Will amendments to bid norms jeopardazie private sector power investment in India

India is the fourth largest electricity network in the world with a gross generation capacity of 211 GW. The country which is growing at an average GDP growth rate of 6% plans to add 88,000 MW by the end of the current five-year plan (2012-2017).

This necessitates huge investments, majority of which is expected to be brought-in by the private sector.

After the Electricity Act 2003, India has followed a competitive tariff-based bidding mechanism to select private sector developers. The Distribution Companies (Discoms) are required to prepare their long-term plans for power purchase in order to meet the base and peak load in their area of supply.

Based on demand projections, the Discoms are required to call generators or power plant developers to submit suitable bids which are selected on the basis of a least cost method.

The Ministry of Power has issued a standard set of documents which allow the Discoms to follow a common procedure for bidding. Document standardization also helps in reducing the time taken in bid process management.

These Standard Bidding Documents (SBD) provide for the minimum qualification criteria, project details such as useful life, type of fuel, capacity etc. and the terms & conditions for contractual agreement between the selected developer and the Discom.

SBD was first issued by the Ministry of Power in 2005 and has been successfully used in the past to contract large-scale thermal power plants, especially the now well-known Ultra Mega Power Projects (UMPPs).

Recently the Ministry of Power has initiated amendments to the SBD following specific requests from the concerned stakeholders.

However the industry participants, especially the project developers and lenders seem not to be happy with the amendments proposed. The primary point of disagreement is the suggested change of Public Private Partnership model used for development of power projects.

Till now projects were developed on a Build Own and Operate (BOO) model; however the ministry has proposed to change this to a Design, Build, Finance, Operate & Transfer (DBFOT) model.

Which means that the power plants would be transferred to the contracting Discom at the end of their project life, usually 25 years.

Project lenders fear that a DBFOT model shall cause bidders to charge higher tariffs since they will have to recover the complete fixed costs in a limited time frame.

Also since a DBFOT model would mean that the land and asset ownership remains with the contracting party (i.e. the Discom) and not with the project developer.

Project lending, especially public sector bank loans, would then be difficult to arrange as the funds will be categorized as ‘unsecured loans’ and the lenders would not adequate recourse in case of a default by the project developer.

Safety and quality maintenance operations at the plant might also be questionable, especially towards the later years, if the projects are to be run under an DBFOT model and are to be transferred back.

Developers are also unhappy with the fact that their suggestions for fuel-price risk pass-through, due to change in law of fuel exporting country, has not been included.

Several developers who in the past have won bids with quoted tariffs based on fuel sourcing from outside India (especially coal from Indonesia) have suffered losses when the Indonesian Government decided to price its coal in-line with coal prices in the international markets.

The timelines for project completion has been made further stringent – from four years to 1,350 days – which developers believe would be difficult to achieve given the uncontrollable delays in arranging for power evacuation with the central and state transmission utilities.

With the given conditions the industry has expressed its fears that private investment in India power sector generation will go down if its view are not heard.

The Indian Government cannot shut ears to these serious demands given the need of private capital and the efficiency brought in by private developers in construction and erection of power plants and transmission lines.

How fast the Government acts is crucial and the fate of the next three Ultra Mega Power Projects, which will add another 12,000 MW depends on that.