The Ministry of Power has recently notified guidelines for procurement of electricity from thermal power plants set up on design, build, finance, operate and transfer (DBFOT) basis. These guidelines are expected to be an improvement over the now repealed competitive bidding guidelines for procurement of power under case 2 procurement mechanism that the central government had notified in January 2005. In this column, we examine the efficacy of newly notified guidelines.
One major difference between the new DBFOT guidelines and the case 2 guidelines is with in respect of ownership pattern. While the new guidelines provide for setting up of a power plant on DBFOT basis, the now repealed case 2 guidelines provided for setting up of plants on build, own and operate (BOO) basis. Though a major change, no rationale or arguments in support of preferring to procure electricity from plants set up on DBFOT basis as against plants set up on BOO basis have been provided. As pointed out by the CERC in its statutory advice to the central government in its letter dated October, 26, 2012, DBFOT model is more suited for natural monopoly businesses like roads, transport, transmission, distribution of electricity, etc, and not for de-licensed businesses like generation.
The new guidelines, by allowing pass-through of fuel charges to discoms, and in turn, to their consumers, purport to address the issue of uncertainty associated with fuel cost. This, unlike the old bidding guidelines, no doubt will help the project developers in completely eliminating the fuel cost risk. But, how does this look from the point of view of the supply utilities or their consumers? In her book on Making Competition Work in Electricity, Sally Hunt points out that, the major difference between regulation or the MoU route and the competitive route for tariff determination is who bears the various risks. While under the traditional cost-plus-return route, consumers bear most of the risks like demand risk, price risk or technology risk, under the competitive route, the project developers must bear most of these risks. Under case 2 guidelines, while the demand and technology risks were largely borne by the consumers, the price risk was largely the project developers. By allowing pass-through of fuel costs, under the new guidelines, even the price risk would have to be largely borne by the consumers. Thus, the new guidelines have made power procurement much more akin to the MoU route of power procurement