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CBG Framework

The Electricity Act 2003, in its preamble lays emphasis on promoting competition. For procurement of power by distribution licensees through competitive bidding, Section 63 of the Act, has been provided whereby the Regulatory Commission adopts tariff discovered through bidding, if the due process as per the Competitive Bidding Guidelines (CBG) notified by the Government of India has been followed. CBG framework was notified to make power procurement process by the utilities more fair and transparent and for this purpose standard templates for bidding documents such as RFQ, RFP and PPA were prescribed.

With the notification of CBG private sector participation in the power generation segment got the much needed fillip as it provided a strong platform for investor to conduct business. The outcome has been considerably low tariff discoveries vis-a-vis the traditional cost plus regime. Lower tariff discoveries surely augur well for the end consumer.

The CBG framework applies to long-term procurement i.e. above 7 years and for medium term procurement i.e. exceeding one year but less than 7 years. The guidelines cover two possible cases:

CASE 1 : where the location, technology and fuel is not specified by the procurer (Distribution Company or its agent).

CASE 2 : where the procurement is for hydro-power, load centre projects or other location specific projects with specific fuel allocation such as captive mines, which the procurer intends to set up under tariff based bidding process. Two or more procurers can jointly procure through an authorized agent or through a SPV in case of two projects.

A multipart tariff structure featuring separate capacity and energy components of tariff forms the basis for bidding. For medium term procurement the procurer may call for bids on a single part tariff basis. In case of long term procurement with specific fuel allocation (Case 2), the procurer may invite bids on the basis of capacity charge and net quoted heat rate.

Ever since notification of CBG framework, considerable capacities have come-up under Case-1 and Case-2, primarily by Private Sector developers, inasmuch as 14,819 MW capacity has been awarded under Case -1 and 26,240MW under Case -2 till the end of XI Plan. For Public Sector Projects, the guidelines provided that tariff of all new generation projects should be decided on the competitive bidding basis after a period of 5 years from 6.1.2006 i.e. the date of Tariff Policy notification.

While encouraging response from the developers has validated the utility of a transparent bid process based on standard documentation, several issues related to fuel security and payment risks have emerged with unravelling of the framework. These issues are being addressed separately by the Government of India. Factoring in the learning’s during 5 – 6 years of CBG framework existence, into the revised policy, is indeed crucial as ~50-60% of the capacity targeted to be added in the XII plan period is likely to come from private sector. Addressing the inadequacies of the present CBG framework, therefore, holds the key to achieving targeted capacity addition during XII Plan and onwards.

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