Energy Development in India: Why No One is Happy with Bidding Process
Power plant developers and financiers in India are not happy with the Standard Bidding Document (SBD) amendments proposed recently by the Central Power Ministry. The SBD is the basis by which developers are selected for setting up power projects by the State Distribution Companies (Govt. owned & managed). India plans to add about 88,000 MW by 2017, out of which approximately 60% projects would be developed by the private sector who are awarded projects through a competitive bidding process using the SBD.
Project developers insist on having in place suitable risk mitigation mechanisms – notably for fuel price increase (especially in case of imported coal). Lenders on the other hand are worried that a proposed change of bid model will lead to increases in quoted tariffs and shall make project financing next to impossible.
Genesis of Standard Bidding Documents and when are they used
India witnessed major reforms in the electricity sector about a decade ago when the Electricity Act, of 2003 was introduced by the Central Government. The Act allowed for a complete delicensing of the power ‘generation’ function and was envisaged to remove the red-tape and bring fresh investments by Independent Power Producers (IPPs).
In order to bring price competition and to maintain transparency, the Electricity Act called for Distribution Companies to follow a bidding procedure for selection of a power plant developer. A project is awarded to a developer who quotes the least cost tariff (fixed & variable cost per year in INR/KwH) taking into account various costs (fuel, equipment & labour) and efficiencies (technical, project management, supply chain, fuel sourcing).
The Central Power Ministry had issued a set of documents, called ‘Standard Bid Documents’ to guide the Distribution Companies in carrying out the bidding procedure. Broadly the SBD is a set of three documents –
1. The RfQ (Request for Qualification), outlining the minimum technical and financial qualifications that a developer has to meet in order to be eligible for submitting a price bid.
2. The RfP (Request for Proposal), outlining the project details, such as required minimum capacity, fuel type, land details, construction time, project life time, monitoring procedures and the format for tariff OR price bid.
3. The PPA (Power Purchase Agreement), outlining the various contractual obligations of the developer and the Distribution Company and recourse in case of default by either party.
SBD was finalized by the Power Ministry in 2005 and there have been few amendments in the past. To date about 16,000 MW capacity alone has been contracted through this competitive bidding procedure for the now well-known Ultra Mega Power Projects (UMPPs) in addition to about 30,000 MW of capacity contracted by individual State Distribution Companies.
Why are project developers not happy with the SBD?
The biggest bone of contention for project developers is the absence of a mechanism to protect them from unforeseen steep increases in fuel price. In the past many developers who had bid for projects which used imported coal from Indonesia, have suffered from the Indonesian Government’s ‘change in law’ to price its coal in-line with international coal prices. This resulted in developers taking a huge hit on their margins as their revenues were locked in based on the prices they had quoted in their winning bids.
These developers are asking for an amendment which ensures that suitable clauses are in place for contractual negotiations with the Distribution Company in case of such future events of change in law by fuel exporting nations.
The biggest lenders to the power sector, including the State Bank of India and ICICI Bank, are unhappy with the ministry’s changes to the type of model used for development of new projects. While earlier the projects were to be developed on a Build Own Operate (BOO) model, the ministry now wants developers to build projects under a Design, Build, Finance, Operate & Transfer (DBFOT) model. This means that the projects will be handed back to the contracting Distribution Company, once its contractual life is over (usually 25 years for coal power plants). Lenders believe that this will force project developers to recover all their fixed costs over the contracted time period, which would lead to an increase in quoted prices. Lenders fear the already financially stretched Distribution Companies will default on payments if they are required to pay higher tariffs for power purchase.
Further under a DBFOT model the land and asset ownership would remain with the Distribution Company. This is unacceptable to the lenders who say that under such scenario bank loans will be categorized as ‘unsecured’ and difficult to arrange. They are worrying that there is no provision of land or project assets in case of a default by the project developers.
Even the Central Electricity Regulatory Commission which regulates power sector investments that benefit more than one Indian State, has asked the power ministry to go back to the earlier BOO model citing that a changed model would lead to higher electricity prices – which is not in the interest of the consumers. The regulator has also asked to remove the provisions for an ‘Independent Engineer’ – which according to the regulator adds one more hierarchy of monitoring agency, in addition to the existing Central Electricity Authority (CEA). According to the Electricity Act of 2003 the CEA is responsible for monitoring of construction and safety aspects of power plants and transmission lines.
Developers are not agreeable to the revised timelines for project commissioning – which has been reduced to 1,350 days (three years and eight months) from the original 1,460 days (four years). They fear delays occur due to causes beyond their control, especially coordinating with Government-owned transmission companies for arranging for transfer of generated electricity.
As of now the final decision on which amendments to be accepted lies with an Empowered Group of Ministers (EGoM) created especially for this purpose. A twenty-two member board advisory panel, with representatives from the private sector, financiers and state Distribution Companies have also been formed which is supposed to provide final set of recommendations to the EGoM.
India is rapidly ramping up its power generation capacity with a target to provide ‘electricity for all’ by 2015. The country which is the 4th largest power system in the world with a gross generation capacity of 211 GW, would need at least USD 135 billion to provide universal access of electricity as estimated by the International Energy Agency.
The Government of India needs to be extra careful in making any changes to the procedures for private sector investment and judiciously address the demands of the involved stakeholders. Meanwhile the bidding for the next phase of UMPPs (~ 12,000 MW) is getting further delayed.
Rasika is the Founder of MindCrunch, a boutique business outsourcing and advisory firm which assists infrastructure sector companies in conceptualizing and developing high quality Thought Leadership content – including Case Studies, Thought Leadership Position Papers & social media strategy. She has previously worked as a management consultant for KPMG & PwC and advises clients on policy, ...
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