Indian Power Sector

Bidding Strategies
& Issues
Rajat Misra

04 July 2008

IIT Kanpur

SBICAP
pfi rankings
#1 MLA in Asia pacific (# 9 globally)
#1 Advisor in Asia pacific (#5 globally)
Petrochemicals deal of the year (GGSRL)

04 July 2008

IIT Kanpur

SBICAP
Power Sector Assignments
Bid Advisory & MLA to TPL for UMPP
Bid Advisory to CSEB for 1500 MW
Bhaiyathan Project
Advisor to PGCIL for Tala Transmission
Advisor to GERC for all rules and regulations
under EA03 and Gujarat Act
Unbundling & Privatization of DVB
04 July 2008

IIT Kanpur

Current State
The story of future
GDP growth rate 8% will require similar
growth in power capacity
Installed generating capacity of 128 GW
Required 200GW / 300GW by yrs 2012/2017

Electricity Act 2003 focuses on reforms,

competition
Policies framed under Act reinforce the spirit
04 July 2008

IIT Kanpur

ISSUES
All (??) procurement through bidding
No cost-plus projects through MoU (??)

Advantages

Competition
Transparent process
Risk Allocation to Bidder and its Lenders
Incentivization for Efficiency

04 July 2008

IIT Kanpur

ISSUES
However, flawed strategy can negate the
advantages
Further, no real competition if mines are
allocated in non-transparent manner
Difference in Bids where mines are attached
vis--vis case2 bids is evident

04 July 2008

IIT Kanpur

Bid Scenario

04 July 2008

IIT Kanpur

Policy Framework
Section 63 of EA03:
..the Appropriate Commission shall adopt the
tariff if such tariff has been determined
through transparent process of bidding in
accordance with the guidelines issued by the
Central Government.

Tariff Policy issued in Jan 2006 under

Section 3 of EA03
04 July 2008

IIT Kanpur

Bidding Guidelines
Case I: Location, technology or fuel is not
specified
Example GUVNL bid

Case II: Location specific projects

Example: UMPP, Bhaiyathan, Jhajjhar

Standard bid documents prepared

However, these should not be taken as the Holy
Grail..
04 July 2008

IIT Kanpur

Bidding Guidelines
Guidelines binding on procurers and
deviations to be approved by ERC
Role of SERCs extremely important
Appropriate deviations should be approved
keeping in view special situations (eg qualification
criteria in case of bhaiyathan; umpp;
overleveraging)

04 July 2008

IIT Kanpur

Bidding Guidelines
A 2 part tariff (Capacity and Energy
charges) for long term procurement.
Combined allowed
Tariff to be in Indian Rupee only (except)
Capacity charges may have separate
escalable and non-escalable components.
Min/Max capacity Charges > 0.7
How feasible is it?
04 July 2008

IIT Kanpur

Bidding Guidelines
Energy Charges
Fixed in Base Year and indexed
May have separate escalable and non-escalable
components

OR fixed for each of the years

No provision for heat rate degradation,

ambient conditions

04 July 2008

IIT Kanpur

Bidding Guidelines
Energy Charges for Imported Coal
Base Energy Charge to be escalated
Imported fuel in USD/kWh
Transportation in USD/kWh
Inland fuel in Rs/kWh

Each of above may have escalable and

non-escalable
Different Strategies adopted by Bidders
recently
04 July 2008

IIT Kanpur

Bidding Guidelines
Combined Capacity and Energy Charges
permitted
No escalations above those quoted
allowed
Min offtake to be specified in Bid dox

04 July 2008

IIT Kanpur

Bidding Guidelines
Indices for bid evaluation by CERC
Discounting rate for levelised tariff
calculation to be specified by CERC
Current Rates are as follows:

04 July 2008

IIT Kanpur

Evaluation Rates by CERC

Parameter

Rate

Discounting Rate for

tariff

10.49%

Imported coal fuel

7.61%

Imported coal transport

14.79%

Captive mining coal

6.39%

04 July 2008

IIT Kanpur

Developers Perspective
Case Studies

04 July 2008

IIT Kanpur

Bidding Steps
Extremely important to have pre-bid tieups in place
Commitment on major costs
Time period for financial close
Interest rates risk?
Escalation & Currency provisions on EPC?
Bids not required to be underwritten

04 July 2008

IIT Kanpur

Bidding Steps
Imported Coal as Fuel
Bidding Strategy and appetite for risk are
more important
Recent bids have clearly underlined this fact
Mix of Indexed and non-indexed costs much
more important
More sensitive to variation in quality

04 July 2008

IIT Kanpur

Imported Vs Domestic
Criteria

Domestic

Imported

Calorific Value
(kcal/kg)

3500

6000

Cost (Rs/MT)

1000

2700

Variable Cost
(Rs/kWh)

0.80

1.4

04 July 2008

IIT Kanpur

04 July 2008

IIT Kanpur

Bidding Scenario
Scenario

Affect on Tariff in
spreadsheet example

D/E 80:20

8 paise

Loan repayment 15
years

7 paise

Interest Rate increase 3 paise

by 1% p.a.
04 July 2008

IIT Kanpur

Lenders Views
Paradigm Shift in financing
Move from Payment Security based lending
to Competitive Tariff based lending
Avoids mistakes of the past
Unbundling, Open Access Provisions drive
lenders comfort

Encouraging Response from ECA/ECB

04 July 2008

IIT Kanpur

Lenders concerns
Buy Out Provisions
Evacuation Transmission Risk
Time Frame to achieve Financial Closure
1 year from date of signing of PPA

Environmental Concerns
ECA/ECB financiers

Third Party Sale

Cure Period- Resumption of supply

Force Majeure
Land acquisition
Procurers responsibility!!
Change in Law, still
04 July 2008

IIT Kanpur

Lenders Perception
Imported Coal as Fuel
Take or pay only at 65% on imported fuel
Lenders see the above as a risk in long term
contracts.
What would a developer do??

04 July 2008

IIT Kanpur

Case Studies
Imported Coal

04 July 2008

IIT Kanpur

UMPP Mundra & GUVNL Bids

For UMPP Bids for Mundra, Tata Power
and Reliance had different bid strategies
TPL bid numbers were broken into
escalable and non-escalable components
Reflects clear direction of owning mine and
ships (or equivalent long term contracts) while
retaining limited risk

04 July 2008

IIT Kanpur

UMPP Mundra & GUVNL Bids

Reliance has bid all numbers as escalable
Reflects strategy of procurement on spot
basis for coal and transport
No upsides possible unless captive mines /
long term contract on different terms
Was it conservative or aggressive?

04 July 2008

IIT Kanpur

UMPP Mundra & GUVNL Bids

For GUVNL bid that was all-inclusive,
Adani had bid based on imported coal
Tariff for each year fixed and no escalations
Risk of international coal price, transportation
cost, forex variation borne by bidder
Possible only with ownership / long term
contracts for coal & transport
What about exchange rate risk??
04 July 2008

IIT Kanpur

UMPP Mundra & GUVNL Bids

How does Adani bid address goals of
bidding?
Competition
Efficiency
Transparency
Risk sharing

04 July 2008

IIT Kanpur

UMPP Krishanapatnam
Significant change in Reliance Strategy
What do the numbers tell?

04 July 2008

IIT Kanpur

Summary

04 July 2008

IIT Kanpur

For SERCs
Take a pragmatic view on deviations from
bidding documents
BE TRANSPARENT ALL BID
NUMBERS TO BE IN PUBLIC DOMAIN
Bidding Strategies Take a call on
appropriate risk sharing mechanism
WHEN TO CANCEL A BID????
04 July 2008

IIT Kanpur

Any Questions?
Bhaiyathan Model???

04 July 2008

IIT Kanpur

Thank you

04 July 2008

IIT Kanpur