Change power project bid rules, says Mercados

AF Mercados EMI, a Britain-based international energy consultancy, has backed the domestic power industry’s argument for changes in the government’s competitive bidding guidelines, to make these more flexible to deal with contingencies.

Case-1 bidding is conducted for projects where location, technology and fuel are not specified by the procurer of power, typically, a distribution company. In such cases, the bidder is responsible for obtaining clearances. The model is followed by states which do not have fuel resources of their own. Case-2 bidding is for projects where location, technology and fuel are specified by resource-rich states. The procurer of power, the state utility, obtains clearances.

In a report prepared for the industry body, the Association of Power Producers (APP), the firm has recommended wide-ranging modifications in the 2005 guidelines. These include allowing the price risk on account of high-cost imported coal to be passed on to consumers for projects awarded on Case-1 bidding and allowing the power generator to recover the capacity charge if plant availability is reduced owing to coal shortage in Case-2 projects.

“The case for revision of the bidding framework to make it more compatible to the dynamics of project development and the fuels sector is apparent. This would require changes in the policy and regulatory framework, and could require changes in legislation as well,” Mercados has said in its report dated September 2.

Power projects of 44,821 Mw capacity have been awarded on the basis of the competitive bidding guidelines since 2005. The report has concluded that most of these plants will face difficulties in meeting their supply obligations, as the guidelines do not protect the developers against issues such as coal shortages and the high cost of imported coal.

The report says bidding for imported coal-based projects should be on the basis of heat-rate (an efficiency indicator) and any risk arising from high cost of coal should be allowed to be passed on. “This will hold the developer responsible only for efficiency and fuel availability. It would also mean that the benefit of reduced cost would be passed on to the purchaser,” it says.

It has also recommended allowing the developer to seek a rate revision from the regulator in a ‘force majeure’ event (one freeing the parties from liabilities in case of an extraordinary event beyond their control), a relief not available in the current guidelines.

In Case-2 bidding, in case of reduced availability from a power station due to fuel shortage, “the seller should be permitted to recover the capacity charge corresponding to such deemed availability,’ it says.

It also suggests Case-2 bidding be launched only when all clearances have been obtained. These should be necessarily in place when the Letter of Intent (LoI) is issued to the selected bidder, the report says, referring to the latest tightening of environment and forest clearance norms.

About 21,000 Mw of capacity would be affected due to fuel shortages for plants based on domestic coal. “If the current provisions of 50 per cent Annual Contracted Quantity remains, developers may stagger their investments. Thus, plants may not come online,” the report states, referring to the recent insistence of Coal India Ltd to commit to not more than half the coal requirement of power plants.

Similarly, 14,200 Mw of capacity would be affected as plants based on imported coal grapple with the changes in law in the host country on mining and “abnormal changes in coal prices,” the report says, referring to the latest directive of the Indonesian government to align coal exports to international benchmark prices.