Competitive bidding guidelines for

power procurement

Presentation to Hon’ble Central Electricity Regulatory Commission

and Distinguished Invitees
May 7, 2004

1
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

2
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

Largely cost plus tariff A well functioning power
systems with limited market leading to free
Gradual
incentives for improving competition – rewards more
transition path
efficiencies 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

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

4
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 Linked to particular

generation 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)

* Page 289 – Report of the Task force on Power Sector Investment and Reforms (Feb 2004 Volume I) 5
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

6
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

7
POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL
COST OF SUPPLY
Paise/Kwh, 2001-02
469

106
365
357 349

98
Other cost 136 119

363
267
Power procurement cost 221 230

Maharashtra Delhi Gujarat All India

Power procurement
cost as percentage of
62 77 73 66
total cost of power
(Per cent)

Source: Planning commission report on SEB performance (2001-02) 8

POWER PROCUREMENT IS COMPLEX DUE TO DIFFERENT BASELOAD
AND PEAK LOAD REQUIREMENTS
Delhi’s ‘unrestricted’ load duration curve (MW)

4000

Peak
3500

3000 Intermediate

2500

2000 Baseload

1500

1000

500

0
0% 20% 40% 60% 80% 100%
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 Rs/Kwh

• Salal • Hydro 358 0.59

• While some of these
• Baira Siul • Hydro 86 0.63
differences can be
• Tanakpur • Hydro 58 1.04
explained by
• Singrauli • Thermal 1,370 1.09 differences in fuel
• Chamera • Hydro 132 1.32 type, technology,
• Rihand • Hydro 850 1.47 location and vintage,
• Anta • Thermal (GT) 375 1.61 some differences are
• Auraiya • Thermal (GT) 600 1.62 attributable to
• Unchachar-I • Thermal 190 1.88 differing generation
• Uri • Hydro 286 2.08 efficiencies
• Dadri (Gas) • Gas 640 2.24 • Current cost plus
• Unchachar-II • Thermal 400 2.26 system does not
• Dadri (Thermal) • Thermal 5,065 2.27 adequately
• Badarpur BTPS • Thermal 4,600 2.37 encourage
• RPH • Thermal 740 2.50 generators to
• IP Station • Thermal 490 2.50 improve operational
efficiencies
• GT • Thermal (GT) 1,060 2.50
• Pragati PPCL • Thermal (GT) 1,706 2.71
• RAPP(B)-III • Nuclear 28 2.98
• NJPC • Hydro 160 3.02
• RAPP (B)-IV • Nuclear 276 3.25

Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04 10
POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE

Today’s wholesale power procurement Desired market structure for power

model procurement (in the end-state)

• Single buyer model - SEB/transco pools • Multiple buyer model (e.g., each
distribution utility requirements to distribution company procuring for its
procure power own requirements)

• Primarily long duration contracts • Suitable mix of long, medium and short
term contracts

• Cost plus tariff setting • Tariff setting driven by market forces

– CPSUs and SEBs: cost plus tariffs
based on CERC/SERC orders
– IPPs: mix of cost plus and tariff based
bidding
• 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 Competitive bidding
demand based power
procurement is crucial
for the healthy
• Develop a fast, efficient and transparent development of this
bidding process that expedites sector
procurement

• Building a framework for the end state of

the power procurement in the envisaged
free market pricing system

12
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

Existing generating
Distribution stations
Licensee

Procurement
New generating
transaction stations

Trading licensee Trading licensee

Nominated Buyer (?) Distribution Licensee (?)

16
GUIDELINES SHOULD COVER BOTH GENERATION AND NEW
TRANSMISSION CAPACITY
Should guidelines
Procurement category cover it? Rationale
• Generation
– Capacity May be • Yes • This would form the bulk of the
baseload/Peak power procurement bids; hence it is
– Energy or off peak imperative that the guidelines cover
these

• Transmission capacity
– Existing • Not required • Rules for open access on
• Firm May be entire transmission lines already well
day/part day defined (e.g., transmission service
• Non-firm
charge bidding)
– Setting up • Yes • New capacity addition not based on
new capacity competitive bidding so far, but lends
itself to the process quite naturally

• Ancillary services
– Spinning reserves • Not initially • The concept of ancillary services
– Reactive Power not well developed yet
– Harmonics etc. • In future as market matures
guidelines may be expanded to
include these as well
17
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
Long term
• Capacity added in three ways -
– Self generation – Allocation from central – Independent power
(SEB owned generating stations ; producers; Bid/MOU route
generators); capacity CERC determines for projects; CERC/SERC
cleared by SERC as tariffs vets the tariff
required

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

• Upto one year duration contracts; (form small part of total power procured)
Short term
• 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/day
• Real time power requirement (in excess or deficit of scheduled drawls) drawn
directly from grid without any prior permission from regulator
to day
• SEB pays/receives UI charges under ABT regime at the end of accounting
cycle

Excessive burden on regulator

18
PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE
Discom forecasts its power Covered by
requirements for Regulator approves competitive bidding
Discom procures
• Long term forecasted power guidelines
• Medium term need power
• Short term

Pricing mechanism

Traders

Competitive
bidding • Competitive bidding

Generators

Discom power
procurement
Pricing mechanism

With generator • Cost plus pricing

MOU based
bilateral
contracts
With traders
• Cost plus pricing
(e.g., PTC)

• Competitive bidding
by Trader

19
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

Long term

The lead time

• Contracts that span 1-10 years duration (advance
Medium term notice before
start of
contract)
• Power requirement for several months duration (upto 1 needs to be
year) decided for
Short term each term
(long/
medium/
Day(s) ahead • Typically a day to a week ahead demand short) to
market / • Requirement typically driven by forecasting error/ weather ensure
Emergency changes/unforeseen conditions effective
procurement competition
• Unscheduled spikes/drops in demand that have to be
Real time managed
• Can continue with current UI/ABT system until the
establishment of a fully functioning wholesale and spot
market 20
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 Regulatory
approval of Procurement
short / medium / process Path 2
long term by discom forecast
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 Shortlist Evaluation Award

Initiate RFQ RFP Bidding
definition bidders of bids of bid(s)

Post bid
negotiations

Key activities/Salient points

• Specification • Publish • Evaluate • Issue RFP • Short listed • Technical
of notice responses to selected bidders compliance
– Quantum • Issue RFQ to RFQs bidders invited to must for any
– Timing • Shortlist • Conduct submit bids bid to be
– Duration of bidders pre-bid considered
contract • For short conference • Determination
term of winner on
contracts bases of price
bidders may bids
be pre- • Use of
qualified independent
observer if
• RFQ/RFP process may be combined into single necessary
step, especially for short term contracts

At each stage we may Regulator kept informed at all stages of the

specify minimum process
number of bids to
proceed to next stage

23
PROPOSED POWER PROCUREMENT BIDDING PROCESS IN CASE OF
DEVIATIONS FROM STANDARD BIDDING DOCUMENTS
Regulatory Prepare
Requirement Shortlist
clearance of bidding Initiate RFQ A
definition bidders
forecast documents

Iterations on
development of
bid documents

Seek regulatory
approval

Evaluation Regulator’s comments Awards of

A RFP Bidding on process and go bid
of bids
ahead

Regulatory
Post bid
approval if
negotiations Even though active
required
regulatory approval
needed in only certain
stages, but the regulator is
• Any modifications
always kept informed of
suggested by bidders, or
all developments
due to any other reasons to
be approved by regulator –
possibly over several
rounds of iterations

24
IN THE RFQ STAGE, BIDDERS SHOULD BE SCREENED ON THE BASIS OF
AN ARRAY OF METRICS
Technical metrics Past record Financial metrics

To prevent To ensure supply

To minimise risk of frivolous/mischievous contracts, in case of
delay/shortfall bidders default

• For new plants • Should be an organization • To ensure supply

For – Past infrastructure
generators project execution
– Resource raising
• For existing plants
– Reliability
– Performance in the past
• Tie ups with transmission
companies preferred
of repute contracts, in case of
• No default on previous default Net worth
contracts • Credit worthiness
• Bank/other financial
guarantees

• For long term contracts • Trader of repute • Net worth

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
• No default on past • Credit worthiness
contracts • Bank/other financial
• Past litigation record guarantees
• No conflict of interest
between other obligations
and contract being bid

To be suitably relaxed in initial stages for Limits to vary by duration of

traders, as they would have no history of contract and amount of load
trading operations 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 Details

• Financial guarantee covering supply default

Supplier’s
guarantee
All these aspects
need to be
• Different bidders could be capable of delivering power at sufficiently
Delivery point different points in grid detailed in the
• Most reliable/least bottlenecked point most preferable standard bid
documents and
• Relevant for time of day contracts, or for parts of long term processes, to
Delivery contract
dates/period enable bids to be
• Best fit to demand should get preference efficiently and
transparently
• Bidder asking for least financial guarantee from buyer would be evaluated/ rejected
Buyer’s preferred
guarantee on technical merits

• Risk sharing mechanism in case of forced outages/unforeseen

Force majeure circumstances
/risk sharing

26
BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL
Discussed further

Element Illustrative examples

• Energy
What is being bid
for? • Capacity
• Percentage of load (varying)

• No part bidding
Elements Whether part bidding
of a bid is allowed?
• Part bidding allowed
• Part bidding allowed in multiples of
some pre-specified minimum bid unit
(preferred option)

What is the tariff • Single part tariff

structure used? • Two part tariff with suitable indexation
(preferred)

27
BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF

Aspect Details

Price • Two part tariff structured as follows

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 28
FOR SHORT TERM CONTRACTS, THREE ASPECTS SHOULD BE
MODIFIED TO SPEED UP THE PROCESS
Discussed further

Aspect Details

• Single part tariff

Bid pricing – 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

Empanelment
• Panel kept updated on regular basis
of bidders
• 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
Short lead before the actual requirement of the contract
times
• 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

• For short term bid, buyer should skip bidder qualification

Process/details
of empanelment
• 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

Updation of over time. These would include –
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

30
INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR
FORMULATING THE COMPETITIVE GUIDELINES
Reference document
Aspect International examples Issue date/number

Bidding for part of the

• RFP for Central Maine Power Company allows • November 18, 2003;
bidders to bid in multiples of 20% of total contract issued by Maine PUC
contract
amount

Bidding for partial

• EPSA guidelines mention use of annuity based • EPSA guidebook for design
calculations while comparing bids for unequal implementation and
duration
(part) duration and choosing a lower overall bid monitoring of competitive
portfolio power supply solicitations
Use of Independent
• Independent observer was used for overseeing • January 20, 2004; Interim
the process of RFP’s for Portland General report of independent
observer
Electric Company observer

Bidding for percentage

• Rather than a fixed load (in MW/ MWh) the bid • EPSA guidebook for design
may be asked for the percentage of the utility’s implementation and
of load
load, so as to offload some risk to the suppliers monitoring of competitive
power supply solicitations
Use of discounting/ • Public service commission of Maryland approved • Order no. 78710 Case no.
NPV calculations for use of single discounted average term price 8908; Phase II September
evaluation (DATP) for evaluation of bids in the phase II 2003
settlement proceedings
Pre-qualification of • Rules of the Florida Public Service Commission • Ch.25-25 Sup no.194
bidders to form a on general purchasing procedures allow the
panel prequalification of bidders to form a panel

Financial guarantees
• RFP for Central Maine Power Company required • November 18, 2003;
bidders to provide financial guarantees upto US$ issued by Maine PUC
from bidders
1.21 million/month and 1.50 million/month while
bidding for service to 2 classes of consumers 31
INTERNATIONAL BIDDING PROCESS - EXAMPLE

US long term PPA bid process

Process Receiving Regulatory Bidder Receiving Revision/ Contract

Steps Round 1
start EOIs Validation selection proposals Round 2 start

Timeline 3½ months 15 days 15 days 15 days 2 months 9 months

• Posting of • FERC and • Pre-bid • Price • More • Retail prices

Details information PJM conference proposals rounds if published 6
publicly qualification • Eligible received previous months before
• Request for • Credit bidders • Bids rounds fail start of
Expressions of application qualified and evaluated to meet contract
objectives
Interest (EoI) and issued • Award of
financial certification bids • Iteration
information • Request for continues till
received detailed satisfactory
proposals solution
from eligible reached
bidders

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
Discussed further

Standardization
• Standard contract documents to cover as many
Spee scenarios as possible
d of contracts
• All deviations counted as material deviations –
requiring regulatory approval
• All details of bid process and method given to all bidders
Information
Transparency
• All factors that will be considered and their relative
dissemination
weights notified in advance

• All communications to be made in written form

Communications • All records retained for a certain duration after the end
of bidding
Fairness • Optional separate rounds for RFP and RFQs
• Not required in usual biddings – as long as standard
Independent processes are being followed
observer
• 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? In order to avail benefits of scale
(e.g., flattened load curve,
– Across states?
economic size of the plant) and
– Across regions? 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