Competitive bidding guidelines for power procurement

Competitive bidding guidelines for power procurement Presentation to Hon’ble Central Electricity Regulatory Commission and Distinguished Invitees May 7, 2004

AGENDA • Context and objectives • Need and importance of competitive bidding for power procurement • Guiding principles • Our suggestions • Scope of guidelines • Bidding process and evaluation of bids • Enablers for speed, transparency, and fairness

CONTEXT FOR TODAY’S DISCUSSION • Electricity Act, 2003 aspires to create a liberal framework for the development of the power sector – “An Act to consolidate the laws…for taking measures conducive to development of electricity industry, promoting competition therein, protecting interests of consumers and supply of electricity to all areas…” • Current situation • End goal Gradual transition path • Largely cost plus tariff systems with limited incentives for improving efficiencies • A well functioning power market leading to free competition – rewards more efficient generators and reduce power procurement cost • The power sector needs to introduce competition into the power procurement process as it gradually migrates to competitive markets across electricity value chain

INDIAN ELECTRICITY REGULATIONS ENVISAGE A COMPETITIVE MARKET • “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” • “Under the competitive bidding route, the Commission perceives its function of regulating tariffs to primarily be the scrutiny and approval of the process adopted for competitive bidding, with a view to ensure that competitive conditions do prevail” • “A significant portion (which could be up to 50% of the new capacity) should be committed to trading or other forms of competitive power markets. This could be attained over a period of time, keeping in view the transition requirements.” • “As far as possible, power procurement should be through a transparent competitive bidding mechanism.” Section 63 Electricity Act 2003 • CERC order dated 9th March 2000 on a petition filed by Power Trading Corporation Ltd. • Task force report on power sector 2004 , page # 275 Tariff Policy, Appendix 1 of the Task force report 2004 , page # 275

The task force report of 2004 specifies five preferred mechanisms for procurement of electricity through competitive bidding* • Tariff based bid for entire project capacity • Tariff based bids for blocks of capacity • Competitive tariff based bidding, without being related to any particular generation source • Tariff based bidding for peaking requirements • Bidding on capital cost of specific project (with overall two part tariff structure) • Linked to particular generation capacity THE TASK FORCE REPORT ALSO SEEKS TO ENHANCE COMPETITION IN THE SECTOR USING COMPETITIVE BIDDING * Page 289 – Report of the Task force on Power Sector Investment and Reforms (Feb 2004 Volume I)

OBJECTIVES OF TODAY’S DISCUSSIONS • Share our views on competitive procurement of generation and transmission capacity • To achieve consensus on how to formulate and implement guidelines for competitive bidding process, so that it embodies the spirit of the Electricity Act 2003 • To discuss and arrive at a consensus on the extent of standardization required in the bidding process and documents in order to expedite the process

POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL COST OF SUPPLY Paise/Kwh, 2001-02 469 365 357 349 Other cost Power procurement cost Maharashtra Delhi Gujarat All India Power procurement cost as percentage of total cost of power (Per cent) 73 62 77 66 Source: Planning commission report on SEB performance (2001-02)

POWER PROCUREMENT IS COMPLEX DUE TO DIFFERENT BASELOAD AND PEAK LOAD REQUIREMENTS • Delhi’s ‘unrestricted’ load duration curve (MW) Peak Intermediate Baseload • Hours of the year Source: Delhi operations of REL

TODAY, SIGNIFICANT COST DIFFERENCES EXIST AMONG GENERATORS • Tariffs of various plants supplying to Delhi • Power plant • Type • MUs bought • Rs/Kwh • Salal • Baira Siul • Tanakpur • Singrauli • Chamera • Rihand • Anta • Auraiya • Unchachar-I • Uri • Dadri (Gas) • Unchachar-II • Dadri (Thermal) • Badarpur BTPS • RPH • IP Station • GT • Pragati PPCL • RAPP(B)-III • NJPC • RAPP (B)-IV • Hydro • Hydro • Hydro • Thermal • Hydro • Hydro • Thermal (GT) • Thermal (GT) • Thermal • Hydro • Gas • Thermal • Thermal • Thermal • Thermal • Thermal • Thermal (GT) • Thermal (GT) • Nuclear • Hydro • Nuclear • 358 • 86 • 58 • 1,370 • 132 • 850 • 375 • 600 • 190 • 286 • 640 • 400 • 5,065 • 4,600 • 740 • 490 • 1,060 • 1,706 • 28 • 160 • 276 • 0.59 • 0.63 • 1.04 • 1.09 • 1.32 • 1.47 • 1.61 • 1.62 • 1.88 • 2.08 • 2.24 • 2.26 • 2.27 • 2.37 • 2.50 • 2.50 • 2.50 • 2.71 • 2.98 • 3.02 • 3.25 • While some of these differences can be explained by differences in fuel type, technology, location and vintage, some differences are attributable to differing generation efficiencies • Current cost plus system does not adequately encourage generators to improve operational efficiencies Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04

Single buyer model - SEB/transco pools distribution utility requirements to procure power • Multiple buyer model (e.g., each distribution company procuring for its own requirements) • Primarily long duration contracts • Suitable mix of long, medium and short term contracts • Cost plus tariff setting • CPSUs and SEBs: cost plus tariffs based on CERC/SERC orders • IPPs: mix of cost plus and tariff based bidding • Tariff setting driven by market forces • Limited incentives to improve efficiency • Market rewards players with lower costs and higher efficiencies POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE • Today’s wholesale power procurement model • Desired market structure for power procurement (in the end-state)

TO REACH THE REQUIRED STRUCTURE, IT IS IMPERATIVE TO ACHIEVE COMPETITION IN GENERATION • What needs to be achieved as the market transitions to full competition? • Reduce inefficiencies in generation plants to enable low cost power production • Encourage private investment in generation to keep pace with growing demand • Develop a fast, efficient and transparent bidding process that expedites procurement • Building a framework for the end state of the power procurement in the envisaged free market pricing system • Competitive bidding based power procurement is crucial for the healthy development of this sector

GUIDING PRINCIPLES FOR COMPETITIVE BIDDING Competitive bidding process should ensure • Free fair and effective competition • Transparency • Simplicity and cost effectiveness of process • Minimal burden on regulator and other stakeholders • Flexibility to adapt to varying needs of power procurement according to the structure of the sector The new guidelines should adequately build on CERC and GOI guidelines issued earlier by incorporating new inputs from EA 2003 and the Task Force report

GUIDELINES SHOULD COVER PROCUREMENT BY VARIOUS ENTITIES • Sellers • Buyers Existing generatingstations Distribution Licensee • Procurement transaction New generatingstations Trading licensee Trading licensee Nominated Buyer (?) Distribution Licensee (?)

GUIDELINES SHOULD COVER BOTH GENERATION AND NEW TRANSMISSION CAPACITY • Should guidelines cover it? • Procurement category • Rationale • Generation • Capacity • Yes • This would form the bulk of the power procurement bids; hence it is imperative that the guidelines cover these • May be baseload/Peak or off peak • Energy • Transmission capacity • Existing • Not required • Rules for open access on transmission lines already well defined (e.g., transmission service charge bidding) • Firm • May be entire day/part day • Non-firm • Setting up new capacity • Yes • New capacity addition not based on competitive bidding so far, but lends itself to the process quite naturally • Ancillary services • Spinning reserves • Reactive Power • Harmonics etc. • Not initially • The concept of ancillary services not well developed yet • In future as market matures guidelines may be expanded to include these as well

No clear process currently for bridging medium term requirements (i.e. more than one year and less than 15 year duration) • Long term • Short term • Real time/day to day • Medium • term TODAY, DISCOMS/TRANSCOS PROCURE POWER MAINLY THROUGH LONG TERM BILATERAL CONTRACTS • Description/Details • Generally 15-25 year contracts. New capacity may be added if needed • Capacity added in three ways - • Self generation (SEB owned generators); capacity cleared by SERC as required • Allocation from central generating stations ; CERC determines tariffs • Independent power producers; Bid/MOU route for projects; CERC/SERC vets the tariff • Upto one year duration contracts; (form small part of total power procured) • SEBs propose power purchase from third parties in their ARRs, prior to actual contract • Some SERCs have taken a hands off view on these bids as long as the total annual power purchase cost remains within budget • No day ahead market • Real time power requirement (in excess or deficit of scheduled drawls) drawn directly from grid without any prior permission from regulator • SEB pays/receives UI charges under ABT regime at the end of accounting cycle Excessive burden on regulator

Traders • With generator • Generators • Competitive bidding • Discom power procurement PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE • Discom forecasts its power requirements for • Long term • Medium term • Short term • Covered by competitive bidding guidelines • Regulator approves forecasted power need • Discom procures power • Pricing mechanism • Competitive bidding • Pricing mechanism • Cost plus pricing • MOU based bilateral contracts • Cost plus pricing • With traders (e.g., PTC) • Competitive bidding by Trader

Long term • Medium term • Short term • Day(s) ahead market / Emergency procurement • Real time IN TERMS OF DURATION, GUIDELINES WOULD COVER ALL PROCUREMENT CONTRACTS OUTSIDE THE DAY AHEAD AND REAL-TIME MARKET • Proposed scope of guidelines • Description of type of contracts • All contracts greater than 10 year duration • The lead time (advance notice before start of contract) needs to be decided for each term (long/ medium/ short) to ensure effective competition • Contracts that span 1-10 years duration • Power requirement for several months duration (upto 1 year) • Typically a day to a week ahead demand • Requirement typically driven by forecasting error/ weather changes/unforeseen conditions • Unscheduled spikes/drops in demand that have to be managed • Can continue with current UI/ABT system until the establishment of a fully functioning wholesale and spot market

Procurement process • Demand forecast for short / medium / long term by discom • Using standard bid documents • Using non-standard bid documents • Regulatory approval of forecast BIDDING PROCESS WOULD START WITH THE REGULATOR APPROVING THE DEMAND FORECAST FOR THE DISTRIBUTION COMPANIES • Path 1 • Path 2 • Guidelines specify process to be followed in each case • Standard documents supplied for following path 1 • Regulator approves documents if path 2 is followed

At each stage we may specify minimum number of bids to proceed to next stage PROPOSED POWER PROCUREMENT BIDDING PROCESS IF STANDARD DOCUMENTS ARE USED • Award of bid(s) • Requirement definition • Shortlist bidders • Evaluation of bids • Initiate RFQ • RFP • Bidding • Post bid negotiations • Key activities/Salient points • Specification of • Quantum • Timing • Duration of contract • Publish notice • Issue RFQ • Evaluate responses to RFQs • Shortlist bidders • For short term contracts bidders may be pre- qualified • Issue RFP to selected bidders • Conduct pre-bid conference • Short listed bidders invited to submit bids • Technical compliance must for any bid to be considered • Determination of winner on bases of price bids • Use of independent observer if necessary • RFQ/RFP process may be combined into single step, especially for short term contracts Regulator kept informed at all stages of the process

Even though active regulatory approval needed in only certain stages, but the regulator is always kept informed of all developments PROPOSED POWER PROCUREMENT BIDDING PROCESS IN CASE OF DEVIATIONS FROM STANDARD BIDDING DOCUMENTS • Prepare bidding documents • Regulatory clearance of forecast • Requirement definition • Shortlist bidders A • Initiate RFQ • Iterations on development of bid documents • Seek regulatory approval • Regulator’s comments on process and go ahead • Awards of bid • Evaluation of bids A • RFP • Bidding • Regulatory approval if required • Post bid negotiations • Any modifications suggested by bidders, or due to any other reasons to be approved by regulator – possibly over several rounds of iterations

For traders • For generators IN THE RFQ STAGE, BIDDERS SHOULD BE SCREENED ON THE BASIS OF AN ARRAY OF METRICS • Technical metrics • Past record • Financial metrics • To prevent frivolous/mischievous bidders • To ensure supply contracts, in case of default • To minimise risk of delay/shortfall • For new plants • Past infrastructure project execution • Resource raising • For existing plants • Reliability • Performance in the past • Tie ups with transmission companies preferred • Should be an organization of repute • No default on previous contracts • To ensure supply contracts, in case of default Net worth • Credit worthiness • Bank/other financial guarantees • For long term contracts trader should show the capability/history to source 70-80% of contract amount • Tie ups with generators and transmission companies are preferred • Source of power has to be specified • Trader of repute • No default on past contracts • Past litigation record • No conflict of interest between other obligations and contract being bid • Net worth • Credit worthiness • Bank/other financial guarantees • Limits to vary by duration of contract and amount of load contracted • To be suitably relaxed in initial stages for traders, as they would have no history of trading operations

Supplier’s guarantee • Delivery point • Delivery dates/period • Buyer’s guarantee • Force majeure • /risk sharing FOR MEDIUM/LONG TERM CONTRACTS, AT RFP STAGE, BIDS SHOULD BE SCREENED BASED ON NON PRICE EVALUATION PRIOR TO PRICE COMPARISONS • Element for evaluation • Details • Financial guarantee covering supply default • All these aspects need to be sufficiently detailed in the standard bid documents and processes, to enable bids to be efficiently and transparently evaluated/ rejected on technical merits • Different bidders could be capable of delivering power at different points in grid • Most reliable/least bottlenecked point most preferable • Relevant for time of day contracts, or for parts of long term contract • Best fit to demand should get preference • Bidder asking for least financial guarantee from buyer would be preferred • Risk sharing mechanism in case of forced outages/unforeseen circumstances

Elements of a bid • What is being bid for? • What is the tariff structure used? • Whether part bidding is allowed? BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL • Discussed further Element Illustrative examples • Energy • Capacity • Percentage of load (varying) • No part bidding • Part bidding allowed • Part bidding allowed in multiples of some pre-specified minimum bid unit (preferred option) • Single part tariff • Two part tariff with suitable indexation (preferred)

BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF • Aspect • Details • Two part tariff structured as follows • Price setting mechanism • Tariff bid = • Fixed component (X) + Variable component (Y) • X = X1 + X2 • X1: Inflation linked (e.g., O&M) • X2: Non-Inflation linked (e.g., debt servicing) • Y = Y1 + Y2 • Y1: Variable component not linked to any index • Y2: Linked to suitable energy index* • Both X and Y could vary by time frame • Buyer should compare the competing bids based on annualised/NPV type calculations • Bidder should not be disqualified for submitting different price bids in different contracts * Index might be a reference fuel price, or price of a basket of fuels, or some other index Note: Medium term contracts could follow a pricing mechanism similar to long term contracts with simplified indices

Bid pricing • Empanelment of bidders • Short lead times FOR SHORT TERM CONTRACTS, THREE ASPECTS SHOULD BE MODIFIED TO SPEED UP THE PROCESS • Discussed further • Aspect • Details • Single part tariff • No escalation/inflation • No fuel variation • Bids compete purely on single price (i.e., all bids that fulfill all technical criteria beforehand) • Bidders empanelled once • Panel kept updated on regular basis • For each short term requirement, panel members asked to bid – eliminates the need for bidder qualification step in procurement process • Bid process may be started (public notification stage) upto a few weeks before the actual requirement of the contract • Thus mostly traders and existing generators would likely bid for these

Process/details of empanelment • Rationale • Updation of bidders panel EMPANELMENT OF BIDDERS - DETAILS • Short term bids need to be executed rapidly since time is of the essence • Need to avoid unnecessary repetition/ duplication of records • For short term bid, buyer should skip bidder qualification • Buyer should ask the existing panel of bidders to bid • Buyer should regularly update the list of empanelled bidders • Buyer should update the list of empanelled bidders to reflect changes over time. These would include – • New entrants – should be allowed to submit details at 3-4 occasions in an year. Once a bidder is empanelled, he stays on the panel until he withdraws, or is disqualified • Regular checks - Empanelled bidders should submit details of credit worthiness and make other financial/ legal disclosures annually. Any discrepancy / shortfall could lead to revoking of pre-qualified status • Disqualification from panel - Bidders will attract disqualification if • They default (or dishonor) on any contract • They have not participated in the last 3-4 bids up for competition

RFP for Central Maine Power Company allows bidders to bid in multiples of 20% of total contract amount • November 18, 2003; issued by Maine PUC • Bidding for part of the contract • Independent observer was used for overseeing the process of RFP’s for Portland General Electric Company • January 20, 2004; Interim report of independent observer • Use of Independent observer • Public service commission of Maryland approved use of single discounted average term price (DATP) for evaluation of bids in the phase II settlement proceedings • Order no. 78710 Case no. 8908; Phase II September 2003 • Use of discounting/ NPV calculations for evaluation • Rules of the Florida Public Service Commission on general purchasing procedures allow the prequalification of bidders to form a panel • Ch.25-25 Sup no.194 • Pre-qualification of bidders to form a panel • RFP for Central Maine Power Company required bidders to provide financial guarantees upto US$ 1.21 million/month and 1.50 million/month while bidding for service to 2 classes of consumers • Rather than a fixed load (in MW/ MWh) the bid may be asked for the percentage of the utility’s load, so as to offload some risk to the suppliers • EPSA guidelines mention use of annuity based calculations while comparing bids for unequal (part) duration and choosing a lower overall bid portfolio • EPSA guidebook for design implementation and monitoring of competitive power supply solicitations • November 18, 2003; issued by Maine PUC • EPSA guidebook for design implementation and monitoring of competitive power supply solicitations • Bidding for percentage of load • Bidding for partial duration • Financial guarantees from bidders INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR FORMULATING THE COMPETITIVE GUIDELINES • Reference document • Issue date/number • Aspect • International examples

Process start • Receiving EOIs • Regulatory Validation • Bidder selection • Revision/Round 2 • Receiving proposals • Contract start • Round 1 INTERNATIONAL BIDDING PROCESS - EXAMPLE • US long term PPA bid process • Steps • Timeline • 3½ months • 15 days • 15 days • 15 days • 2 months • 9 months • Posting of information publicly • Request for Expressions of Interest (EoI) • FERC and PJM qualification • Credit application and financial information received • Pre-bid conference • Eligible bidders qualified and issued certification • Request for detailed proposals from eligible bidders • Price proposals received • Bids evaluated • Award of bids • More rounds if previous rounds fail to meet objectives • Iteration continues till satisfactory solution reached • Retail prices published 6 months before start of contract • Details Source: Allegheny power RFPs and RFQs

Standardization of contracts • Speed • Transparency • Information dissemination • Independent observer • Communications • Fairness SYSTEMS REQUIRED TO ENSURE SPEED, TRANSPARENCY AND FAIRNESS • Discussed further • Standard contract documents to cover as many scenarios as possible • All deviations counted as material deviations – requiring regulatory approval • All details of bid process and method given to all bidders • All factors that will be considered and their relative weights notified in advance • All communications to be made in written form • All records retained for a certain duration after the end of bidding • Optional separate rounds for RFP and RFQs • Not required in usual biddings – as long as standard processes are being followed • Needed if an affiliate of the buyer is also bidding for the contract • This would be more of an oversight role without any involvement in decision making

Need for detailed documents as standard templates; but with sufficient flexibility to ensure responsiveness to new needs STANDARDIZED BIDDING DOCUMENTS NEEDED FOR EXPIDITING PROCESS • Providing standard documents as templates is important to • Expedite process • Prevent the whole process from getting bogged down in litigation • Reduce burden on regulator and all shareholders • Standardization is easy for short term contracts. It gets increasingly complex as the duration of contracts increases • For new plants standard documents need to capture all possible aspects of • Finance structuring • Risk sharing • Need to provide flexibility for future requirements

IMPORTANT ISSUES FOR DEBATE – NOT EXHAUSTIVE • Can any buyer aggregate power requirements • Across distribution companies? • Across states? • Across regions? • Even though the Electricity act itself does not prohibit such aggregation, would this lead to a dispute between state and central bodies ? • How do these guidelines change with the development of a power pool? • Should there be a common energy index to link the variable costs of plants? If yes, how should it be developed/monitored/updated? • Should the buyer inform rejected bidders about reasons for rejection? • Should the buyer seek power at one specific delivery point per bid and compare costs accordingly? • For long-term procurement requiring set up of new capacities, should the buyer specify location, fuel, technology (e.g., for BOT basis)? • Evaluation of non-price factors • What is the process for dispute resolution? • Is the duration definition (long-term > 10 years, medium-term between 2 and 10 years, and short-term less than 2 years) rigid or evolving over time? • Should these guidelines cover competitive bidding by a trader as well? • In order to avail benefits of scale (e.g., flattened load curve, economic size of the plant) and reduce transaction costs

Thank you

Competitive bidding guidelines for power procurement