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
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
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
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
• Tariff based bids for blocks of capacity
Linked to particular
generation 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
357
Other cost
365
98
136
349
119
363
Power procurement cost
Power procurement
cost as percentage of
total cost of power
(Per cent)
267
221
230
Maharashtra
Delhi
Gujarat
All India
62
77
73
66
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
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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
MUs bought
Rs/Kwh
358
86
58
1,370
132
0.59
0.63
1.04
1.09
1.32
850
375
600
190
286
640
1.47
1.61
1.62
1.88
2.08
2.24
Thermal
Thermal
Thermal
Thermal
Thermal
400
5,065
4,600
740
490
2.26
2.27
2.37
2.50
2.50
Thermal (GT)
Thermal (GT)
Nuclear
Hydro
Nuclear
1,060
1,706
28
160
276
2.50
2.71
2.98
3.02
3.25
Hydro
Thermal (GT)
Thermal (GT)
Thermal
Hydro
Gas
Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04
• 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
10
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)
• Single buyer model - SEB/transco pools
• Multiple buyer model (e.g., each
distribution utility requirements to
procure power
• Primarily long duration contracts
distribution company procuring for its
own requirements)
• 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
demand
• Develop a fast, efficient and transparent
bidding process that expedites
procurement
Competitive bidding
based power
procurement is crucial
for the healthy
development of this
sector
• 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
Sellers
Buyers
Existing generating
stations
Distribution
Licensee
Procurement
transaction
Trading licensee
Nominated Buyer (?)
New generating
stations
Trading licensee
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
• Not required
– Existing
• Firm
• Non-firm
– Setting up
new capacity
• Rules for open access on
transmission lines already well
defined (e.g., transmission service
charge bidding)
May be entire
day/part day
• 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
17
TODAY, DISCOMS/TRANSCOS PROCURE POWER MAINLY THROUGH
LONG TERM BILATERAL CONTRACTS
Description/Details
Long term
Medium
term
Short 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
No clear process currently for bridging medium term requirements (i.e. more
than one year and less than 15 year duration)
• 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
18
PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE
Discom forecasts its power
requirements for
• Long term
• Medium term
• Short term
Regulator approves
forecasted power
need
Covered by
competitive bidding
guidelines
Discom procures
power
Pricing mechanism
Traders
Competitive
bidding
• Competitive bidding
Generators
Discom power
procurement
Pricing mechanism
With generator
MOU based
bilateral
contracts
With traders
(e.g., PTC)
• 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
Day(s) ahead
market /
Emergency
procurement
year)
• 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
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
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
notice
• Issue RFQ
• Evaluate
• Issue RFP
responses
to RFQs
• Shortlist
bidders
• For short
term
contracts
bidders may
be prequalified
to selected
bidders
• Conduct
pre-bid
conference
• Short listed • Technical
• RFQ/RFP process may be combined into single
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
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
A
Iterations on
development of
bid documents
Seek regulatory
approval
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
Evaluation
of bids
Regulator’s comments
on process and go
ahead
Awards of
bid
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
For
generators
Technical metrics
Past record
Financial metrics
To minimise risk of
delay/shortfall
To prevent
frivolous/mischievous
bidders
To ensure supply
contracts, in case of
default
• For new plants
• Should be an organization
• To ensure supply
•
•
– Past infrastructure
project execution
– Resource raising
For existing plants
– Reliability
– Performance in the past
Tie ups with transmission
companies preferred
• 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
•
of repute
No default on previous
contracts
• Trader of repute
• No default on past
•
•
contracts
Past litigation record
No conflict of interest
between other obligations
and contract being bid
To be suitably relaxed in initial stages for
traders, as they would have no history of
trading operations
•
•
contracts, in case of
default Net worth
Credit worthiness
Bank/other financial
guarantees
• Net worth
• Credit worthiness
• Bank/other financial
guarantees
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
Supplier’s
guarantee
Details
• Financial guarantee covering supply default
• Different bidders could be capable of delivering power at
Delivery point
Delivery
dates/period
Buyer’s
guarantee
Force majeure
/risk sharing
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
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
• Risk sharing mechanism in case of forced outages/unforeseen
circumstances
26
BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL
Discussed further
Element
Elements
of a bid
Illustrative examples
What is being bid
for?
• Energy
• Capacity
• Percentage of load (varying)
Whether part bidding
is allowed?
• No part bidding
• Part bidding allowed
• Part bidding allowed in multiples of
some pre-specified minimum bid unit
(preferred option)
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
Price
setting
mechanism
Details
• 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
Details
• Single part tariff
Bid pricing
Empanelment
of bidders
– 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
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
Updation of
bidders panel
• 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
30
INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR
FORMULATING THE COMPETITIVE GUIDELINES
Aspect
Bidding for part of the
contract
Bidding for partial
duration
Use of Independent
observer
Bidding for percentage
of load
Use of discounting/
NPV calculations for
evaluation
Pre-qualification of
bidders to form a
panel
Financial guarantees
from bidders
International examples
Reference document
Issue date/number
• RFP for Central Maine Power Company allows
• November 18, 2003;
bidders to bid in multiples of 20% of total contract
amount
• 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 RFP’s for Portland General
Electric Company
• Rather than a fixed load (in MW/ MWh) the bid
issued by Maine PUC
• EPSA guidebook for design
•
• EPSA guidebook for design
may be asked for the percentage of the utility’s
load, so as to offload some risk to the suppliers
• Public service commission of Maryland approved
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 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
• Ch.25-25 Sup no.194
• RFP for Central Maine Power Company required
• November 18, 2003;
•
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
issued by Maine PUC
31
INTERNATIONAL BIDDING PROCESS - EXAMPLE
US long term PPA bid process
Process
start
Steps
Timeline
Receiving
EOIs
3½ months
• Posting of
Details
•
information
publicly
Request for
Expressions of
Interest (EoI)
Regulatory
Validation
Bidder
selection
Receiving
proposals
Round 1
Revision/
Round 2
15 days
15 days
15 days
2 months
9 months
• FERC and • Pre-bid
•
Source: Allegheny power RFPs and RFQs
PJM
qualification
Credit
application
and
financial
information
received
•
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
Contract
start
• Retail prices
published 6
months before
start of
contract
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
Spee
d
Standardization
of contracts
• Standard contract documents to cover as many
scenarios as possible
• All deviations counted as material deviations –
requiring regulatory approval
Transparency
Information
dissemination
Communications
• 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
Fairness
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