Is ‘composite’ bidding good for market?

Maharashtra government’s unique award for supply of 1,600 MW coal-fired thermal power together with 5,000 MW solar power (RE) – 6,600 MW in all – to Adani Power on September 15, 2024 marks a paradigm shift in competitive bidding.

A first for India, it is called ‘composite’ bidding – a ‘deviation’ from the ‘standard bidding documents for long term procurement,’ which allows bids only for single-source energy – either thermal or solar (RE). But in the present case, it was a twin-source energy bid.

Meanwhile, Rajasthan has also floated a similar ‘composite’ bid (on May 6, 2024) – for supply of 3,200 MW coal and 8,000 MW solar power (11,200 MW). It may announce the result any day.

Notice, in both the cases the bidder must be a big player in both thermal and solar power to qualify: Will ‘composite’ bidding foster market competition or kill it by limiting bidders? Will it lead to fair pricing or predatory pricing?

Before answering it, a brief backgrounder to the Maharashtra bid.

Maharashtra’s ‘composite’ bid

Adani Power has won the bid to supply 6,600 MW power for 25 years at ‘weighted average tariff’ of ₹4.08 per unit – after beating JSW Energy and Torrent Power in the fray.

The process began with ‘resource adequacy planning’ that the Centre had directed on June 28, 2023 to all states by way of ‘Guidelines for Resource Adequacy Planning Framework for India.’ These guidelines are meant for power distribution companies to ensure ‘adequate power generation’ and ‘reliable supply.’

The Maharashtra State Electricity Distribution Company Ltd (MSEDCL) floated the ‘composite’ bid on March 13, 2024 after such a planning but without prior sanctions – mandatory for any ‘deviation.’ It applied for post facto clearance from the Maharashtra Electricity Regulatory Commission (MERC) three months later on June 13, 2024.

On July 12, 2024, the MERC gave a conditional clearance (‘partly allowed’)– (a) permitted ‘composite’ bidding (b) allowed ‘deviation’ from the ‘standard’ bidding process for thermal power but (c) directed the MSEDCL to seek the Centre’s permission for solar (not in the MERC’s jurisdiction).

While doing this, the Commission condoned the violation of ‘mandatory’ requirements of prior permission for deviations (in the ‘Guidelines/SBDs’) even as it rejected the MSEDCL’s argument: ‘Avoid loss of time’ since the model code of conduct (MCC) for the 2024 Lok Sabha elections was to kick in three days later – from March 16, 2024. The Commission said, even if the argument was accepted, there was ‘no justification for filing this Petition after 3 months’ and MCC ‘did not stop MSEDCL from filing the petitions.’

The MSEDCL’s arguments for adopting this ‘innovative approach’ (composite bid) were (other than ‘boost resource adequacy and ensure stable power to its consumer’):

1. Solar power is available only during 0800-1800 hours (daylight) and combining the bid with thermal power is ‘a viable proposition’ to bridge the supply gap during the rest.

2. ‘Weighted average tariff’ (combining thermal with solar) would ‘lower effective tariff of power’.

3. Consumers ‘do not get any additional advantage’ in separate bids.

4. ‘Effective way to achieve net zero’ – or ‘mitigate carbon footprints’ for both the MSEDCL and supplier.

Maharashtra is not new to solar power (‘contracted capacity’ for solar power was 8,724 MW on April 30, 2024) and the gap can be filled without a ‘composite’ bid, like in the past.

It may be noted that the Adani Power is building a green-field in Uttar Pradesh’s Mirzapur (1,600 MW), expanding Singrauli plant in Madhya Pradesh (1,600 MW) and seeking a link to domestic power grid for its Godda plant in Jharkhand (Ultra Super Critical Thermal Power Plant of 1,600 MW) as this was earlier exclusively meant for Bangladesh and is now at risk (both due to regime change and review).

Besides, the Centre has queered the pitch for calculating ‘net zero’ by declaring large hydel projects (25 MW or more) as ‘renewable energy source’ and less than 25 MW as ‘renewable energy on March 7, 2019. Hydel dams are known producers of carbon dioxide and methane but on December 23, 2023, the Ministry of New and Renewable Energy (MNRE) clubbed together ‘solar energy, wind energy and green hydrogen’ as renewable energy – a code for green energy or zero emission.

Problem is lack of transmission, not generation

One needs a historical perspective for better understanding of the goings on.

Recall India’s experiment with ‘fast-track’ power projects of the 1990s – billed as power sector reform – which paved the way for private players in the power sector. Maharashtra was one of the states seeking more power plants. Hence, came the gas-fired Dabhol Power Project (DPP) in the 1990s – as part of eight fast-track mega projects. The Narasimha Rao government had decided to raise power generation urgently (hence ‘fast-track’ projects).

The lie would be exposed later when the Vajpayee government found India was power surplus!

Suresh Prabhu, then Power Minister, shifted the reform thrust to power distribution around 2001 – finding that lack of infrastructure to transmit and distribute power (also high T&D loss) was the main cause of poor power supply.

Two Parliamentary Standing Committee reports had said so – one attached to the Coal Ministry in 2001 and the other to the Power Ministry in 2002. Both said India was power surplus but lacked grid connectivity to distribute (evacuation). For decades until then, many public sector plants had remained idle. For example, the Damodar Valley Corporation (hydel) alone had surplus and idle capacity of 6,000 MW in 2001.

The MSEDCL is a result of this shift in power policy towards transmission/distribution.

No wonder what happened to the DPP.

In 2001, when it was up and running, Maharashtra refused to buy power from the DPP – arguing that (a) DPP power was too costly but more importantly, (b) Maharashtra State Electricity Board (MSEB) had ‘idle’ capacity (excess power) of 500 MW!

Enron went bust in 2001, taking down with it the auditor Andersen, then one of the Big 5, to bankruptcy in 2002 – both were accused of corporate frauds. The DPP collapsed too and had to be bailed out by the Centre in 2005 to become a NTPC subsidiary, Ratnagiri Gas and Power Private Ltd (RGPPL). Last heard, the RGPPL was shut down in 2022 due to multiple factors (gas shortages, restructurings and others).

The problem endures. India is power surplus even now – and in the interim.

For example, in 2017, many power plants were shut down because of excess capacity. The ‘Energy Statistics India’ reports of 2021 and 2024 show the gap between ‘net availability’ of electricity and ‘sold to ultimate consumers’ keeps rising in absolute numbers since FY11, though in percentage terms, this gap (called T&D loss) has fallen from 24% in FY11 to 18% in FY23 (P).

Note, despite power distribution reforms since 2001, the T&D loss has reduced by a mere six percentage points.

Worse, the problem has traveled to the renewable sector.

- On February 2, 2024, the CEA’s “Draft Distribution Perspective Plan 2030 – Request for Stakeholder Comments” said, “a significant amount of generation capacity including RE capacity” had transformed India into “power surplus”. But it also said, “distribution sector is facing various challenges”, including “unreliable power supply” – resulting in “poor financial health of Discoms and distribution companies”, disabling them from investing in “infrastructure augmentation.” It said, the power distribution sector needed investment of ₹4.28 lakh crore by 2027 but the DISCOMS had ₹1.98 lakh – that is, DISCOMs need additional funds of ₹2.3 lakh crore by 2027. Nothing is said about idle capacity.

- On July 18, 2024, a business daily said 32 transmission projects had already or likely to be delayed.

- On September 17, 2024, Prahlad Joshi, MNRE Minister said, at the 4th RE-Invest conference, that his ministry faced two challenges: (a) evacuation (transmission and distribution) and (b) financing. The latter was for both setting up new RE plants (to increase the current capacity of 200 GW to 700 GW by 2030 – upward revision from 500 GW) and evacuation. The evacuation problem is due to both lack of buyers and lack of infrastructure. He also pointed out that some states had over-achieved RE generation targets.

- September 2024 also saw multiple news reports saying “grid access delays” had hit transmission and growth of RE and evacuation systems for most RE projects might not be ready until 2029.

India should then direct private investments to transmission and distribution infrastructure instead of coal-fired plants.

Will composite bid help competition or lower prices?

Note, though Maharashtra’s bid is “composite”, it entails separate PPAs for thermal and solar power – even though the supplier is one.

Adani Power offers “weighted average tariff” of ₹4.08 per unit – in which solar power is offered at a fixed rate of ₹2.70 per unit. The MSEDCL has said that this was lower than its “average” procurement cost (from all sources) of ₹4.7 per unit in 2023.

But the CEA’s “National Electricity Plan (Volume I)”, released in March 2023 says: “India has witnessed a steep decline in solar tariffs from ₹6.47/ kWh in 2013-14 to ₹1.99/kWh in December 2020.”

Secondly, the Commission approved the MSEDCL’s provision that coal-power will be linked to coal prices throughout the 25 years. The order said, “the cost of coal fully pass through”, helping “full transmission of coal cost in the tariff” but bidders “will not be able to have any mark-up in the fuel charge”.

This means, the price of thermal power will change – as per coal price.

So, no assertions about “lower effective tariff” can be made.

The assertion that consumers get no benefit from single-source bidding is contrary to facts (refer to the CEA’s March 2023 report mentioned earlier). Had that not been the case, competitive bidding would have disappeared from India and abroad. 

This brings to fore the last question: Will “composite” bid foster market competition or curtail it?

Given that Maharashtra’s composite bid limits applicants to only those who are big thermal and solar power suppliers, it would remove smaller and sector-specific players in the market. This will increase market concentration – which is already high in India (and abroad) and has been found to be the cause of predatory pricing and sellers’ inflation in the recent past.