Demand Forecast and capacity addition planning: Policy and regulatory process

1. Demand Forecast and capacity addition planning: Policy and regulatory process Prayas - EGI Skill-share workshop for Tajikistan and Kyrgyzstan DelegatesNovember 16-18, 2010, Pune, IndiaPrayas Energy Groupwww.prayaspune.org/peg, energy@prayaspune.org

2. Agenda Impact and significance Legal and regulatory framework Challenges and opportunities Prayas EGI workshop Pune Nov 2010

3. Break-up of Maharashtra distribution utility’s revenue requirement Prayas EGI workshop Pune Nov 2010

4. Important considerations • Economic • Crucial financial implications arising out of contractual agreements over long periods • Bad planning: Load shedding or high cost short term power purchase • Fuel specific • Locking into a particular fuel technology • Energy security related issues: excessive dependence on a particular fuel, etc.. • Social and environmental • Huge land and water requirement and mining • Displacement and issues related to land acquisition • Emissions and other environmental concerns Prayas EGI workshop Pune Nov 2010

5. Demand forecast: Indian scenario • Central Electricity Authority agency responsible for planning • Maintains data about installed capacity, generation and status of various on going projects • Tracks state wise, sector wise demand and growth • Makes state wise, sector wise demand estimations for each five year plan period • Limitations • Does not undertake demand forecast analysis at each discom level • Does not consider seasonal and peak variations • Undertakes this study after every five years or so Most state utilities do not undertake independent demand assessment Prayas EGI workshop Pune Nov 2010

6. Demand supply trend for last 10 years Prayas EGI workshop Pune Nov 2010

7. Generation and demand served Prayas EGI workshop Pune Nov 2010

8. Capacity addition Legal framework • What has been tried? • Central corporations such as National Thermal Power corporation and National Hydro Power Corporation • Successful but not sufficient • Private investments through Independent Power Producers (IPP) policy route. Failed on account of: • Lack of transparency in signing MoU • Absence of competition • Public protests against forceful land acquisitions • Huge tariff impacts and dismal performance of most IPPs Prayas EGI workshop Pune Nov 2010

9. $/kW Plants 370-600 18 800-1000 4 > 1000 3 Enron IPP project Comparison of CCGT Plants Around the World 1400 Enron Dabhol 1200 1000 800 Cost per kW ($/kW) 600 400 600-800 3 200 0 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Capacity MW LNG NG 1 NG 2 Prayas EGI workshop Pune Nov 2010

10. Capacity Addition provisions under Electricity Act 2003 Consumers buying from DISCOM and paying regulated tariff Competitive bidding for power procurement by DISCOM Cost-plus tariff determined by regulatory commission based on regulations and norms Consumer having choice of supplier Merchant capacity, captive generation Power exchanges and trading Prayas EGI workshop Pune Nov 2010

11. Competitive bidding: Legal framework • Section 63 of Electricity Act: • “Notwithstanding anything contained in section 62, 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.” • Bidding guidelines and standard bidding documents published by Ministry of Power • Ensuring consistency and transparency in bidding processes • Helps in creating level playing filed Prayas EGI workshop Pune Nov 2010

12. Competitive bidding: Regulatory framework “The bid documentation shall be prepared in accordance with these guidelines and the approval of the appropriate Regulatory Commission shall be obtained unless the bid documents are as per the standard bid documents issued by the Central Government.” Adopting the tariff discovered if the same is consistent with prevailing market rates and subject to adherence of bidding guidelines and due processes Prayas EGI workshop Pune Nov 2010

13. Capacity addition through competitive bidding Prayas EGI workshop Pune Nov 2010

14. Bidding guidelines • Standard bidding documents • Request for qualification • Request for proposal • Power purchase agreement • Payment security to be made available by procurer • Time lines for each type of process Prayas EGI workshop Pune Nov 2010

15. Tariff related provisions Tariff components • Multi part tariff consisting of: • Capacity charge • Energy charge • Tariff to expressed in Indian Rupees • “The bidder who has quoted lowest levellised tariff as per evaluation procedure, shall be considered for the award.” Prayas EGI workshop Pune Nov 2010

16. Accountability related provisions • “The procurer shall constitute a committee for evaluation of the bids with at least one member external to the procurer’s organization and affiliates. The external member shall have expertise in financial matters / bid evaluation.” • “The evaluation committee shall have the right to reject all price bids if the rates quoted are not aligned to the prevailing market prices.” • “..the Evaluation Committee constituted for evaluation of RFP bids shall provide appropriate certification on conformity of the bid process bid evaluation according to the provisions of the RFP document. The procurer shall provide a certificate on the conformity of the bid process to these guidelines.” Prayas EGI workshop Pune Nov 2010

17. Transparency related provisions • “The procurer shall publish a RFQ notice in at least two national newspapers, company website and preferably in trade magazines also to accord it wide publicity.” • “Procurer shall provide only written interpretation of the tender document to any bidder / participant and the same shall be made available to all other bidders.” • “For the purpose of transparency, the procurer shall make the bids public by indicating all the components of tariff quoted by all the bidders, after signing of the PPA or PPA becoming effective, whichever is later. While doing so, only the name of the successful bidder shall be made public and details of tariffs quoted by other bidders shall be made public anonymously. The procurer shall also make public the PPA signed in accordance with clause 6.1” Prayas EGI workshop Pune Nov 2010

18. Screen shot of Mahadiscom website Prayas EGI workshop Pune Nov 2010

19.  Capacity of 26,605 MW is currently contracted under bidding process Apart from this another 16,000 MW of capacity is being added under Ultra Mega Power Policy process Prayas EGI workshop Pune Nov 2010

20. Capacity Charge – CB Projects v/s Others • Most projects have a fixed capacity charge for the life time of the PPA and thus the change in the capacity charge is not a pass through to the consumers. – Greater certainty and Low risk • 2. For other projects which have an escalable component, the pass through is at a rate specified by the CERC and thus not at actuals. Prayas EGI workshop Pune Nov 2010

21. Comparison of levelised Variable charges – CB Projects and Other Blue – CB; Red – Other Projects Prayas EGI workshop Pune Nov 2010

22. Regulatory framework • Mandating distribution companies to prepare power purchase plan through regulations • Role in determining generation tariff of non-competitive power procurement • Transparent scrutiny of all costs and contractual terms through public hearings • Allowing/disallowing costs based on performance norms and benchmarks • Adjudication of disputes if any, between discom and generation company Prayas EGI workshop Pune Nov 2010

23. Challenges Utilities reluctance towards undertaking proactive demand forecast and prudent Power purchase planning Reluctance towards competitive bidding, preference to non-transparent or inefficient MoU/cost plus projects Lack of transparency in fuel allocation Lack of consideration of social and environmental realities Prayas EGI workshop Pune Nov 2010

24. Opportunities • Provisions for increasing transparency and accountability related norms and requirements • E.g. standard bidding documents, reasoned orders, publishing tenders and agreements on website, etc • Strengthens commission’s role and mandate to prevent bad projects • E.g. Uran and Talegaon gas based generation • Collaborative action can force utilities to address the planning related issues in a more accountable manner • Joint declaration process in Maharashtra Prayas EGI workshop Pune Nov 2010