Competitive bidding guidelines for power procurement

Presentation to Honble 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 TODAYS DISCUSSION

Electricity Act, 2003 aspires to create a liberal framework for the development of the power sector An Act to consolidate the lawsfor taking measures conducive to development of electricity industry, promoting competition therein, protecting interests of consumers and supply of electricity to all areas
Current situation Largely cost plus tariff systems with limited incentives for improving efficiencies End goal A well functioning power market leading to free competition rewards more efficient generators and reduce power procurement cost

Gradual transition path

The power sector needs to introduce competition into the power procurement process as it gradually migrates to competitive markets across electricity value chain
3

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
Section 63 Electricity Act 2003

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
CERC order dated 9th March 2000 on a petition filed by Power Trading Corporation Ltd.

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.
Task force report on power sector 2004 , page # 275

As far as possible, power procurement should be through a transparent competitive

bidding mechanism.
Tariff Policy, Appendix 1 of the Task force report 2004 , page # 275
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THE TASK FORCE REPORT ALSO SEEKS TO ENHANCE COMPETITION IN THE SECTOR USING COMPETITIVE BIDDING

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
particular generation source

Linked to particular generation capacity

Competitive tariff based bidding, without being related to any

Tariff based bidding for peaking requirements Bidding on capital cost of specific project (with overall two
part tariff structure)

* Page 289 Report of the Task force on Power Sector Investment and Reforms (Feb 2004 Volume I)

OBJECTIVES OF TODAYS 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

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

POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL COST OF SUPPLY

Paise/Kwh, 2001-02
469
106

357 Other cost

136

365
98

349
119

363

Power procurement cost

221

267

230

Maharashtra Power procurement cost as percentage of total cost of power (Per cent)

Delhi

Gujarat

All India

62

77

73

66

Source: Planning commission report on SEB performance (2001-02)

POWER PROCUREMENT IS COMPLEX DUE TO DIFFERENT BASELOAD AND PEAK LOAD REQUIREMENTS
Delhis unrestricted load duration curve (MW)
4000 3500 3000 2500 2000 1500 1000 500 0 0% 20% 40% 60% 80% 100%

Peak

Intermediate

Baseload

Hours of the year

Source: Delhi operations of REL 9

TODAY, SIGNIFICANT COST DIFFERENCES EXIST AMONG GENERATORS

Tariffs of various plants supplying to Delhi Power plant Type MUs bought 358 86 58 1,370 132 850 375 600 190 286 640 400 5,065 4,600 740 490 Rs/Kwh 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

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

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

Thermal (GT) Thermal (GT) Nuclear Hydro Nuclear

1,060 1,706 28 160 276

2.50 2.71 2.98 3.02 3.25

Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04

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POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE

Todays wholesale power procurement model

Desired market structure for power procurement (in the end-state)

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 Cost plus tariff setting

CPSUs and SEBs: cost plus tariffs based on CERC/SERC orders IPPs: mix of cost plus and tariff based bidding

Suitable mix of long, medium and short

term contracts

Tariff setting driven by market forces

Limited incentives to improve efficiency

Market rewards players with lower costs

and higher efficiencies

11

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 Competitive bidding based power procurement is crucial for the healthy development of this sector

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

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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

13

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

14

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

15

GUIDELINES SHOULD COVER PROCUREMENT BY VARIOUS ENTITIES

Buyers

Sellers

Distribution Licensee

Existing generating stations

Procurement transaction
Trading licensee

New generating stations

Trading licensee

Nominated Buyer (?)

Distribution Licensee (?)

16

GUIDELINES SHOULD COVER BOTH GENERATION AND NEW TRANSMISSION CAPACITY

Procurement category Should guidelines Rationale cover it?

Generation
Capacity Energy May be baseload/Peak or off peak

Yes

This would form the bulk of the

power procurement bids; hence it is imperative that the guidelines cover these

Transmission capacity
Existing
Firm Non-firm

Not required
May be entire day/part day

Rules for open access on

transmission lines already well defined (e.g., transmission service charge bidding)

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
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TODAY, DISCOMS/TRANSCOS PROCURE POWER MAINLY THROUGH LONG TERM BILATERAL CONTRACTS
Description/Details

Long term

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

Medium term

No clear process currently for bridging medium term requirements (i.e. more than one year and less than 15 year duration)

Short term

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

Real time/day to day

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
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PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE

Discom forecasts its power requirements for Long term Medium term Short term Regulator approves forecasted power need

Discom procures power

Covered by competitive bidding guidelines

Pricing mechanism

Traders
Competitive bidding Generators Discom power procurement Pricing mechanism With generator MOU based bilateral contracts With traders (e.g., PTC)

Competitive bidding

Cost plus pricing

Cost plus pricing Competitive bidding

by Trader 19

IN TERMS OF DURATION, GUIDELINES WOULD COVER ALL PROCUREMENT CONTRACTS OUTSIDE THE DAY AHEAD AND REAL-TIME Proposed scope MARKET
of guidelines

Description of type of contracts

All contracts greater than 10 year duration

Long term

Contracts that span 1-10 years duration

Medium term

Power requirement for several months duration (upto 1

Short term year)

Day(s) ahead market / Emergency procurement

Real time

Typically a day to a week ahead demand Requirement typically driven by forecasting error/ weather
changes/unforeseen conditions

The lead time (advance notice before start of contract) needs to be decided for each term (long/ medium/ short) to ensure effective competition

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

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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

21

BIDDING PROCESS WOULD START WITH THE REGULATOR APPROVING THE DEMAND FORECAST FOR THE DISTRIBUTION COMPANIES

Path 1
Using standard bid documents Demand forecast for short / medium / long term by discom Regulatory approval of forecast

Procurement process

Path 2 Using non-standard bid documents

Guidelines specify process to be

followed in each case Standard documents supplied for following path 1 Regulator approves documents if path 2 is followed

22

PROPOSED POWER PROCUREMENT BIDDING PROCESS IF STANDARD DOCUMENTS ARE USED

Requirement definition Initiate RFQ Shortlist bidders RFP Bidding Evaluation of bids Award of bid(s)

Post bid negotiations Key activities/Salient points

Specification
of Quantum Timing Duration of contract

Publish

Evaluate
responses to RFQs Shortlist bidders For short term contracts bidders may be prequalified

Issue RFP
to selected bidders Conduct pre-bid conference

Short listed Technical

bidders invited to submit bids compliance must for any bid to be considered Determination of winner on bases of price bids Use of independent observer if necessary

Issue RFQ

notice

RFQ/RFP process may be combined into single

step, especially for short term contracts

At each stage we may specify minimum number of bids to proceed to next stage

Regulator kept informed at all stages of the process

23

PROPOSED POWER PROCUREMENT BIDDING PROCESS IN CASE OF DEVIATIONS FROM STANDARD BIDDING DOCUMENTS
Regulatory clearance of forecast Requirement definition Prepare bidding documents Initiate RFQ Shortlist bidders

Iterations on development of bid documents Seek regulatory approval Regulators comments on process and go ahead Awards of bid

RFP

Bidding

Evaluation of bids

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

Even though active regulatory approval needed in only certain stages, but the regulator is always kept informed of all developments

24

IN THE RFQ STAGE, BIDDERS SHOULD BE SCREENED ON THE BASIS OF AN ARRAY OF METRICS
Technical metrics
To minimise risk of delay/shortfall For generators

Past record
To prevent frivolous/mischievous bidders

Financial metrics
To ensure supply contracts, in case of default

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

For traders 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

To be suitably relaxed in initial stages for traders, as they would have no history of trading operations

Limits to vary by duration of contract and amount of load contracted 25

FOR MEDIUM/LONG TERM CONTRACTS, AT RFP STAGE, BIDS SHOULD BE SCREENED BASED ON NON PRICE EVALUATION PRIOR TO PRICE COMPARISONS
Element for evaluation
Suppliers guarantee 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

Delivery point

Most reliable/least bottlenecked point most preferable

different points in grid

Delivery dates/period

Relevant for time of day contracts, or for parts of long term

contract Best fit to demand should get preference

Buyers guarantee

Bidder asking for least financial guarantee from buyer would be

preferred

Force majeure /risk sharing

Risk sharing mechanism in case of forced outages/unforeseen

circumstances

26

BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL

Discussed further

Element What is being bid for?

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)

Elements of a bid

Whether part bidding is allowed?

What is the tariff structure used?

Single part tariff Two part tariff with suitable indexation

(preferred)

27

BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF

Aspect Details

Price setting mechanism

Two part tariff structured as follows

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

28

FOR SHORT TERM CONTRACTS, THREE ASPECTS SHOULD BE MODIFIED TO SPEED UP THE PROCESS

Discussed further

Aspect
Bid pricing

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)

Empanelment of bidders

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

Short lead times

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

29

EMPANELMENT OF BIDDERS - DETAILS

Short term bids need to be executed rapidly since time is of the

Rationale essence

Need to avoid unnecessary repetition/ duplication of records

Process/details of empanelment

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

Updation of bidders panel

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
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INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR FORMULATING THE COMPETITIVE GUIDELINES
Aspect Bidding for part of the contract Bidding for partial duration International examples Reference document Issue date/number

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

EPSA guidelines mention use of annuity based

calculations while comparing bids for unequal (part) duration and choosing a lower overall bid portfolio Independent observer was used for overseeing the process of RFPs for Portland General Electric Company may be asked for the percentage of the utilitys load, so as to offload some risk to the suppliers

EPSA guidebook for design

implementation and monitoring of competitive power supply solicitations January 20, 2004; Interim report of independent observer implementation and monitoring of competitive power supply solicitations Order no. 78710 Case no. 8908; Phase II September 2003

Use of Independent observer Bidding for percentage of load Use of discounting/ NPV calculations for evaluation

Rather than a fixed load (in MW/ MWh) the bid

EPSA guidebook for design

Public service commission of Maryland approved

use of single discounted average term price (DATP) for evaluation of bids in the phase II settlement proceedings Rules of the Florida Public Service Commission on general purchasing procedures allow the prequalification of bidders to form a panel
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

Pre-qualification of bidders to form a panel

Financial guarantees from bidders

Ch.25-25 Sup no.194 November 18, 2003;

issued by Maine PUC
31

RFP for Central Maine Power Company required

INTERNATIONAL BIDDING PROCESS - EXAMPLE

US long term PPA bid process

Steps

Process start

Receiving EOIs

Regulatory Validation

Bidder selection

Receiving proposals

Round 1

Revision/ Round 2

Contract start

Timeline

3 months

15 days

15 days

15 days

2 months

9 months

Posting of
Details

FERC and Pre-bid

PJM qualification Credit application and financial information received

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

information publicly Request for Expressions of Interest (EoI)

conference Eligible bidders qualified and issued certification detailed proposals from eligible bidders

Request for

Source: Allegheny power RFPs and RFQs

32

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

33

SYSTEMS REQUIRED TO ENSURE SPEED, TRANSPARENCY AND FAIRNESS

Standardization of contracts

Discussed further

Standard contract documents to cover as many

scenarios as possible

Spee d

All deviations counted as material deviations

requiring regulatory approval

Transparency

Information dissemination

All details of bid process and method given to all bidders All factors that will be considered and their relative
weights notified in advance

Communications
Fairness

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

Independent observer

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
34

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

Need for detailed documents as standard templates; but with sufficient flexibility to ensure responsiveness to new needs
35

IMPORTANT ISSUES FOR DEBATE NOT EXHAUSTIVE

Can any buyer aggregate power requirements
Across distribution companies? Across states? Across regions? In order to avail benefits of scale (e.g., flattened load curve, economic size of the plant) and reduce transaction costs

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?

36

Thank you

37