A method in madness: An integrated approach to Case 1 and

Case 2 bidding
Yasir Altaf and Amit Sharma
The article examines the development prospects and future potential of Case 1 and Case 2
bidding within an integrated power market approach. The article identifies the key components
and structural concepts that comprise the bidding and should form the basis of an intelligent
decision making process. The article also explores how market trends and infrastructure
bottlenecks are influencing the development of bidding and identifies how bidding can be
integrated into the system. It also provides an estimate of capacity allocations under Case 1 and
Case 2 development and compares how buyers and sellers should position themselves in
response to the recent trends.
The Indian power sector is in a state of rapid flux with both buyers and sellers of
electricity struggling with uncertainty around decision making. The stakeholders
warrant an objective view about understanding how current trends in regulation,
economics and markets create unwanted risks and influence the decision making
process. Earlier, a developer had an option to enter into long term PPA with
discoms under cost plus tariff norms. With the 2006 amendment to the National
Tariff Policy (NTP), all future power requirements are to be met compulsorily
through bidding route for private players. As a result of this a large number of
thermal plants announced by private sector have little knowledge about the
perspective buyers and a competitive sales strategy. In this scenario, application
for an integrated power market analysis seems limitless. A comprehensive power
market analysis can facilitate this assessment and can be seamlessly extended
to procurement of power under a competitive bidding process. Both buyers and
sellers of electricity can build bidding strategies around a baseline forecast of
future market conditions and test alternative scenarios to understand the
strategic implications.
As per the NTP guidelines, procurement of power can be through the following
two mechanisms:
• Case 1: General bid for power where location, technology or fuel is not
specified.
• Case 2: Location specific projects where government assists the
developer in securing land, clearances, fuel etc.
In case of competitively bid project, a long-term PPA is signed between the
discom and the wining bidder, who offers the lowest levelized tariff. Hence,
private players are compelled to offer competitive tariff quotes. This would bring
clear benefits to the system such as increased transparency, more choice,
competition, efficiency and reduced risk. However, a private developer at the
same time has to consider potential negative consequences that competitive
bidding may introduce. The inherent risk profile of competitively bid projects
exceeds those with traditional cost-plus tariff structures. Even though there may
be a technical pre-qualification process, the emphasis on transparency and
public accountability is likely to favor projects that simply offer the lowest prices.
It may be difficult for the government to accept projects that are more robust over
the longer-term but not the lowest cost. Lastly, a private player would have to
wait till a particular state decides to invite tender for its power procurement. It is
only after the tender is floated that they can bid and once bids are finalized,
financial closure can be facilitated and plants set up.
Last few years have seen tremendous response from private sector to the
creation of generation capacities under various initiatives and routes (i) Case 1
e.g. Procurement bids by distribution utilities (ii) Case 2 e.g. Ultra Mega Power
Project (UMPP) bidding, and (iii) Creation of merchant capacities and power
trading.
Table 1: Bidding outcomes for Case 2
State Plant Name Capacity (MW) Bid (Rs/kWh) Winner
Uttar Pradesh Bara 1,980 3.02000 JP Associates
Madhya Pradesh Sasan 4,000 1.19616 Reliance Power
Gujarat Mudra 4,000 2.26367 Tata Power
Andhra Pradesh Krishnapattam 4,000 2.33296 Reliance Power
Jharkhand Tiliaya 4,000 1.77000 Reliance Power
Haryana Jhajjar 1,320 2.99600 CLP
Punjab Talwandi Sabo 1,200 2.86400 Sterlite Energy Limited
Chhattisgarh Bhaiyathan 1,600 0.81000 India Bulls Power Generation
Uttar Pradesh Karchana 1,320 2.97000 JP Associates
Maharashtra Dhopave 1,600 3.66000 Lanco Infratech

Reliance Power’s Sasan with a levelised tariff of 1.19616 Rs/kWh and later on
India Bulls Bhaiyathan with a tariff of 0.81 Rs/kWh created the lowest ever
benchmarks under Case 2 category. With PPA’s being signed at such aggressive
tariffs which are well below the cost of generation or maybe even irrational, the
strategy adopted by the developers is to cover up through merchant sales apart
from vertical integration in terms of taking over captive mines. In some cases, the
risks are being passed on to the public (IPO investors), since the private sector
initiatives are being well supported by the capital markets with the risk capital
being provided in the form of IPOs and private equity.
Gujarat was the first state to formalize power purchase agreements under the
Case 1 route and has so far tied up 3,200 MW of power capacity under long term
purchase agreements, making it the highest in India by any state under this
category. Gujarat has been able to get very competitive rates - 2.35 Rs/kWh
(Adani Power), 2.40 Rs/kWh (Essar Power) and 2.25 Rs/kWh (Aryan Coal) in its
power procurement drive. It has now sought to procure another 3,000 MW (±20
percent) on long-term basis.
 Table 2: Bidding outcomes for Case 1
State Capacity (MW) Bid (Rs/kWh) Winner
Gujarat 1,000 2.34950 Adani Power Pvt. Ltd
Gujarat 1,000 2.89000 Adani Power Pvt. Ltd
Gujarat 1,000 2.40060 Essar Power Ltd
Gujarat 200 2.24980 Aryan Power Ltd
Madhya Pradesh 660 2.34000 Lanco
Madhya Pradesh 1,241 2.64000 Reliance Power
Haryana 300 2.86000 GMR
Haryana 1,424 2.96000 Adani Power Pvt. Ltd
Maharashtra 2x660 2.64000 Adani Power Pvt. Ltd
Maharashtra 1X600 2.70000 Lanco Kondapalli Power Ltd

Some other states such as Haryana, Madhya Pradesh, Maharashtra, Punjab,

Rajasthan and Uttar Pradesh are also in the process of concluding similar
agreements. However, some other states such as West Bengal have been less
enthusiastic in allowing private sector to set up generation capacities despite
having energy resources. Inspite of all this, the general theme of competitive
bidding has advanced in the past one year with some concrete examples visible
on ground to substantiate it. Going forward, with the inclusion of Hydro and
CPSU, Case 1 and Case 2 bidding is expected to manifest on a much wider
scale 1 .
A quick comparison shows that the tariff bid and hence return would be usually
lower in Case 2 vis-à-vis the Case 1 bidding. Further, under Case 1, the
developer is free to sell power above the portion contracted with discoms in the
merchant market and hence the return upsides could be higher. Under Case 2,
typically, the discom procures the entire power generated from the plant. In order
to incentivise developers, even under Case 2, several states such as Chattisgarh
and UP, have allowed the L1 bidder to sell a defined portion of the capacity as
merchant power. The returns in Case 2 depend upon the bidding strategy
adopted by the developer and upsides are by way of capital cost efficiencies,
shorter construction periods, right project structuring, right EPC price, competitive
financing terms etc.
To date, tariffs established through competitive bids are far lower than short term
tariffs. Apart from Case 1 and Case 2, the other options for private developers is
that of selling in the merchant market by entering into short term PPAs with
traders, discoms and end-customers or through power exchanges. In the short to
medium term with supply more or less stagnant the returns for pure merchant
power plants are expected to be significantly higher than the long-term supply
agreements. The other factor for the peak power or short-term merchant power
to be expensive in the short term has been attributed to uncertainty of capacity
utilization and need to recover capital costs over a shorter period of time.

1
The Central Power Sector Utilities (CPSU) and states are exempted from bidding till 2011 or alternately to a time frame
when the regulatory commission assumes that the situation is ripe for competitive bidding.
 Figure 1: Volume and Average Price of traded power for the period Apr ’08 - Jul ’09
12.0 3,000

10.0 2,500
Price (Rs/kWh)

Volume (MU)
8.0 2,000

6.0 1,500

4.0 1,000

2.0 500

0.0 0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Bilateral Trade (MU) UI (MU) P Ex. (MU)
Bilateral Trade Price P Ex. Price UI Price
The magnitude of the price wedge is apparent from the weighted average short-
term power price of 7.24 Rs/kWh (Apr ’08 –Jul ‘09) and the levelized tariff quoted
by various bidders for coal linkage projects on long term basis to state electricity
boards (SEBs) of 2.5 – 3.5 Rs/kWh. But for the load shedding, the short term and
peaking power would have been even more costlier. Peaking power price being
available on energy only is expected to be high, however round the clock high
price of traded power is clear indication of inadequate capacity contracting by the
utilities. Thus, the higher short and merchant returns have attracted the private
developers to setup both peak and base load plants as merchant plants or
alternately, have initiated the current trend of reserving a part of the power plant
capacity for merchant transactions.
In this scenario, any flawed strategy adopted by the buyers or sellers can negate
the advantages. Therefore developers warrant a sales strategy (i.e. an optimum
mix of long term, medium term and merchant sale) and distribution utilities an
advance planning of generation mix for their power purchases (i.e. procurement
under long term and short term). In order to achieve these twin objectives, the
key is to have a firm view on short, medium and long term power prices (both
peak and off-peak conditions). The power prices in the foreseeable future are
expected to be largely driven by how demand – supply equation (forecasted
electricity & latent demand, shortages etc.), capacity additions, transmission
expansion, fuel availability and prices, environmental concerns, paying capacity
of discoms and policy and regulatory developments shape up. But the pressure
one parameter has been exerting on the other and the current uncertainty makes
it difficult to take any stance on the prices and hence a bid that is appropriate.
The fundamental requirement for successful bidding is therefore an integrated
market approach with careful consideration of the multiplicity of the above factors
and how they are affecting the power markets. Such a proposition would assist
both buyers and sellers of electricity in making the choices between types of
generation and fuel in a systematic and transparent manner. This would address
the concerns of most of the developers and utilities that continue to struggle in
arriving at an efficient price discovery and least cost capacity additions and
power procurement. In this scenario, an integrated power market approach with a
view on long term horizon would help decision makers in formulating their long
term strategies. One such model (refer box 1) uses an integrated power market
analysis process to arrive at a comprehensive view on how the capacity additions
and power prices could evolve from the today’s starting point. Different risks can
then be weighed by adopting a scenario based analysis that would help in
valuing each and every risk. This robust methodical analysis would help in
framing structured strategy for bidders and power procurers. The power prices
and capacity additions for the state of Maharashtra using the model are shown
below. The assumption used here are very specific to this case.

8,000 25
7,000
20
6,000
5,000 15

GWh
MW

4,000
3,000 10
2,000
5
1,000
0 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Case 1 (MW) Case 2 (MW) Short term trading (GWh)

Figure 1: Illustrative estimated Case 1 and Case 2 capacity additions for Maharashtra over
the period 2012 – 21 using I-IPM®

14
12
10
Rs/KWh

8
6
4
2
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

RTC Peak Off ‐ Peak

.
Figure 2: Illustrative forecasted Peak, Off-peak and Round the Clock (RTC) power prices
for Maharashtra for the period 2012 – 21 using I-IPM®
The main objective of this type of model is to minimize the long run marginal
costs of energy services while balancing the interests of all the stakeholders.
Thus the most cost effective among an array of various capacity types and
additions can be identified with the cost of generation being compared on a level
playing field. Any capacity additions whether Case 1 or Case 2 would be
recommended only if cost is less than or equal to other competing alternatives.
Thus the decision regarding the best ways to bridge the supply demand gap by
providing rational choices among alternatives (Case 1 and Case 2 additions and
merchant power) by a particular state can be forecasted. The end result is a
market perspective that delivers a detailed, integrated, consistent and
transparent set of medium and long term projections on power prices, Case 1
and Case 2 capacity additions, transmission and fuel resource optimization.
Box 1: India - Integrated Planning Model (I-IPM®)

India - Integrated Planning Model (I-IPM®) is a detailed bottom up dynamic linear

programming model. It takes an integrated view across generation, transmission, fuel and
emissions markets along with other system constraints and solves all parameters in an
integrated manner. The model typically captures a planning horizon spanning 25 years.

I-IPM® is backed by an extensive database representing the Indian power sector comprising of
all the existing and potential – power plants, transmission lines, fuel sources and linkages. The
model is anchored by an integrated simulation engine which is used to prepare a long term
view on the Indian power markets.
The data sources in the model are ably supplemented with expert views on a number of
market drivers. From a top down perspective, the current state of the power market at state
and regional levels is assessed to determine the impact on the wholesale markets and future
power prices. Utilizing model inputs as diverse as power plant capital costs, total transmission
capability (TTC), environmental issues, regulatory policy, fuel supply and developmental costs,
and projected gas pipeline expansions etc, the capacity additions and power prices can be
forecasted over short, medium and long term.