HYDRO POWER PROJECTS:

RECENT TRENDS IN
BIDDING
Presented
by
Rajiv Malhotra
COO

Power Summit
2008 Athena Energy Ventures Private Limit
Kathmandu An initiative of PTC, IDFC and Athena
 Outline

Competitive Bidding for Infrastructure Projects Ratio

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 States 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
 Outline

Competitive Bidding for Infrastructure Projects Ratio

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.
 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
 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
 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
Arunachal (2007); modified Premium Based
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
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
 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
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
uniformadditional 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
 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 (MoAs) 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
 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 CEAs 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
 Outline

Competitive Bidding for Infrastructure Projects Ratio

Frameworks deployed in India a Chronology

Outcomes Achieved

Fit with Best Practices and Principles

Possible Futures
 Recent Trends on Bidding: Bidding
Parameters
Parameter Arunachal Himachal Pradesh
Pradesh (AP) (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%...12/12-
30/30-40 Years
Upfront Min. INR 0.15 MM/MW for INR 2 MM/MW (Fixed)
Premium 500 MW
State Govt. To be Offered by the Govt. Has Rights upto 49%
Equity Developer 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 Himachal Pradesh

Pradesh (AP) (HP)
Turn-over INR 500 Cr. Should be Adequate
Earlier 500 MW Installed by the Not Required
Experience Bidder
Local 50% Skilled & Managerial & 100% of Total Staff (Min.
Recruitment 100% Unskilled has to be 70%)
Local Area 1 Paisa/Unit of Electricity 1.5% of Project Capital
Development Sold Cost
State Govt. To be Given by State Under Supposed to be Taken by
Clearances its Purview Bidder
 Risk Sharing Matrix
Premium Based Tariff Based
Bidding Bidding
Risk Developer Beneficiar Develope Benefici
y/ies r ar/ies
Mode of ERC determined/Case- Case-2 Bidding
Power Sale 1 Competitive Bidding
Hydrological X
Risk
Geological X
Risk
Seismological X X
Risk
Force
Majeure Risk
Completion X X
 Risk Sharing Matrix

Premium Based Tariff Based

Bidding Bidding
Risk Developer Beneficiar Develope Beneficia
y/ies r r/ies
Policy Risks X
Technological X X
Risks
Market Risk X
Financial Risks X X
Transmission X
Risks
Political Risks X X
RevenueLetter of Credit
*Irrevocable by the SEB in favor of the IPP
X and a designated

primeRisks*
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. Governments 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 Governments equity.
 Outline

Competitive Bidding for Infrastructure Projects Ratio

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 Risk and Cost of

Invitation Process acquiring the
1.Is adequate information Information
for making the bid made 1.Is the stage at which
available to all selected bidder
participants? understands the complete
2.If information available is risks of the project
limited, has the process reasonable;
been broken into stages? a.In terms of timeline?
Sequenced correctly? b.In terms of capital put at
Qualification of Bidders risk?
Evaluation Criteria
(and will potential upsides be able to keep the
1.Ensuring sufficient What is the focus;
project attractive)
competition
End-user benefit?
versus
versus
2.Not evaluating technical,
financial and experience Near-term benefits to the
parameters in detail 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
 Outline

Competitive Bidding for Infrastructure Projects Ratio

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 Winners Pay-Off and a Winners 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.
 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 its 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
 Heard in passing..

Hydro Project development

(and hence bidding) is an
art.

Indeed it isif 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 / Countrys 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. Governments 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 Governments 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. Governments 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
Governments equity.