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Revisiting tariff-based bidding

Em News Bureau ,  Monday, February 18, 2013, 16:21 Hrs  [IST]

Making tariff-based bidding mandatory for any power purchase has been a watershed development in the power sector. Coming into force from January 2011, it meant that all power procurement done by utilities would be done through the tariff-based competitive bidding route – no more “private” agreements like memoranda of understanding. In principle, migrating to the tariff-based route signifies evolving maturity in the power sector. In the new regime, private and public sector companies need to compete with each other to offer the best tariff, and the procurer of power can select that supplier offering the best quote. This, in principle, makes sure that the procurer and therefore the end-consumer has got the best deal.

Tariff-based bidding has taken off at the Central and state level. The ultra mega power project series was based on this route. One might recall how awestruck industry observers were when Lanco Group quoted an astonishing Re.1.196 per kwh for the Sasan UMPP. This was in late 2006 and at a time when the average tariff rate at NTPC’s coal-fired power stations was around Rs.1.50 per kwh. (That Lanco, owing to some other controversies, could not pursue the project is another part of the story.) The tariff-based bidding mechanism nevertheless changed the way one looked at power tariffs, forever. It nudged the cushy and comfortable “cost-plus” method to oblivion.

Now, with some years into the tariff-based mechanism, practical problems are surfacing. This is part of the learning curve. Developers are realizing that they are unable to honour the tariffs quoted for reasons beyond their control. What happens when there is a surprise development that makes it impossible for the developer to adhere to the winning tariff quoted? What does one do when this happens after the developer has incurred significant capital expenditure on the project?

Cases like these have started surfacing, largely because of vagaries in fuel costs. Tata Power relied on a long-term “negotiated” rate (much lower that the market price) for Indonesian coal but that country is now unable to honour it. Tata Power is now feeling the same about the power tariff that it quoted to win the Mundra UMPP in Gujarat. A similar case was witnessed when Lanco Group found it difficult to sell power from its plant in Madhya Pradesh at rates specified in the MoU of 2005. However, the state electricity regulatory commission recently allowed for an increase in tariff in light of increased fuel costs.

The operating environment of power plants is constantly changing. Uncertainties surrounding fuel supplies are getting graver by the day. A flexible and fair approach for revising power tariff is certainly called for. When power supplies are disrupted for any reason, socio-economic development is compromised. And with this, the very objective of setting up the power plant is defeated.
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