tariff Policy notified on6thJanuary, 2006 unless otherwise specified by the Central Government on case to case basis. “

Power Procurement in India

Power Market Structure in India

The present power market is a vibrant market with both government and private players in the generation sector (also called Independent Power Producers). The erstwhile State Electricity Boards (with the exception of Kerala SEB[6] and partly Himachal Pradesh SEB[7]) have now unbundled into State Generation, Transmission and Distribution Companies. Apart from these, there are industrial/commercial/captive open access consumers. The structure of the Indian power market is shown in the Figure below:

Figure 1: Structure of Indian Power Market [8]

Modes of Power Procurement

Power procurement by discoms can be classified as long, medium or short term based on the duration for purchase of power. Further, they can be classified as PPAs (bilateral or competitive bidding) and procurement from traders or power exchanges (short term,  day ahead or contingency).

The usual mode of procurement of power is through long term PPAs of 25 years, where tariffs are determined based on rates discovered through reverse auctions. Typically, long term PPAs are the most preferred mode since they provide long term certainty and reduce risks to both generators as well as discoms. For the generators, the risk is reduced due to certainty of revenue for 25 years and for discoms, the risk is reduced in terms of constant source of power supply and less risk exposure to volatility in fuel prices.

The Ministry of Power released Guidelines for Determination of Tariff by Bidding Process for Procurement ofPower by Distribution Licensees in 2005, which defined two mechanisms of procurement of power through competitive bidding Case 1 and Case 2.  Case 1 projects are those where the location, technology or fuel are not specified and most of the approvals, clearances, land acquisition for the project has to be carried out by the private developer.  For Case 2 project, generally the location is specified, fuel, including the fuel linkages are established/facilitated by the government and various approvals, water availability etc. are facilitated by the government[9]. Thus, the risk with developer is higher in Case 1 projects and lower for Case 2 projects as some risk is shared by the government. Even the terminology for procurement of power is slightly different, Power Purchase Agreement for Case 2 projects and Power Supply Agreement for Case 1 projects, implying that the onus of procuring the power is on the discom/utility in the former, whereas in the latter the onus is on the developer to supply power.

The Power Procurement Process

The steps of power procurement process are outlined as follows[10]:

  • Preparation of Bid Documents
  • Site identification and land acquisition
  • Environment and Forest Clearance
  • Fuel arrangement and water linkage
  • Detailed Project Report consisting of all information related to the project, including hydrological, geological, meteorological and seismological data
  • Other related information
  • Bidding Process

 

  • Preparation of Bid Documents: The quantum of power to be procured is decided by the procurer (discom) on the basis of demand forecast available from the latest Electric Power Survey, published by the CEA, in case of deviation from the forecast, approval of the appropriate commission is sought. The bid documents are required to be prepared by the procurer in line with the Model Bidding documents issued in 2013 for DBFOT power projects for Case 2 projects[11] and DBFOO model documents for Case 1 projects[12].
  • Site identification and land acquisition: In Case 2 projects, as the site is pre-identified. Land acquisition and related clearances are required to be taken by the procurer prior to the issue of bid documents.For Case 1 projects, the site selection and land acquisition are required to be done by thebidder/developer, for which documentary evidence indicating land acquired and pending land is required to be submitted along with bidding documents.
  • Environment and Forest Clearance: Environment and Forest clearance (if applicable) is required to be taken by the procurer prior to issue of bid documents for Case 2 projects. For Case 1 projects, the proposal for environment/forest clearance is to be submitted by the bidder/developer.
  • Fuel arrangement and water linkages:For Case 2 bids, the fuel linkages, if available, are specified by the procurer prior to the issue of bid documents. For Case 1 projects, the bidder is required to have fuel linkage or coal block allocation or fuel supply agreement for gas which should typically suffice for the entire duration of the PPA.
  • Grid connectivity: For Case 2 projects, typically grid connectivity for long term access is the responsibility of the procurer. For Case 1 projects, grid connectivity is responsibility of the bidder. However, it would be the responsibility of the bidder in case bid documents do not specify grid connectivity.
  • Detailed Project Report: For Case 2 projects, detailed project report (or feasibility report) with details on site specifications, water availability, soil type, geological, hydrological and seismological information is made available to bidders before issue of bid documents, which bidders can ascertain through site visits. In Case 1 projects, the DPR is required to be submitted by the developer with the bidding documents.
  • Other related information: ln case the bidder is a trading licensee (power trader), it is required to submit a copy of the PPA signed with the generator for the required capacity. Availability of fuel and transmission linkages need to be ascertained by the trader, prior to bidding.
  • Bidding process: The bidding process for procurement under both Case 1 and Case 2 projects is a two stage process. The first stage is a Request for Qualification (RFQ) wherein the technical and financial credentials of the bidders are evaluated. Only those bidders who qualify the first stage then submit a financial (tariff) proposal in the Request for Proposal (RFP) stage. For thermal plants, the financial bid comprises of a fixed charge and a fuel charge (for some projects, especially renewable projects, the financial bid comprises only of a single tariff). The bidder quoting the lowest financial bid is awarded a Letter of Award, followed by signing of Power Purchase Agreement (Case 2 project) or Power Supply Agreement (Case 1 project).

Contents of RFQ and RFP documents

The Ministry of Power has released Model Bidding documents for Case 2 projects under DBFOT (Design Build Finance Operate and Transfer) and Case 1 projects under DBFOO (Design Build Finance Own and Operate). For both type of projects, the bidding process is a two stage process. A typical RFQ document has the following contents[13]:

  • Information about the utility, location of plant (for Case 2 projects), indicative project cost (only for Case 2 projects) and payment cost for the RFQ process
  • Information on the bidding documents including the RFQ, PPA and other documents issued from time to time
  • Brief description and schedule of the bidding process
  • Requirements on formation of SPV Financial, technical and operational eligibility requirements
  • Evaluation criteria for techno-commercial evaluation
  • Formats for submitting information relating to technical and financial parameters

On the basis of evaluation in the RFQ stage, in the RFP stage, selected bidders submit bank guarantee for bid security, legal documents including power of attorney for consortiums or joint ventures and financial bid which is either atwo-part tariff, i.e.  fixed charge and fuel charge for thermal plants or a single part tariff. The bidder quoting the lowest tariff is selected. Further, the RFP contains rules for selection if multiple bidders quote the lowest tariff or lowest tariffs are quoted by different bidders for different capacities.

Power Purchase Agreements

Power Purchase Agreements (PPAs)are contracts signed between selected bidders and procurers. Usually, such agreements are capacity (MW) based, some renewable energy based projects also have energy (MU) based PPAs. The PPA plays an important role in ensuring cost competitiveness of power, since it not only contains payment related clauses but also clauses pertaining to obligations of the supplier and procurer, default events, liquidated damages applicable to both parties and force majeure clauses. The PPA minimizes developer risk through letter of credit and other payment security arrangements and also sets obligations through generation clauses. The key elements and features of a model PPA are as follows[14]:

  • Conditions Subsequent clause: Conditions Subsequent are conditions to be fulfilled by the seller/generator and the procurer within a certain period post signing of PPA. Conditions Subsequent for the seller include signing of fuel supply agreement, necessary clearances and permits, long term or medium term access as applicable and signing of EPC contracts for supply and erection of boiler, turbine and balance of plant. For the procurer, the Conditions Subsequent involves obtaining long term or medium term access to the grid, if applicable.
  • Contract Performance Guarantee: Contract performance guarantee is a bank guarantee submitted by the seller as a security which can be encashed by the procurer if the seller is unable to supply the contracted amount of power within a given period of time.
  • Guarantee of offtake: The offtake of power from the generating plant is guaranteed by the procurer up to the available or contracted capacity, whichever is lower.
  • Defining of injection and delivery points, open access, transmission charges and scheduling clauses for scheduling and dispatch of energy.
  • Billing and payment clauses, including Letter of Credit and escrow arrangements for payment security of seller.
  • Force Majeure clauses: Define force majeure events that are beyond the control of parties and the remedies available to the parties on occurrence of such events
  • Change in law clause: Allows pass through of increase in capital costs due to change in law which impacts the capital or operational costs substantially, for instance through an increase in tax rates.
  • Event of default clause: Provide for compensation, including termination compensation to either party on default from its obligations.

Conclusion

The power sector has evolved from a regulated state monopoly to an open market with more access to private players. While the market has certainly become more competitive, yet there are certain risks that need to be addressed. For thermal projects, certain factors such as fuel and land availability and payment delay by utilities are some of the risks that are still pertinent to developers. Such risks can be addressed through inputs and suggestions from the developers and incorporating them in the bidding documents. Achieving the objectives of efficiency, quality and reliability of power and optimum utilization of resources as set by the Electricity Act would require estimating and incorporating all possible risks and making the bidding documents as inclusive as possible.

[1]Section 13 (a) and Section 22(1) (a) of The Electricity Regulatory CommissionsAct, 1998 (repealed)

[2]Section 2 (1) (b) of (Grant of Connectivity, Long term Access and Medium term open access in interstate transmission and related matters) Regulations, 2009

[3]Kumar, S. (n.d.)Open Access, Retrieved from http://indianpowersector.com/home/open-access/

[4]Section 5.7 of National Electricity Policy, 2005

[5]Section 4.0 ,Objectives of the National Tariff Policy, 2016

[6]KSEB Limited Overview. (2015) Retrieved from http://www.kseb.in/index.php?option=com_content&view=article&id=50&Itemid=493&lang=en

[7] HPERC, History of HPSEBL, 4th APR Order for 3rd MYT Period (FY15-19) & Determination of Tariff for FY19 & True Up of FY16, Retrieved from http://hperc.org/File/to%20FY18-19.pdf

[8]Tata Power Trading Company Ltd. (n.d.) Presentation on Power Procurement: Planning, Regulations and Practices.

[9] Forum of Regulators (2017). Competitive Tariff vis-a-vis Cost plus Tariff- Critical Analysis. Retrieved from http://www.forumofregulators.gov.in/Data/study/FOR.pdf

[10] Ministry of Power (2005) Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees

[11]Ministry of Power (2013) Guidelines for Procurement of Electricity from Thermal Power Stationssetup on DBFOT basis

[12]Ministry of Power (2013) Guidelines for Procurement of Electricity from Thermal Power Stations setup on DBFOO basis

[13] Ministry of Power (2013) Model Request for Qualification for Power Purchase Agreement for DBFOT Power Projects

[14] Standard Power Purchase Agreement for Procurement of Power Under Case – 1 Bidding Procedure Through Tariff Based Competitive Bidding Process, as per Guidelines issued by the Government of India for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees

 

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