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The highs and lows of tariff-based competitive bidding

It is a matter of irony that while the country the celebrating the success of the tariff-based competitive bidding (TBCB) mechanism in the solar and wind energy sectors in terms of historically low tariffs quoted by developers, the same philosophy is creating turmoil in the conventional power generation and transmission industry.

According to reliable reports, the Supreme Court has disallowed any increase in tariffs from Tata Power’s 4,000-mw Mundra ultra mega power project (UMPP) to be passed on to beneficiary utilities. Tata Power in late 2006 had clinched the Mundra UMPP quoting a levelised tariff of Rs.2.26 per kwh during the 25-year concession period. The tariff quoted by Tata Power was based on long-term negotiated deals signed with Indonesian coal suppliers. However, Indonesia in 2010 ruled that coal cannot be exported at less than market price. The fuel cost for Tata Power shot up, rendering the tariff (of Rs.2.26 per kwh) simply unviable.

Two mega transmission schemes of Reliance Power (Anil Ambani Group) have been under litigation for quite some time now, on the same grounds. Reliance Power had won the North Karanpura and Talcher-II transmission schemes under the TBCB mechanism, back in 2009. Reliance Power has sought revision in tariffs as the company has alleged that work on the projects could not start on time due to non-timely pre-project clearances from the Union government. Reliance Power has sought 160 per cent increase in tariff for the North Karanpura project and 90 per cent in the case of Talcher-II. Beneficiary state utilities have contested this plea and the matter is still sub-judice. The next hearing of the Appellate Tribunal of Electricity (ATE), with whom the matter is now resting, is scheduled on July 12, 2017, for both these projects. Incidentally, Power Grid Corporation of India has stepped in and offered to take over the projects but on conventional “cost-plus” basis, and not under the tariff-based competitive route.

Selling stake

Coming back to the Mundra UMPP case, Tata Power has offered GUVNL 51 per cent stake in Coastal Gujarat Power Ltd (the 100 per cent Tata Power subsidiary that owns the Mundra UMPP) for just Re.1. This will result in CPGL relegating itself to an O&M contractor. GUVNL (Gujarat Urja Vikas Nigam Ltd) is the parent body of all power utilities in Gujarat. It is never going to be easy for power utilities to take over the project and sell power at Rs.2.26 per kwh. The project is designed to run on imported coal; domestic coal will be an inferior alternative from both technical and commercial standpoints.

Adani Power and Essar Power are also saddled with their projects – Mundra (4,620 mw) and Salaya (1,200 mw), respectively – that are based on imported (Indonesian) coal. Both the developers are finding it difficult to sell power at rates contracted in the power purchase agreements. [These projects do not technically fall under the TBCB mechanism but are based on long-term PPAs signed with beneficiary utilities. However, the impact of rising fuel costs on the commercial viability of the power generation asset is the same.]

Also read: Tariff-based bidding in wind energy to gain momentum

The TBCB mechanism has done wonders for the solar industry with tariffs falling to a historical and incredulous low of Rs.2.44 per kwh, as seen in the Bhadla-Phase III project in Rajasthan. Even in the recent 1-GW wind energy auction conducted by SECI, the winning tariffs have been around Rs.3.50 per kwh, much lower than the Rs.4-6 per kwh band seen in the feed-in tariff regime. The biggest advantage that solar and wind projects have is a complete insulation from the vagaries of fuel cost. Despite this, experts believe that such aggressive quotations have been submitted with an underlying desperation to bag projects. Solar developers have set up large teams but the flow of projects has not been much slower than anticipated.

What next?

Based on the cases under discussion, it appears that the TBCB regime is going through a rough patch. While the developer does his homework in quoting the winning tariff, there is always room for unexpected developments that can make financial calculations go awry. Agreed that developers fully subscribe to the project risk but what happens when a developer is confronted by a totally unanticipated situation that makes the tariffs unviable? This is more so considering that the concession periods are long—25 to 30 years. Although concession agreements provide for force majeure, not all eventualities can qualify.

The power projects of Tata, Adani and Essar under discussion are stuck in a policy logjam, and there is no easy way out. It is a tragedy that technically efficient power generation projects are becoming victims of commercial inefficiency.

The tariff-based competitive bidding mechanism, a sound philosophy of power procurement implemented in the country since January 2011, needs some rethinking. Right now, the Central government appears to be distancing itself as issue is strictly between the power generator, the procuring state government utilities, and the lending institutions. While this is understandable, the Centre could do well in reworking the nuances of the otherwise sound tariff-based competitive bidding mechanism, protecting the long-term interests of all stakeholders.

by venu — June 29, 2017 in Policy 0

Tariff-based bidding in wind energy to gain momentum

Tariff-based bidding in the wind energy sector is expected to pick up momentum in the coming months with both the Centre and states lining up major auctions.

The competitive tariff-based bidding mechanism in the wind industry, which was initiated earlier this year, is set to gain momentum. Tamil Nadu has become the first state to procure wind power using the reverse bidding process. The southern state is seeking long-term purchase of 500 mw, at a tariff not exceeding Rs.3.46 per kwh. Bidders can set up wind power projects of at least 25 mw in Tamil Nadu and the procurement agency Tamil Nadu Generation & Distribution Corporation Ltd (Tangedco) will select the bidders based on the lowest tariff quoted. It may be mentioned that Tamil Nadu needs to procure 500 mw of wind energy to part-fulfil its RPO target of 9 per cent for FY18.

Tamil Nadu will thus be sourcing wind power at a competitive rate of Rs.3.46 per kwh, or lower. This would be much below the feed-in tariffs for wind that have traditionally been in the range of Rs.4 to Rs.6 per kwh. Tariff-based bidding is thus expected to create of war of tariffs in the wind industry as much as it did to the solar industry.

SECI auction sets benchmark

It may be recalled that in February this year, nodal agency Solar Energy Corporation of India (SECI) opened bids for 1 GW of wind power, heralding the tariff-based competitive bidding route for wind energy in India. Mytrah Energy, Green Infra Wind Energy, Inox Wind, Ostro Kutch Wind and Adani Green Energy emerged as the lowest bidders quoting Rs.3.46 per kwh. It may be noted that Tamil Nadu has used the same Rs.3.46 per kwh as the benchmark. SECI is also scheduled to procure another 1 GW of wind energy through the tariff-based bidding route and one can expect rates to be even more aggressive. The basic idea of such auctions is to help non-windy states meet their RPOs by procuring wind energy generated in windy states and transmitted through the ISTS (interstate transmission system).

More states

While Tamil Nadu is already in the market with its 500-mw procurement, states like Gujarat, Rajasthan and Madhya Pradesh are believed to be lining up similar auctions. Though the quantum of their power purchase is yet unknown, these three states are expected to collectively mop up upwards of 1 GW from their auctions. Incidentally, Tamil Nadu is scheduled to open the techno-commercial bids for its 500-mw procurement drive on July 18, 2017.

India has set a renewable energy target of 175 GW by 2022 and wind accounts for 60 GW. As of March 2017, India’s wind energy capacity stood at around 32 GW with Tamil Nadu leading with a 27 per cent share, followed by Maharashtra, Gujarat and Rajasthan, each with a share of roughly 15 per cent. In the next five years, India needs to double its wind power installed capacity base and tariff-based auctions could help set up large-scale capacity, coupled with aggressive tariffs.

Tariff-based bidding: A game changer for wind energy

by venu — June 21, 2017 in Renewable Energy 0

Restricting China in India’s power transmission

The Union power ministry, according to reliable media reports, is planning to issue a note that seeks to restrict China’s involvement in the Indian power sector. The reports further suggest that restrictions will be imposed in the power transmission sector to start with, and will be extended to power generation and power distribution subsequently.

The objective of the policy is to maintain the principle of reciprocity. China, it should be noted, does not allow Indian companies in its power sector. While there are other countries that also disallow Indian participation, China is significant because of its widespread involvement in the Indian power sector.

When it comes to a Chinese, or any foreign entity for that matter, there are two ways in which it could associate with the Indian power sector. It could either be an equipment supplier or it could be a developer. In the case of a developer, the foreign (Chinese) entity will own equity in the power project, be in the field of generation, transmission or distribution, and will therefore share the risk of the project. When it plays the role of an equipment supplier, there is no equity stake. An equipment supplier can, at the most, become an EPC contractor and perhaps undertake a concomitant operations & maintenance (O&M) contract.

Within equipment suppliers, there are two classes. The first is one that has domestic manufacturing facilities in India, and the second is where the supplier caters to the Indian market through exports from the country of origin.

Thus, we have three broad categories in which a Chinese supplier could cater to the Indian power sector – developer, equipment supplier without local manufacturing facilities and equipment supplier with local presence.

Gauging the impact

Let us gauge the impact of the proposed restriction in the power transmission sector. So far, there are no Chinese developers of power transmission lines. This means that no Chinese company owns and operates transmission lines in India, as yet. Ownership and management of power transmission lines is possible under the under the BOOT/BOOM model. All the same, it is learnt that CLP (incidentally the only independent power producer in India, of Chinese origin) has bid for some interregional lines offered under the tariff-based competitive bidding route. CLP India had bid for three lines but did not secure any. Very recently, CLP India in association with China Southern Power Grid International (CSGI) has bid for three interregional lines, the results of which are awaited. The entry of China as a potential developer of power transmission lines in India was also discussed in a Parliament session earlier this year. Barring this case, there is no other Chinese company that has evinced interested in India’s power transmission sector, in the capacity of a developer.

When it comes to equipment used in the power transmission sector, the proposed ban could have some impact. India’s power transmission infrastructure is gradually moving to extra high voltage levels, typically 765kV. Till around five years ago, power utilities (both Central and state) made large-scale imports of 765kV gear, like transformers and reactors. However, today, local manufacturing capabilities of 765kV equipment have improved thereby lowering the reliance on Chinese equipment. However, there are some items like insulators are imported on a large scale from China as they are available at a very low cost. It is well known that Indian insulator companies have been hurt badly by cheap imports, for several years now.

China as a local player

It is also interesting to note that China is taking the Indian power transmission sector seriously and has even set up local manufacturing facilities. BTW, TBEA and Hyosung are some Chinese companies that have started operations in India through local plants, in the field of EHV power transformers, reactors, switchgear, etc. The Indian manufacturing fraternity, is should be mentioned, has not objected to Chinese companies setting up facilities in India. Their contention has always been to put a check on cheap imports from China.

Though details of the proposed restrictions are not available, it remains to be seen if India actually prohibits Chinese companies from setting up manufacturing facilities in India. Given that India currently permits 100 per cent FDI in the electrical equipment sector, and is also encouraging the “Make in India” campaign, how deftly it deals with the sensitive issue remains to be seen.

The final picture

Since the proposed restrictions on China in the power transmission sector have not yet been spelt out, the final picture cannot be painted. In summary, there will little impact from the “developer” angle. By and large, Chinese companies are not interested in owning and managing transmission lines. It is unlikely that Chinese equipment suppliers that have already set up shop in India will come under the ambit of the proposed restrictions. What could be done is to check imports of power transmission-related equipment. Here, India will be affected but fortunately the dependence on Chinese equipment today is far lesser than what it was, say, five years ago.

China’s Role In Power Transmission Raises Concern

by venu — June 6, 2017 in Power Transmission 0

Electricity gains prominence in index of industrial production

The electricity sector has been given higher weight in the recently revised Index of Industrial Production series.

The Central Statistical Organisation (CSO), a body under the Ministry of Statistics & Programme Implementation (MOSPI), announced major changes to the Index of Industrial Production (IIP), on May 12, 2017. This article tries to discuss the subject in the context of the electricity sector.

The most important change has been the shifting of the base year from 2004-05 to a more recent year, 2011-12. Such shifting makes the calculation of the IIP more in tune with current economic dynamics. The other big change is the increase in the weight of the electricity sector (which means electricity generation) from the earlier 7.994 per cent to 10.316 per cent. The weight of a sector in the IIP broadly suggests its relative importance, measured in terms of value addition, in the overall industrial production. It is worth observing that electricity generation—largely an enabler of industrial production—is itself becoming an important contributor to industrial production.

Sectoral Weights in IIP (per cent)
Sectoral	New Index (Base: 2011-12)	Old Index (Base: 2004-05)
Mining	14.373	14.157
Manufacturing	77.633	75.527
Electricity	7.994	10.316
Total	100.000	100.000

Another point worth noting is that “electricity generation” that was used in the calculation of the IIP till now, was based on only conventional sources—thermal, hydropower and nuclear. Henceforth, generation from renewable energy sources (e.g. wind, solar, biomass, small hydropower, waste-to-energy, etc) would also be taken into account.

Generation from renewable sources recorded an impressive year-on-year growth of 25.5 per cent in the first eleven months (April to February) of FY17, according to latest official statistics. Generation in the said period was 75,949 million kwh as against 60,513 million kwh in the April-February period of FY16. By the same comparison, growth in conventional electricity generation was 4.2 per cent. What is also worth mentioning is that the share of renewable energy generation in total electricity generation improved 6.7 per cent in the April-February period of FY17 from 5.6 per cent in FY16. More than the year-on-year growth rates, which may seem amplified by a low-base effect, it is the share in total electricity generation that reflects the growing importance of renewable energy (RE) generation.

Not the full series

A fine point that may be discussed here is that due to data limitations, the new IIP series has included RE generation with effect from April 2014 only. This means that the IIP series for electricity, for the years FY13 and FY14, are the same as the old series. Due to this “abrupt” inclusion of RE generation, the growth in the IIP for electricity for FY15 shows a spike of 14.8 per cent, as against 8.4 per cent measured by the old series. It may be mentioned here that since 2011-12 (or FY12) is the base year, the IIP for each of the months of that year is set as 100.

Growth in IIP for Electricity (year-on-year % change)
Year	Old Index (Base: 2004-05)	New Index (Base: 2011-12)
2012-13	4.0	4.0
2013-14	6.1	6.1
2014-15	8.4	14.8
2015-16	5.7	5.7
2016-17	4.7	5.8

Significant change in perception

Due to the changes in the IIP composition, the perception of overall industrial growth has altered significantly. For instance, in FY17, industrial growth as suggested by the old IIP was a depressed 0.7 per cent. Now, growth measured as per new IIP series, is a much more respectable 5 per cent. Also, in FY14, industrial production was believed to have shrunk by 0.1 per cent based on the understanding derived from the old IIP series. Thanks to the revised series, industrial growth in that year stands at a commendable 3.4 per cent.

Contribution of electricity

Based on the revised series, the overall IIP grew by 5.0 per cent in FY17 as compared with 3.4 per cent in FY16. By the same comparison, the IIP for electricity was up only marginally from 5.7 per cent in FY16 to 5.8 per cent in FY17. Though the growth in electricity generation was rather flat, the electricity sector made a higher contribution to growth in overall industrial production during FY17. This contribution stood at around 20 per cent in FY17 as against 14 per cent in FY16.

by venu — May 22, 2017 in Policy 0

Multiple certifications needs to be eliminated

Distribution transformer manufacturers are troubled by the need to comply with guidelines issued by two agencies—BEE and BIS.

Of late, the distribution transformer industry has been in the news on the issue of product quality certification by two agencies Bureau of Indian Standards (BIS) and Bureau of Energy Efficiency (BEE). The matter needs to be understood in some detail.

It all started when BEE extended its star labeling programme to include distribution transformers; this was around January 2009. Under BEE’s programme, an electrical equipment or appliance is designated with “stars” (from 1 to 5) depending on the energy efficiency of the equipment. A 5-star rating suggests highest energy efficiency, while a 1-star rating stands for lowest. A distribution transformer was required to have a minimum of 1-star label. However, when these guidelines came out, distribution transformers (DT) corresponding to 1-star and 2-star efficiency were not being manufactured as the industry was by itself technologically evolved. A 3-star label was therefore considered as the minimum norm. This has since progressed to 4-star. In other words, DTs today have either a 4-star or a 5-star label.

BEE versus BIS

Meanwhile, BIS, after a detailed study, revised its IS1180 standard to incorporate features of energy efficiency. Accordingly, what was 3-star under the BEE guideline came to be known as Level-1, 4-star was Level-2 and 5-star was Level-3. This revised guideline was followed by all DT manufacturers and was considered comprehensive, in terms of both product quality and energy efficiency.

Recently, it is learnt that BEE has independently revised its guidelines with a view to introducing more energy efficiency. Accordingly, what was Level-2 under IS1180 has now become the “New Level-1”, the Level-3 under IS1180 has become “New Level-2”. It is further learnt that BEE has revised guidelines without extensive discussions with manufacturers and other stakeholders. This has peeved manufacturers of DTs.

Common objective

Transformers that are affected by the BIS and BEE certification are those up to 2.5MVA in the 11kV, 22kV and 33kV class. Such equipment is termed as a distribution transformer and is used in the last-mile of the flow of electricity from the power generation source to the point of consumption. Distribution transformers of these specifications find widespread application in rural electrification.

The industry feels that the ultimate objective of both BIS and BEE is to ensure minimum energy efficiency of distribution transformers. Getting independent certification from both BEE and BIS is both costly and time consuming. As of now, the new BEE guideline has been put on hold for six months but a permanent solution to this duality of certification still eludes.

by venu — May 9, 2017 in Power Distribution 0

Tata Power’s presence could boost DF model

Tata Power Company’s recent appointment as the distribution franchisee for the Ajmer circle in Rajasthan could do well for the languishing DF model.

On April 21, 2017, Tata Power Company announced that it has signed the distribution franchisee agreement with Ajmer Vidyut Vitaran Nigam Ltd for power distribution in designated areas of Ajmer city in Rajasthan. This development is significant on several counts.

For Rajasthan, this represents furtherance in its endeavour of privatizing power distribution under the DF model. Ajmer represents the fourth city after Kota, Bharatpur and Bikaner to come under the distribution franchisee ambit.

For Tata Power, amongst the oldest power utilities in India, it is another attempt at experimenting with the DF model. The utility in late 2012 was appointed as distribution franchisee for the Jamshedpur circle in Jharkhand but the agreement was called off in 2015. However, this development follows the state government’s decision to work on the DF model afresh and cancel all previous agreements. Accordingly, the DF agreement with CESC for the Ranchi circle was also annulled. Incidentally, Jharkhand had initiated the process of inviting DFs for seven circles (including Ranchi and Jamshedpur) but elicited poor responses from bidders.

Tata Power has done a wonderful job in making power distribution a profitable business in Delhi. However, Tata Power’s involvement in Delhi is through the licensing model. It has formed a joint venture Tata Power Delhi Distribution Ltd, in which the Government of NCT of Delhi is also a stakeholder. The Delhi government, for that matter, is also a stakeholder in the other two private power utilities BSES Yamuna Power and BSES Rajdhani Power, in which the private party is Reliance Infrastructure (Anil Ambani Group).

Under the licensing model, the private entity (licensee) undertakes capital expenditure in improving the distribution grid. It is therefore an asset-heavy model. The DF model is a relatively asset-light model where the primary focus is on improving the commercial efficiency of the designated area through enhanced recovery of dues from customers.

The distribution franchisee model has generally not been successful. Since there aren’t too many successful precedents, there are not many emulators as well. There are several cases where the DF model has failed—Aurangabad and Jalgaon in Maharashtra; Ujjain, Sagar and Gwalior in Madhya Pradesh; Ranchi and Jamshedpur in Jharkhand; and perhaps some more.

Also read: Making the distribution franchisee model work

As a seasoned power utility, Tata Power has tremendous experience in handling both the B2B and the B2C segments in the power value chain. It is therefore expected that Tata Power’s involvement in the Ajmer circle could bring much needed credibility and support to the power distribution franchisee model, per se. According to information available, Tata Power did bring about efficiency in Jamshedpur during its tenure as the distribution franchisee. However the appointment was cancelled more as government ideology rather than inadequate performance by the private franchisee.

First for Ajmer discom

Rajasthan has three power distribution companies—Ajmer, Jaipur and Jodhpur. For Ajmer Vidyut Vitaran Nigam Ltd (AVVNL), the Ajmer circle is the first instance of appointment of a distribution franchisee. AVVNL handles power distribution in 12 circles spread over eleven districts—Ajmer, Bhilwara, Nagaur, Sikar, Jhunjhunu, Udaipur, Banswara, Chittorgarh, Rajsamand, Doongarpur and Pratapgarh.

Ajmer district has two circles called “Ajmer City” and “Ajmer District”. The Ajmer City circle, in turn, has three divisions, out of which two (City Division-I and City Division-II) will be taken over by Tata Power.

by venu — April 27, 2017 in Power Distribution 0

IPPs dominate supercritical power capacity

India’s supercritical power generation capacity crossed 38 GW as of December 31, 2016, according to statistics released by Central Electricity Authority. It is interesting to note that independent power producers (IPP) had the maximum share of this capacity. Nearly 75 per cent of this capacity, corresponding to 28,550 mw, was built by IPPs with government utilities having a very small share. Central PSUs—mainly NTPC—accounted for 12.4 per cent of this capacity while state government entities had a comparable share of around 13 per cent.

by venu — April 9, 2017 in Electricity 0

BHEL gets “developer” tag

Very recently, the first unit of the 2×800-mw Yeramarus supercritical power plant in Karnataka was commissioned. This development assumes significance on several counts. First, it imparts to public sector engineering firm Bharat Heavy Electricals Ltd (BHEL) the status of “power developer.” The Yeramarus plant is owned by Raichur Power Corporation Ltd – a joint venture between Karnataka Power Corporation Ltd (approximately equity stake: 50 per cent), BHEL (26 per cent) and IFCI Ltd (24 per cent). BHEL, after having supplied equipment to a very large share of India’s power generation capacity, is finally an owner, albeit part-owner, of a power plant.

by venu — March 24, 2017 in Power Transmission 0

Making the distribution franchisee model work

Early last month there was some good news on the power distribution front when private utility CESC Ltd (part of the RP-Sanjiv Goenka Group) was appointed the distribution franchisee for the Bikaner circle in Rajasthan. For the northern desert state, this was the third case of appointing a distribution franchisee. In July 2016, Rajasthan had appointed distribution franchisees for Kota and Bharatpur. Incidentally, both these mandates were won by CESC Ltd.

by venu — March 14, 2017 in Power Transmission 0

Solar parks could make up for rooftops

Very recently, the Cabinet Committee on Economic Affairs approved the doubling of envisaged capacity through solar parks and ultra mega solar power projects from 20 GW to 40 GW. The Centre has targeted at least 50 solar parks, each with capacity of at least 500 mw, to come up all over the country by FY20. Financial support from the Centre for this additional 20 GW of grid-connected solar capacity would be to the tune of Rs.8,100 crore. It may be recalled that 20 GW worth of Solsolar parks, 34 in number, are already under various stages of development. The original scheme of solar parks was launched in December 2014.

by venu — February 25, 2017 in Solar Power 0