Transcript HYDRO POWER PROJECTS: TRENDS IN BIDDINGS

HYDRO POWER PROJECTS:
RECENT TRENDS IN BIDDING
Presented
by
Rajiv Malhotra
COO
Power Summit 2008
Kathmandu
Sept. 24, 2008
Athena Energy Ventures Private Limited
An initiative of PTC, IDFC and Athena
Outline
• Competitive Bidding for Infrastructure Projects – Rationale
• Frameworks deployed in India – a Chronology
• Outcomes Achieved
• Fit with Best Practices and Principles
• Possible Futures
Features of Infrastructure Projects
1. Complexity; interfaces with other systems likely
2. Based on long-term usage patterns
3. Externalities and Social Benefit-Costs
4. Structured Finance; non-recourse options
5. Governments / the State’s intent to limit role in businesses,
stick to Governance
Why Competitive Bidding?
1. Transparency - both in public finance and process of award
of `public / national resources’
2. Basic tenet of public finance; “as big a bang for the buck –
to benefit as many as possible”
3. Regulation is a surrogate for competition (considered an
`either-or’) – difficult to find the fine balance of optimal
regulation
4. Socio-psychological reasons or stereotypes (“risk-averse
bureaucracy” “resentful private enterprise”)
Outline
• Competitive Bidding for Infrastructure Projects – Rationale
• Frameworks deployed in India – a Chronology
• Outcomes Achieved
• Fit with Best Practices and Principles
• Possible Futures
India; chronology of Policy / Regulation
impacting Pvt.HEP Business
1. Pre 2003; early and late 90s: Negotiations for small and
medium size HEPs, Bidding route initiated in early 2000s.
2. Electricity Act 2003: Gave a framework for development of
new capacity on competitive basis,
puts statutory
responsibility on Regulators for market development, also
includes concept of Statutory policy (mainly Electricity and
Tariff Policies
3. National Electricity Policy 2005: Hydro power
development through private participation, stresses on the
need successful models for Public Private Partnership.
4. Competitive bidding guidelines 2005: for procurement of
power by discoms for medium term (1 to 7 years) or long
term (more than 7 years) on competitive basis
India; chronology of Policy / Regulation
impacting Pvt.HEP Business (contd…)
5. Competitive Bidding Guidelines 2005 provide for two
situations: Case-1 (where the location, technology, or fuel
is not specified) and Case-2 (For hydro-power projects,
load center projects or other location specific projects
with specific fuel allocation such as captive mines )
6. National Tariff Policy 2006: Made competitive bidding
mandatory on above guidelines
7. Scenario since 2006: (modified) Premium based bidding by
State Govts. (most preferred), Case-1 and Case-2 (no
instance of an HEP initiated yet)
8. New Hydro Policy 2008: stated objective of overcoming
the problems experienced with respect to tariff based
bidding for HEPs
A Brief Overview of Hydro Power Development in India
1. States were entrusted the task of hydro power development. Initially
projects were awarded through the MOU route.
2. After 1974 CPSUs were established to share the responsibility.
3. Till 1990 hydro power in the country was in the hand of Govt. After
1991, private participation invited and has been increasing.
4. From Feb, 1995, bidding for award of power projects to private
sector was made mandatory. Policy revised in August 1998, and
projects up to 100 MW allowed to come through the Negotiation
Route.
5. TEC is not required for projects, capital cost upto Rs. 500 crores in all
cases and Rs. 2500 Cr., if project is allocated through transparent
process of bidding and included in National Electricity Plan.
6. Hydro Policy, 2008 seeks to dispense with the requirement of tariff
based bidding for award of HEPs to private sector for a period upto
2011 and to change the ground rules for bidding processes followed.
Uttaranchal (2002): the first of the Competitive
Bidding Experiences
In 2002 (i.e. ahead of the Electricity Act, 2003), premium
based bidding started under hydro policy of the State;
1. State to provide preliminary project portfolios of identified
sites
2. Pre-qualification on the basis of technical and financial
capabilities
3. Bid Parameters - Upfront premium payable over a threshold of
Rs. 5 cr. per project.
4. 50% amount of excess premium + Rs. 5 Cr. Payable upfront
5. Bank Guarantee for 50% encashable at the time of actual or
schedule financial closure
6. Allotment: followed by Project Development and
Implementation Agreements to definite timelines.
Uttaranchal (2002): the first of the Competitive
Bidding Experiences (contd…)
7. Term of allotment: 45 years; to maintain a residual life of
thirty years at any point of time.
8. Mandatory inspection due: 10th/20th/30th/ and last Year of
operation. (Termination if not found to be maintained
properly; Termination Payment: DCF of Net Cash Flow to
Equity for 10 years.
9. To conform to R&R policy of the State.
10.Third party sales allowed for full capacity. (State may purchase
any subsequent requirement based on negotiated terms and
conditions only)
11.Royalty: 12% free power for life of the project.
12.Incentive: Reduction of free power by 1% for each year of
early completion.
13.1% more Free Power for each 1 year of delay.
14.Transmission System : build Own or by STU/CTU; wheeling
Arunachal (2007); modified Premium Based Bid
BOOT basis, reverted to the State Govt. after 40 years from
COD free of cost. Cost of all activities including DPR to be
borne by the Selected bidder;
1. The Selected Bidder will not be allowed to sell the Project to
any other party without the permission of the State Govt.
2. Suitable financial provision to be made in the Project cost for
the catchments area treatment plans. The Site required for all
the project associated works and facilities transferred by the
state Govt. on lease.
3. Preference to the bidder quoting higher free power. The
State has first right to purchase power from the project. The
Selected Bidder shall be responsible for developing associated
evacuation system.
Arunachal (2007); modified Premium Based Bid
Cont…
4. The Selected Bidder to allow the State to use its infrastructures,
after accounting for project requirements.
5. Developer to reserve 50 % of the total jobs to be filled up by the
local people and preference to local contractors.
6. Developer to achieve the financial closure within 12 (twelve)
months from receipt of Techno-economic clearance (TEC) other
Clearances. If it is confirmed as impossible to achieve Financial
Closure, the Govt. has right to terminate the agreement.
7. If construction works stops for more than 12 months (reasons
not covered under Force Majeure) or implementation of the
project not commenced within 4 years from signing of the
agreement or within 1 year from receipt of all clearances, the
State Govt. have the right to terminate the agreement and have
the right to take over the Project on "As is where is" basis.
Arunachal (2007); modified Premium Based Bid
Cont….
8. Upfront-Premium: Min. Rs. 1.5 Lakhs/MW (Upto 500 MW), Rs. 2
Lakhs/MW (500-1000 MW), Rs. 3 Lakhs/MW (above 1000 MW).
{commitment of Rs.7.5Cr. To Rs.30 Cr.}
9. Developer to commission the project within 5 (Five) years from
the receipt of all clearances, Financial Closure and land
acquisition. Penalty @ Rs. 40,000/- per MW per month to the
State Govt., except when delay is caused by Force Majeure.
10.Developer to allocate equity in SPV from it's equity share to
the State Govt. On request from the State Govt., developer to
arrange the funding for equity participation of State Govt.
11.One paise per unit of power sold for Local Area Development
and environment cess one paise or more per unit of power sold.
No other cess will be levied on the sale of electricity by the
Selected Bidder within the State or outside the State.
Himachal Pradesh
1. Initially State followed the negotiation route. Under this
route, out of projects allotted to private players, 400 MW
is commissioned, 1300 MW achieved Financial Closure and
other projects are close to financial closure.
2. Starting 2005-06, the State opted for premium based
bidding. In 2008, it invited proposals for HEPs in which
Bidders were required to submit the ‘Technical-Bids’ and
‘Price-Bids’. In ‘Price-Bid’, fixed upfront charges of
Rs.20,00,000/- (Rupees Twenty Lacs) per MW of the
Project to be quoted.
3. The ‘Technical-Bid’ includes a fees One Lac per MW
subject to maximum of Rupees Ten Lacs per Project.
4. Bidders were required to have strong financial and
technical base.
Cont….
5. The Govt. of Himachal Pradesh have rights of equity
participation upto 49%.
6. Free power 12%, 18% & 30% upto 12 years, next 18 years
and balance agreement period beyond 30 years from COD.
Developer to quote uniform‘additional Free Power’.
7. Incentive for early commercial operation of the project and
disincentive for delay.
8. Bidder to identify transmission system for the evacuation of
power.
9. The operation period to be forty (40) years from the
Commercial Operation Date (COD), then the Project to be
reverted to the State Government free of cost.
10.Recruitment of 100% staff from Bonafide Himachalis.
Company is permitted to maintain min. 70% of the total
employees if 100% not possible.
11.1.5% of final cost of the Project as Local Area Development.
Sikkim – away from the bidding route
1. Sikkim tried the bidding route in 1990s, not proved fruitful. In
2005, State Govt. adopted the negotiation route in JV mode.
2. Selection on individual presentation representing managerial
and technical capabilities.
3. Memorandum of Agreements (MoA’s) signed with private
developers provide for 26% stake and 35 yrs of operation
period on BOOT basis.
4. Allotted around 3000 MW under this route, of which 1800 MW
has already achieved Financial Closure in 2007 and another 600
MW is close to Financial Closure.
Tariff Based Bidding for Hydro Power Projects
1.Case-1: Where the location, technology, or fuel is not
specified by the procurer.
2.Case-II: For hydro-power projects, load center projects or
other location specific projects with specific fuel allocation
such as captive mines available.
3.In Case 1 developers are required to offer power at
competitive tariff from their projects.
4.In case-II the activities should be completed by the procurer
before commencing the bid process are: Site identification
and land acquisition required for the project, environmental
clearance, fuel linkage, water linkage, Hydrological,
geological, meteorological and seismological data for DPR,
where applicable.
Tariff Based Bidding for Hydro Power Projects
5. Two stage process: Request For Qualification (RFQ) and
Request For Proposal (RFP).
6. In case a bidder offers hydro power, under Case 1 or the
procurer invites bids of hydro power under Case 2, the
hydrological risk shall be borne by the Procurer.
7. RFP is issued to selected bidders at RFQ and includes PPA
proposed to be signed, payment security, bid evaluation
methodology.
8. The project site is transferred to the successful bidder at a
declared price.
New Hydro Policy (2008): seeking to `fix’ things?
In 2008 GoI announces New Hydro Policy to “address the
problem with respect to Tariff Based Bidding” and provides
exemption to Pvt. Projects that obtain CEA’s concurrence, sign
PPAs and achieve Fin.Close before Jan.2011 (alternative of ERC
determined tariff. Stipulates;
1. States to follow a transparent procedure for awarding sites.
(selection on financials, experience, track record)
2. Adopt a single Bid Parameter - Upfront premium payable,
higher free power or equity participation `etc.’
3. For tariff determination, ERCs not to allow expenditure
incurred or committed for getting the allotment
4. Additional 1% free power towards LAD
5. For recovery of costs incurred, `merchant sales’ upto 40%
(reducing by 5% for every 6 month delay in implementation)
allowed. This is also applicable to allotted project of over 100
MW
Outline
• Competitive Bidding for Infrastructure Projects – Rationale
• Frameworks deployed in India – a Chronology
• Outcomes Achieved
• Fit with Best Practices and Principles
• Possible Futures
Recent Trends on Bidding: Bidding Parameters
Parameter Arunachal
Pradesh (AP)
Himachal Pradesh
(HP)
Year
2007
2008
Capacity*
8020 MW (13 Projects)
1968 MW (17 Projects)
Basis
Boot Basis (40 Years)
Boot Basis (40 Years)
Free Power#
Min. 12%
12%/18%/30%...12/1230/30-40 Years
Upfront
Premium
Min. INR 0.15 MM/MW for
500 MW
INR 2 MM/MW (Fixed)
State Govt.
Equity
To be Offered by the
Developer
Govt. Has Rights upto 49%
Equity
Net-Worth
INR 750 Cr.
Adequate (Figures Not
Mentioned)
*In the bid by AP, min size of the project was 150 MW and max was 3000 MW. PFRs of many projects were provided by the State. In HP
min size was 7 MW and max was 484 MW. PFR for 4 projects cumulative to 117 MW was provided and for 13 projects cumulative to
1851 MW was not available.
#In AP additional free power more than 12% had to be offered by bidder. In HP fixed % of free Power corresponding to slabs of years
was specified.
Few other States including Sikkim, Meghalaya had allotted projects as per their power policies.
Recent Trends on Bidding: Bidding Parameters
Parameter Arunachal
Pradesh (AP)
Himachal Pradesh
(HP)
Turn-over
INR 500 Cr.
Should be Adequate
Earlier
Experience
500 MW Installed by the
Bidder
Not Required
Local
Recruitment
50% Skilled & Managerial & 100% of Total Staff (Min.
100% Unskilled
has to be 70%)
Local Area
Development
1 Paisa/Unit of Electricity
Sold
1.5% of Project Capital
Cost
State Govt.
Clearances
To be Given by State Under
its Purview
Supposed to be Taken by
Bidder
Risk Sharing Matrix
Premium Based Bidding
Risk
Mode of Power
Sale
Developer
Beneficiary/i
es
ERC determined/Case-1
Competitive Bidding
Tariff Based Bidding
Developer
Beneficiar
/ies
Case-2 Bidding
Hydrological Risk
√
√
X
√
Geological Risk
√
√
√
X
Seismological
Risk
√
X
√
X
Force Majeure
Risk
√
√
√
√
Completion Risks
√
X
√
X
Cost overrun
Risks
√
X
√
X
Risk Sharing Matrix
Premium Based Bidding
Tariff Based Bidding
Risk
Developer
Beneficiary/i
es
Developer
Beneficiar/
ies
Policy Risks
√
√
√
X
Technological
Risks
√
X
√
X
Market Risk
√
X
√
√
Financial Risks
√
X
√
X
Transmission Risks
√
√
X
√
Political Risks
√
X
√
X
Revenue Risks*
√
√
X
√
*Irrevocable Letter of Credit by the SEB in favor of the IPP and a designated prime area
escrow account.
Bidding for Hydro Power Projects: Some Common Experiences
Major Issues
1. The uncertainty about mode and cost of power transmission in hilly areas is high.
(Modified) Premium based bidding effectively burdens on the project cost. The core
objective of providing power at most economic price gets defeated; also makes
projects less financeable.
2. Information available is inadequate: Developers are provided with a PFR (and
sometimes even PFR may not be available. DPR quality Survey and investigation are
completed much later .
3. Construction of large hydro projects gets delayed mainly due to delay in land
acquisition and lack of law and order in remote areas. State Govt., before bidding
assure only site and not land availability.
4. Developers experience Lack of coordination between various government departments
and lack of uniform policy.
Suggestions
1. PPP model is appropriate (but freeze it upfront) in most situations. Government’s
equity in the project has advantages:
a. Easy grant of various State clearances.
b. Government earn additional revenue as dividends with part / no investment, as
developer may arrange part-financing of Government’s equity.
Outline
• Competitive Bidding for Infrastructure Projects – Rationale
• Frameworks deployed in India – a Chronology
• Outcomes Achieved
• Fit with Best Practices and Principles
• Possible Futures
Benchmarking the Bid Processes; a Framework
Preparation of the Invitation
Process
1.Is adequate information for
making the bid made available
to all participants?
2. If information available is
limited, has the process been
broken into stages? Sequenced
correctly?
Risk and Cost of acquiring the
Information
1. Is the stage at which selected
bidder
understands
the
complete risks of the project
reasonable;
a. In terms of timeline?
b. In terms of capital put at risk?
Qualification of Bidders
1. Ensuring sufficient competition
Evaluation Criteria
What is the focus;
versus
2. Not evaluating technical,
financial
and
experience
parameters in detail
(and will potential upsides be able to keep the
project attractive)
End-user benefit?
versus
Near-term benefits to the State?
How each of the Processes Measure Up
1.Preparation of the Invitation Process: Most modified
Premium Based Bid Processes score low on this, only Case-2
amounts to a high level of preparation – but implies a greater
role and responsibility for procurer, apart from longer
timeline.
2.Risk and Cost of acquiring the information: Modified
Premium Based Bid Processes expose the developer to a
higher risk level, Case-2 mitigates this. However, acquiring the
information could be costlier.
3.Qualification of bidders: all processes provide flexibility,
however is the information sought (particularly on technical
capability) adequate?
4.Evaluation Criteria: only Case -2 focuses on end-user benefit.
Premium based methods focus on near-term benefit
(revenue) to the State.
Outline
• Competitive Bidding for Infrastructure Projects – Rationale
• Frameworks deployed in India – a Chronology
• Outcomes Achieved
• Fit with Best Practices and Principles
• Possible Futures
Will we get what we set out to do?
1.Does the process adopted differentiate between a “Winner’s
Pay-Off” and a “Winner’s Curse” situation? Should the
process attract bids for project development or encourage
speculation and irrational behavior?
2. Does a financial model and its sensitivities capture all the
uncertainties added by a lack of execution experience?
(should the capability check not be more comprehensive?)
A Common Anthem;
“we are not looking at only this project. There are several
options that we can play with.”
“we will financially close the project in no time”
“we can sell the entire output on merchant basis”
Some Reality Checks
1.The Complexity of hydro power projects takes more than just
mobilisation of resources. The quality of execution teams has
been noted to be a Key Success Factor.
2. How deep is the merchant power opportunity?
- Even exchange traded power touches the range of Rs.10/kWh
- Remember – it’s a miniscule proportion of even the short
term market (which is itself only about 3% of total generation)
- Pricing in the exchange can vary from Rs.8 plus for an hour
today to `no deal’ during the same hour tomorrow
….and HEPs produce a fair part of output during monsoons.
3. And Finally…good times for the capital markets do not last
forever, but show a cyclic trend.
In summary…we may be staring at a situation of winners and
losers..well after the bid processes have been concluded
Heard in passing…..
“Hydro Project development (and
hence bidding) is an art.”
“Indeed it is……if you keep aside all
semblance of the commercial logic”
Take-aways for us….
1.Bid processes (or the complete absence of them) has
to be grounded in objectives of the State / Country’s
power development.
2. The objectives in turn flow from the specifics of the
community served.
3. Replicating a model adopted elsewhere,
particularly if done selectively…... a possible recipe
for disaster.
Thank You
Visit us at www.athenaenergy.in
Bidding for Hydro Power Projects
Premium Based Bidding
1. Under this process States invite bids for a particular project/site with the bidding
parameters Free Power, Upfront Premium or State Equity.
2. PFR if available for of the bidding project/site, shall be provided to bidders.
3. The project site is transferred to the bidder who quote maximum numbers on for
above parameters.
4. Free power may be 12%. Government may sell the additional free power after its
own consumption and earn revenues for 40 years.
5. By charging upfront premium link to the project capacity, implementation of the
project by the developer can be ensured.
6. Government’s equity in the JV may be 26%. The proposed JV / PPP
arrangement has the following inherent benefits.
 Presence of Government in the JVC is likely to expedite the grant of various
statutory and other clearances.
 Government would not only earn additional revenue as dividends from its equity.
 The private developer may arrange for financing of the Government’s equity.
Thus, while there would be no upfront investment by the Government, it would
still reap the benefits accruable to the shareholders.
Hydro Power Development in Nepal
1.Study/survey license issued within 30 days, period of such
license up to 5 years.
2.Before end of study license period, generation license to be
applied for and issued within 120 days.
3.Period of such license up to 35 years (30 years for export
orients projects).
4.Government land provided on lease.
Premium Based Bidding for Hydro Power Projects
1. States invite bids for a particular project/site with the bidding
parameters Free Power, Upfront Premium or State Equity.
2. PFR, if available for the project, to be provided to bidders. The
site is transferred to the bidder who quote maximum numbers
on for above parameters.
3. Free power provisions. Government may sell the additional
free power after its own consumption and earn revenues for
40 years. By charging upfront premium, implementation of the
project by the developer can be ensured.
4. Government’s equity in the JV may be 26%. The proposed JV
/ PPP arrangement has the following inherent benefits.
 Presence of Government in the JVC is likely to expedite the
grant of various statutory and other clearances.
 Government to earn additional revenue as dividends from its
equity. The private developer may arrange for financing of the
Government’s equity.