EGoM clears critical electricity bid documents
Given that almost all of the 40,000 MW or thereabouts of fresh electricity generation capacity created over the past 5 years is embroiled in one dispute or the other, mostly over the cost of fuel, the government did well to find a solution to the problem. The solution was to move away from the current system where investors guarantee a fixed price for the fuel over a period of 20-30 years to a system where this fuel price is passed on to the buyer—the state electricity board (SEB) for instance—which passes this on to its customers in much the same way the government is passing on the increase in global petrol prices to consumers. This, you would have thought, was a pretty straight forward process, considering it allowed power producers to pass on unreasonable risks to consumers. It took years, however, because several power producers who, though they were stuck with unviable projects due to fuels costs escalating, were confident they would be able to simply renegotiate their tariffs over a period of time. This was partly because, if a project got stuck for one reason or another, there was no specific provision that allowed bankers who are the biggest lenders to projects to remove one promoter and bring in another—this is critical if projects are to be kept running.
The new Case 2 bidding norms—Case 1 refers to situations where the government does not bundle a fuel supply source and land along with the project—took care of these issues, and also contained certain safeguards to ensure power producers were incentivised to improve operational efficiencies. This, however, ran into problems since power producers were not comfortable with the provision that, in case a project failed, the land and the coal would revert to the state electricity board/buyer—this is despite the fact that, when this happens, the buyer is to compensate the power producer for the capital expenditure/debt on the project. In order to give comfort to banks, the proposal was that the land used for the power plant would be mortgaged to them by the buyer/SEB—in the earlier system, the land was mortgaged by the producer. Power producers also objected to the idea of an independent engineer who was to oversee the project’s quality parameters—this is vital since, in case the project is terminated, and reverts to the buyer, the buyer needs to be assured the plant is in good condition. Indeed, a similar concept is used without a problem in the roadways sector where one firm builds out a road and another acts as an independent supervisor. While the EGoM, which was tasked with resolving the criticisms raised by power producers, deferred a decision the last time around, it cleared the bidding document yesterday.