IDFC ENERGY ADVISORY BOARD

February, 2010

Issues with Tariff based Competitive Bidding under Case I route

Issue 1: Qualifying requirements

a. Land: The Bidder should have acquired and have taken possession of at
least 50% of the area of the land as indicated in the environmental
clearance (eg. TOR) and also certify through an affidavit the total land
acquired for the power station and that there are no pending
claim(s)/litigation of any nature against/involving the Bidder vis-à-vis land
and that the Bidder has absolute rights and authority to establish and run
power plant on the land.

b. Fuel:
 In case of domestic coal, the Bidder should have fuel tied up for the
total installed capacity for the term of the PPA.
 In case of imported coal, the Bidder shall have either acquired mines
having proven reserves for at least fifty percent (50%) of the total installed
capacity for the term of the PPA or should have at least signed Fuel
Supply Agreement for five (5) years for the total installed capacity.
 Similarly for domestic gas and RLNG.

c. Water: The Bidder shall have acquired approval for the quantity of water
required for the power station.

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 d. Environmental & Forest Clearance: The Bidder shall have submitted the
requisite proposal, for the final environmental clearance approval.

Comments and suggestions:

Land: A Bidder needs to meet the entire technical qualifying requirement listed
above to qualify for the tender. This in turn means that the project developer needs
to spend money upfront for acquiring 50% of the land when the financial closure of
the project has not been achieved. Only bidder with deep pockets can meet the
requirement. Another relevant issue here is that many developers plan a phased
development of the project. However, they need to take environmental clearance
for the entire planned capacity of the project. This implies that even if a bidder
wishes to bid for the capacity being targeted in the first phase of the project or a
part of the capacity being targeted in the first phase of the project, there may be a
situation where he would need to show land acquisition for more than that phase.
Therefore, it is suggested that the condition of land availability should be
modified such that land acquisition is correlated with the phase of
development of the project.

Fuel: As regards the fuel, most of the projects that have received the coal
linkages do not meet the qualifying requirement of having fuel for the total installed
capacity. They either do not have the quantity of fuel on normative basis or the
linkage, if available, is only for one unit whereas the project is defined in
environmental clearance as two units. This leads to the project getting disqualified
under the qualifying requirements. The issue of fuel gets further compounded in
case of coastal projects wherein as per the policy, the coal linkage is to be
provided for only 70% of the requirement and the balance has to be tied-up by the
developer through import. Thus effectively, if a coastal based project has only
domestic coal linkage then as per the SBD document, the bid becomes non-
responsive and can get rejected if the imported coal is not tied for the balance
installed capacity. In fact, the linkage available for non-coastal projects is also
usually not sufficient when computed on normative availability basis, which has
resulted in projects getting tagged as non-responsive in tender evaluation.

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Therefore, it is suggested that the condition of fuel availability should be
modified such that fuel availability or tie-up in case of coal based projects is
correlated to 70% of the coal linkage according to the phased development
of the project.

Environmental & Forest Clearance: The process of obtaining environmental

clearance is time taking. Therefore, it is possible that at the time of bidding, the
process of obtaining such clearance is in an initial or intermediate stage. While it is
recognized that the process of public hearing and its outcome has a crucial
bearing on the fate of the clearance, the condition of submitting the proposal for
final environmental clearance approval is somewhat restrictive. Given that the
process of bidding takes time to culminate, it is possible that the proposal for final
environmental clearance may be submitted by the time of opening of the financial
bid. Therefore, it is suggested that the condition of environmental and forest
clearance should be modified such that the bidder is required to submit the
requisite proposal, for the final environmental clearance approval by the
time of opening of the financial bid. If at the time of opening of the financial bid,
the bidder is not able to meet this requirement, the bid should be returned as
unresponsive or disqualified.

Issue 2: Contract Performance Guarantee

The successful bidder is required to provide a Contract Performance Guarantee
within thirty days of issue of Letter of Intent (LoI) by the Procurer. This Guarantee
is determined on the basis of Rs. 30 lakhs/MW of the total Contracted Capacity.
The first issue here is that the level of Guarantee may turn out to be very high (for
1000 MW, Rs. 300 Crores) and a bidder without deep pockets may be unable to
furnish such guarantee prior to the financial closure of the project. Therefore, it is
suggested that the level of the Contract Performance Guarantee may be
lowered. It may be argued that lowering the level of this guarantee may
encourage non-serious bidders. To take care of such concerns, the
termination cost of the PPA may be increased and kept at a very high level
so that it prohibits non-serious bidders.

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Another issue here is that under the bids, the Procurer recognizes the bidder and
not the project developer. Therefore, the Bid Bond and Contract Performance
Guarantee are provided by the Bidder. In case the Bidder is a Trader, then the
developer provides the requisite Bank Guarantee to the trader on back-to-back
basis. This leads to two Bank Guarantees for one single sale contract. It is
submitted that the GoI take note of this point and evolve a way out.

Issue 3: Qualifying requirement and time period for meeting the Condition
Subsequent
It has been observed that although some of the projects have achieved “Financial
closure” and have already awarded EPC contract and paid advance also but still
they have not been found to be „Technically‟ responsive.

The SBD in the Power Purchase Agreement indicates various milestones under
Condition Subsequent which needs to be fulfilled by the Bidder in minimum 10
months, some of the conditions to be fulfilled by the Bidder but not under the
control are:
(a) Execution of the Fuel Supply Agreement
(b) Obtaining all the necessary permission for the long term open access
(c) Obtaining all Consents, Clearances and Permits required for supply of
power to the Procurer(s)
The above listed milestones are quite critical for timely supply of power to the
Procurer, however it may be mentioned that these are not directly under the
control of the Bidder. The Bidder can only apply for the clearances and follow up
regularly. As per the PPA, failure to meet the Condition Subsequent within the
time line means payment of additional Bank Guarantee on weekly basis at the rate
of Rs. 1.50 lakhs per MW of Contracted Capacity. The SBD limits the maximum
liquidated damages to Rs. 40 lakhs/MW before encashing the Bank Guarantee
and terminating the contract. This effectively means that the Bidder has less than
7 weeks time to achieve the milestones, which is a very stringent requirement.

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Comments and suggestions: As far as the qualifying requirements are
concerned, it is suggested that these requirements be diluted keeping in view the
ground realities / practical difficulties like reducing land acquisition requirement
from present 50 % to 25-30 %, aligning fuel requirement with the Government
policy of coal allocation including for coastal projects, keep TOR approval only as
QR for Environment Clearance etc. Correspondingly, time period for meeting the
condition subsequent may be increased to at least 18 months from the present 10
months.

As far as the PPA is concerned, though the Bidder intends to fulfill the obligations
of the PPA which it has entered with the Procurer, the above listed Conditions are
genuine concerns of the Bidder which the Procurer needs to understand and
appreciate as the Procurer is also in major deficit of power and the encashed Bank
Guarantee may suffice to purchase power on short term for a very short duration.
Providing time frame of say 18 months as Condition Subsequent with regular
monthly project progress review would be a win-win situation for the Procurer too
as the Procurer would be able to get the base load power at a quite competitive
tariff vis-à-vis the volatile short terms prices.

Issue 4: Application of Open Access

As per the SBD, in case the power plant is located within the Procurer State than
the project bus-bar becomes the Delivery Point and it is the Procurer‟s
responsibility to co-ordinate with the State transmission network for evacuation of
power. However, in case the power plant is located outside the State than it is the
responsibility of the Bidder to obtain Open Access. In case the signatory of the
power transmission agreement is an IPP/Trader than POWERGRID as payment
security mechanism demands in addition to Letter of Credit 6 months billable
amount as Bank Guarantee but if the same Open Access is obtained by the
Procurer than only Letter of Credit suffices for POWERGRID. Thus the Bidder
obtaining the Open Access increases the tariff for the Procurer which can be easily
avoided.

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Further, as per the SBD, the LC is provided to the Bidder only for the generation
charges and not for the transmission charges. It only states that the transmission
charges shall be reimbursed.

Comments and suggestions: As on date the Procurer already has a power

transmission agreement with PGCIL, the contracted capacity is dedicated to the
Procurer for 25 year period. It is advisable that the Procurer obtain the Open
Access as (a) it would be in parity with the plant located with the State and (b) the
loading of 6 months Bank Guarantee charges can be limited/reduced.

Issue 5: Escalation Rates (fuel, transportation, etc)

On today‟s base cost, escalation rate used for evaluation is applied to find the
base cost for the 1st year of operation. This 1st year base tariff becomes the basis
on which the escalation for making payment is applied.

This means that if based on the present coal price the fuel charges works out to be
Rs. 0.50 per kWh, and considering the present escalation rate for evaluation of bid
as (say 5%), then the coal price for 1st year would be Re. 0.58 per kWh. This
becomes the base price on which CERC escalation rates for payment will be
applied for making payments. But in case the coal prices escalate by more than
5% during the 48 months of project commissioning then the Bidder has no
protection under the present SBD.

Comments and suggestions: SBD may, therefore, be amended to take care of

actual escalation in coal price including freight escalation rate during the
construction period of 48 months to arrive at 1st year base tariff.

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Issues related to the regulatory framework

Issue 1: Regulatory Hurdles / Limitation

In the earlier Case – 1 bid, transmission charges (as applicable on date) was
added to the levellised generation charge to evaluate the bids. However with the
present SBD, even transmission charges have been escalated on annual basis in
the same line as fuel transportation charges so that there could be parity between
fuel transportation and power transmission charges for evaluating the tariff at the
procurer periphery. Such frequent changes in evaluation criteria impede progress
and finalization of bids.

Comments and suggestions Percentage increase of capacity addition in railway

network vis-à-vis capacity addition in power transmission network is quite
insignificant primarily because the railway network is already spread over nook
and corner of the country whereas the major power transmission addition being
undertaken is for evacuation of power. With large generation capacity additions
there is need for corresponding increase in transmission capacity additions. Thus
comparison of increase in freight charges and transmission charges for deriving
the escalation rates are incomparable.

This can be seen from the CERC escalation rates where in the maximum inland
freight escalation rates is 2.48% and the power transmission escalation rates are
5.61%. These rates are to be applied on an annual compounding basis from the
date of bid submission till the tenure of the contract. This makes the plant located
at the pit head unviable compared to plant located within the State which has
invited the bid, as the transmission charges would be ZERO. This necessitates
revising the transmission escalation rates and fixing it at a more realistic
level keeping in view the future growth of the Transmission system and
estimated cost. Further, since transmission charges are to be paid by the
procurer on an actual basis, it is suggested that there should be no loading
of transmission charges for the purpose of evaluation of bids.

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For the sake of illustration to show the impact of transmission charges escalation,
one single delivery State vis-à-vis plant located in various State has been
compared below:
Sr. Plant Location Delivery State Transmission Escalated
No. charges transmission
charges as
considered during
evaluation
1. Maharashtra Maharashtra ZERO ZERO (CTU+STU)
(CTU+STU)
2. Chhattisgarh (WR) Maharashtra (WR) Rs. 0.12 per kWh Rs. 0.256 per kWh
3. Orissa (ER) Maharashtra (WR) Rs. 0.28 per kWh Rs. 0.618 per kWh
4. Uttar Pradesh (NR) Maharashtra (WR) Rs. 0.26 per kWh Rs. 0.577 per kWh
5. Karnataka (SR) Maharashtra (WR) Rs. 0.33 per kWh Rs. 0.731 per kWh

Thus if Maharashtra invites tender then it is a forgone conclusion as to who wins

the bid in case a plant located within Maharashtra is qualified financially and
technically. This clearly upsets the common understanding that carrying coal is
more expensive than transmitting power. Additionally, for carrying coal you also
burn diesel or use electricity, thus leaving more carbon footprint.

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