SUMMER INTERNSHIP REPORT

Scenario Analysis of Coal Based Thermal Power Plant under Case 1 and Case 2 Competitive Bidding Frameworks

Under the Guidance of

Mr. N. R. Haldar, Deputy Director, CAMPS, NPTI

Mr. Nilay Dave, Joint General Manager, Essar Power Ltd

At

Essar Power Limited, Hazira

Submitted By

AGAM KUMAR

Roll No.-1120812186

MBA (POWER MANAGEMENT)

(Under Ministry of Power, Gov. of India)

Affiliated to

MAHARSHI DAYANAND UNIVERSATY, ROHTK

AUGUST 2012

CHAPTER 1

INTRODUCTION, PROBLEM STATEMENT, SCOPE & OBJECTIVES

1.1. INTRODUCTION

India is one of the fastest growing economies in the world and growth of power sector is the key to the economic development. Growth in production of electricity has led to its extensive use in all the sectors of economy in the successive five years plans. Over the years the installed capacity of Power Plants (Utilities) has increased to about 205340.26 MW (as on 30-06-2012) from a meager 1713 MW in 1950. Similarly, the electricity generation has increased from about 5.1 Billion kWh to 811 Billion kWh in 2010-11. The per capita consumption of electricity in the country also increased from 15 kWh in 1950 to about 814 kWh in 2011. Its power consumption is increasing at a very high rate due to fast industrialization, urbanization and population growth.

Figure1.1:Annual Energy Generation and Growth Rate during 2001-2011

Source: CEA

The per capita electricity consumption in India is 24% of the world’s average and 35% & 28% respectively that of China and Brazil. The Government of India has targetedto raise the availability of electricity to 1000 units per capitaby 2012 in its National Electricity Policy(NEP).

Figure1.2: per Capita Electricity Consumption in India

Source: CEA

However, there exist several challenges that need to be addressed to achieve the objectives of the National Electricity Policy. One of challenge is to manage the resources to meet the demand. India witnessed a peak power shortage of 10.3% and energy shortage of 8.5% during the year 2010-2011.

Figure1.3: Energy Deficit and Peak Deficit during 2010-2011

Source: CEA

The other important challenge is adequate and timely addition of capacity. During 11th plan, GOI had set target to add 78700 MW of additional capacity but it achieved only 41000 MW of revised target of 63000 MW.

Figure1.4: Percentage of Target Achieved in the previous plan period

Source: CEA

Taking note of the above issues, the Electricity Act 2003 emphasized on competitive bidding framework to encourage private participation in generation segment. As per Section 63 of the Act, regulator has to adopt the tariff determined through competitive bidding according to the guidelines issued by the Government of India under the Competitive Bidding Guidelines, 2005.

The Competitive Bidding Guidelines (CBG) was issued in Jan 2005 to enhance transparency and fairness in procurement of power by utilities. Ever since the introduction of CBG about 42605 MW of capacity have been awarded under Case 1 and Case 2 bidding.

While an encouraging response from the developers has validated the utility of a transparent bid process based on standard documentation, several issues have emerged that need to be addressed. As a consequence of these issues beyond control of developers and investors, private sector interest is showing signs of fading. The CBG is also necessary because 50% - 60% of total capacity addition during 12th plan is to be done by the private sector and failure to address the issues seriously put at risk the capacity addition prospects in the country.

In order to analyze the competitive bidding framework, it is necessary to understand the key objectives of the framework, the bidding process and the governing policies laid down in the Competitive Bidding Guidelines (CBG).

1.2. PROBLEM STATEMENT

For the past few years both the Central Gov. and the State Governments have adopted the process of tariff based competitive bidding for allotting thermal power plants. Butthere are many problems associated with this process that are demoralizing the developers. These problems need urgent attention of the policy makers and the problems are:

  • Shortage of fuel(coal & gas);
  • Changes in international laws;
  • Environment and forest clearance;
  • Land acquisition problem;
  • Delay in placement of orders – mainly Civil Works and Balance of Plants(BOPs);
  • Inadequate deployment of construction machinery;
  • Contractual dispute between project developer and contractor and their sub vendors/ sub-contractors;
  • Shortage of skilled manpower for erection and commissioning;
  • Inadequate infrastructure facilities like reliable construction power supply and constraints in transportation of heavy equipment;
  • Similar bid document for both gas and coal based power plants.

1.3. OBJECTIVE OF THE STUDY

The objectives of this study are:

  • To analyze the present scenario of competitive bidding;
  • Relevance of the bidding process and standard bid document (SBD) in present scenario;
  • To analyze the tariff resulted through Case 1 & Case 2 competitive bidding frameworks;
  • To find out the barriers in smooth implementation of the competitive bidding frameworks;
  • To suggest possible and feasible remedial solution of the problems;
  • To find out various cost associated with tariff calculation through financial modeling.

1.4. SCOPE OF THE STUDY

The study analysis the growing demand of the power sector with special impetus on the mechanisms followed for the allotment of power plants. The project also takes into account the power plants allotted to either private players or public sector players after tariff based competitive bidding mechanism replaced the MOU based mechanism and the tariff resulted under the mechanism. Here financial modeling of 2*660 MW coal based power plant, based on supercritical technology has been done. The project also mentions several suggestions and recommendations that present a true roadmap for the future of the competitive bidding mechanism and the way forward.

1.5. ORGANIZATIONAL PROFILE

1.5.1. ABOUT THE ORGANIZATION

The Essar Group is a global conglomerate and a leading player in the sectors of Steel, Energy (Oil & Gas and Power), Infrastructure (Ports, Projects & Concessions) and Services (Shipping, Telecom, Realty and Business Process Outsourcing). With operations in more than 25 countries across five continents, the group employs 75,000 people and has revenues of US$ 27 billion.

Essar began as a construction company in 1969 and diversified into manufacturing, services and retail. Over the last decade, it has grown through strategic global acquisitions and partnerships, or through Greenfield and Brownfield development projects, capturing new markets and discovering new raw material sources.

The Essar Group is widely regarded as a responsible and conscientious global employer. It has experience in managing businesses in different geographies with a culturally diverse workforce. The Group's people strategy is focused on promoting a learning culture that continually enhances the professional skills of its employees.

The combined assets of Essar Power and Essar Oil constitute Essar Energy.

1.5.2. VISION OF THE ORGANIZATION

“To be respected as global entrepreneur through the power of Positive Actions.”

People- Nurture our people with care.

Progress- Responsive with new opportunities

Power- Synergy through global presence

Passion- Winning spirit in everything we do

1.5.3. MISSION

Be responsive to Customer needs, deliver optimal solutions and value added services.

To achieve excellence in project execution, quality, reliability, safety, and operational efficiency.

Ensure sustainable growth and professional excellence using state-of-the-art technology, process driven approach, eco-friendly solutions and IT enabled tools.

Foster a culture of mutual trust and employee empowerment to provide a conducive atmosphere to work.

Adhere to fair, transparent and ethical practices in interactions with all shareholders and be a good corporate citizen.

Be flexible and agile to continually adapt to changing business environment.

To improve the lives of local community in all our projects.

To be a partner in nation building and contribute towards the India’s economic growth.

1.5.4. PORTFOLIO OF BUSINESSES AND SERVICES:

Steel Business

Oil & Gas Business

Power Business

BPO & Telecom Services Business

Shipping Business

Port Business

Projects Business

1.5.5. ABOUT ESSAR POWER LIMITED

Essar Power is India’s leading power producers with a 14-year operating track record. The company has five operational power plants in India and one operational power plant in Algoma, Canada, with a total installed generation capacity of 2,800 MW. The company plans to have 4,510 MW of operating capacity by the end of March 2013 and 9,670 MW by the end of 2014.

1.5.6. ACHIEVEMENTS OF THE CONPANY

India’s 1st new generation, independent power plant in Hazira.

Growing portfolio of gas, coal and liquid fuel-based power plants

Owns about 800 million tons of coal reserves and resources in blocks spread across four continents and One of the lowest cost power producers

Expanding in the transmission sector; first private power company to get a transmission license

1.5.7. PROJECTS UNDER CURRENT OPERATION

Essar PowerBhander Power, Hazira, Gujarat- 515 MW & 500 MW

Vadinar PowerVadinar P1, Gujarat- 120 MW &380 MW

Salaya 1, Gujarat- 1,200 MW

Algoma Power Plant, Canada- 85 MW

1.5.8. PROJECTS UNDER CONSTRUCTION

Mahan 1, MP- 1,200 MW

Vadinar P2Hazira II, Gujarat- 510 MW & 270 MW

Para dipNavabharat I, Orissa- 120 MW & 1050 MW

Tori I & II, Jharkhand- 1,200 MW & 600 MW

Salaya II & III, Gujarat- 1,320 MW & 600 MW

1.5.9. BEYOND BUSINESS

Essar Foundation: Essar Foundation is leading CSR efforts across Essar business and locations in India. The thrust of the efforts is education, entrepreneurship, health and environment through institutional partnerships and employees volunteering programs.

Education: Community outreach initiatives, Essar International School, AVID’s school of continuous learning

Entrepreneurship: Tie-ups with premier educational institutions, Sponsoring entrepreneurship events, Knowledge sharing expert sessions.

Environment: HSE practice on par with global standard, Climate change initiatives, Model village concept.

CHAPTER 2

LITERATURE REVIEW, POLICY AND RESEARCH METHODOLOGY

2.1.LITERATURE REVIEW

Richard P. Rozek et al(1989):A number of states as well as the Federal Energy Regulatory Commission have been considering whether traditional regulatory regimes in electricity and natural gas markets should be replaced with competitive bidding systems. This shift is designed to yield a more efficient allocation of energy resources within the existing legal framework The paper examines both the theoretical basis and empirical evidence on bidding processes in light of the characteristics of energy markets, especially electricity markets. It then discusses the extent to which one can draw policy conclusions about designing specific bidding processes for these markets. It concludes that given the underlying complexity of the products involved, the optimal system for procuring power should include a mix of bidding negotiation and utility construction. There exists the potential for gaming such as strategic bidding by participants (power suppliers and large consumers) in a deregulated power market, which is more an oligopoly than alaissez-fairemarket. Each participant can increase his or her own profit through strategic bidding but this has a negative effect on maximizing social welfare.A method to build bidding strategies for both power suppliers and large consumers in a pool co-type electricity market is presented in this paper. It is assumed that each supplier/large consumer bids a linear supply/demand function, and the system is dispatched to maximize social welfare. Each supplier/large consumer chooses the coefficients in the linear supply/demand function to maximize benefits, subject to expectations about how rival participants will bid. The problem is formulated as a stochastic optimization problem, and solved by a Monte Carlo approach. A numerical example with six suppliers and two large consumers serves to illustrate the essential features of the method.

Michael H. Rothkopfet al (1994): In analyzing bidding, modeling matters. Thepaper is critical analysis of the models available to aid competitive bidding decision making- bidding strategy and auction design-in real transactions. After an introductory overview, this paper describes the contexts in which auctions arise, reviews the mainstream theory of single, isolated auctions and discusses the important work involved in enrichment of this theory. In doing so, it indicates results that have been obtained and the sort of changes in analytical approach that are needed to tackle other critical enrichments, the paper summarizes briefly what is known about the direct use of models by bidders and auction designers. A general theme of this paper is that enriched models are needed to bring bidding theory closer to direct applicability in decision making. Bidding is important. The volume of economic transactions conducted by competitive bidding gives importance booth to studyof auctions as part of basic research in economics and management science, and to the evaluation of the assistance bidding practitioners can get from the advances made in auction theory. Both concerns gain further importance from the role of competitive bidding as per archetypal formalization of competitive exchange. Those interested in the general topic of decision making in the face of both competition and uncertainty have found auction and bidding a fruitful area of study. Auctions have the added structure imposed by formal rules of exchange and price discrimination, and auction yield data. Hence, results for general economic models have been preceded by qualitatively similar results developed for the special case of auctions.

G. Strbac et al (1996): The paper discusses the importance of simultaneous plant production and demand reduction scheduling which is required for the establishment of a full electricity market where demand-side has opportunity to compete withgenerators, as is the case with the England & Wales Pool’s demand-side bidding (DSB) scheme. It also emphasizes that demand cannot be generally treated as negative generation because of the ability of demand to redistribute itself in response to price based load management activities. In that sense, an adequate scheduling methodology of available resources (from supp1) - and demand-sides) is needed to facilitate the new market. However, traditional formulations of the plant scheduling problem are not valid when load reduction is available, as gross demand is not known in advance. For that purpose a composite model for optimal generation and demand reduction scheduling is presented in the paper. It is shown that this model can be used for a comprehensive evaluation of possible scenariosor the implementation of demand-side biddinginto the electricity market and the assessment of the influence of DSB on total production costs, system marginal price (SMP) profile, capacity element payments and benefit allocation between producers and consumers.In this paper a framework is developed for a comprehensive evaluation of possible scenarios for the implementation of DSB into the electricity market and the assessment of the influence of DSB on total production costs, SMP profile, capacity element payments and benefit allocation between producers and consumers. The proposed composite model is capable of dealing with supply and demand-side bidders simultaneously. For the practical implementation of the full market, a suitable philosophy has to be developed. The presence of large differences between SMP and load reduction marginal benefits has to be adequately addressed, requiring that both short-term and long-term implications should be investigated further.

Ahmuel s. orenet al (1997): The main thesis of this paper is that passive transmission rights such as transmission congestion contract (TCC) that are compensated ex-post base on nodal prices resulting from optimal dispatch by an Independent System Operator (ISO) will be presented by the strategic bidding of the generators. Thus, even when generation is competitive, rational expectation of congestion will induce implicit collusion enabling generators to raise the bid above marginal costs and capture the congestion rents, leaving the TCCs uncompensated. These conclusions are based on a Cornet model of competition across congested transmission links where an ISO dispatches generators optimally based on bid prices. We characterize the Cornet equilibrium in congested electricity networks with two and three nodes. We show that absent active transmission rights trading, the resulting equilibrium may be at an inefficient dispatch and congestion rents will be captured by the generators. We also demonstrate how active trading of transmission rights in parallel with a competitive energy market can prevent the price distortion and inefficient dispatch associated with passive transmission rights.

George Gross et al (2000): This paper reports on the development of a comprehensive framework for the analysis and formulation of bidsin competitive electricity markets. Competing entities submit offers of power and energy to meet the next day’s load. We use the England and Wales Power Pool as the basis for the development of a very general competitive power pool (CPP) framework. The framework provides the basis for solving the CPP dispatcher problem and for specifying the optimal bidding strategies. The CPP dispatcher selects the winning bids for the right to serve loadeach period of the scheduling horizon. The dispatcher must commit sufficient generation to meet the forecasted load and reserve requirements throughout the scheduling horizon. All the unique constraints under which electrical generators operate including start-up and shut-down time restrictions, reserve requirements and unit output limits must be taken into account. We develop an analytical formulation of the problem faced by a bidder in the CPP by specifying a strategy that maximizes his profits. The optimal bidding strategy is solved analytically for the case of perfect competition. The study in this work takes into account the principal sources of uncertainty—the load forecast and the actions of the other competitors. The formulation and solution methodology effectively exploit a Lagrangian relaxation based approach. We have conducted a wide range of numerical studies; a sample of numerical results is presented to illustrate the robustness and superiority of the analytically developed bidding strategies. This paper has reported the development of a competitive power pool (CPP) framework which incorporates the salient features of the England and Wales Power Pool (EWPP). We have applied the framework to formulate and determine the optimal bidding strategies of a bidder in the CPP under conditions of perfect competition. This paper’s results are noteworthy for the explicit inclusion and detailed representation of the various considerations and constraints associated with the generation for electrical power. We have developed a globally optimal bidding strategy: regardless of generation resources, costs and constraints, a generator maximizes profits by bidding to supply generation at cost and at maximum capacity. The increasing interest in the POOLCO concept (Bud raja andWoolf, 1994) makes this work highly topical. This paper has focused only on one aspect of CPP—the optimal bidding strategy problem for generators. The recent introduction of demand side bidding into the EWPP has introduced a problem which can be effectively solved using the CPP framework. There are several facets of the CPP that require additional work. For example, the optimal bidding strategy problem for buyers from the CPP may be formulated as a bid to optimize profits given resources, constraints and costs. The oligopoly situation in the EWPP generation markets (Green and Newbery, 1989) has thus far been resistant to analytic approaches. The construction of optimal bids by the method of this paper may provide little insight into the formulation of optimal bids under no perfect competitive conditions. Approaches based on other concepts such as game theoretic notions need to be explored. Another extension of this work is the study of the integration of financial instruments such as contracts and futures into the CPP. An area which requires considerable work is the incorporation of transmission constraints and pricing (Wu et al., 1994) into the CPP framework. There are some fundamental difficulties in the development of appropriate schemes for the economically efficient pricing of transmission services. Research into this area is currently underway.