Friday, December 24, 2010

Competitive bidding in power purchases

In an attempt to ensure a transparent price discovery mechanism in all power purchases by distribution utilities and lower retail tariffs, the Government of India have mandated tariff-based competitive bidding for all purchases from January 5, 2011. This marks the end of the current practice wherein power purchase agreements were executed through MoUs based on regulator-determined "cost-plus" tariffs.

This follows the National Tariff Policy notification (Para 5.1) that all power procurements should be only through competitive bidding from January 2011. A comparison of the tariffs obtained through competitive route and those arrived under the cost-plus tariff structure reveals that the those obtained through bidding were lower.

The state-owned producers like NTPC and the various state-government generators had expectedly opposed this. It is a testament to the competitiveness (or lack of it) of the state-owned generators that despite being the country's largest power producer, NTPC has failed to come even close to winning any of the UMPPs bid out so far.

Here is a comparison of the tariffs under different scenarios (via India Power Reforms and this). The Case I (no location specification and linkages) and Case II (government helps in land acquisition, coal linkages, clearances and water supplies) bid rates for various projects are as follows.

The comparison with some of the rates arrived at through the cost-plus MoU route makes the case in favor of competitive bidding a no-brainer.

Power purchase agreements on a cost-plus MoU route is a classic case of inefficient utilization of resources. It is an example of subsidizing inefficient state utilities at the cost of consumers. It may have been a necessity in the half-century or so after Independence when the private sector did not have the breadth and depth to meet the requirements. Now, with the private sector stronger and with the resources to provide a major share of the country's power requirement, it is time to bury such inefficient policies.

However, on a cautionary note, it is important that such contracts do not end up replacing public sector inefficiency with private sector crony capitalism. This assume importance in view of the widespread practice (and growing moral hazard) of contract re-negotiations, citing loose or ambiguous contractual provisions, after the bids are finalized. Recent efforts to tighten bidding norms in UMPPs are a step in the right direction.

The one thing I am curious about is whether any state-owned utility has succeeded with a tariff-based bid anywhere in the country!

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