The winner’s curse — or overpricing by bidders due to incomplete information — has undermined a few public-private partnership projects in the highway and power sectors in recent months, leading to renegotiation of contract terms, despite that being dubbed a moral hazard. Such incidents are hardly going to be a thing of the past, going by a slew of power purchase agreements signed recently in Rajasthan, Uttar Pradesh and Tamil Nadu. In these cases, the developers have quoted prices as high as R5/unit to the distribution companies and yet won the contracts.
These exorbitant prices, apparently beyond the market’s capacity to pay, are mainly due to the uncovered fuel risk in the existing Case 1 bidding provisions. The new prices discovered for long-term (up to 25 years) power supply are significantly higher than the price level of R3-3.50/unit quoted by developers in 2010.
A question mark is thus put on the way these PPP contracts are structured and bids made. The high bid prices underline the urgency of implementing the new Case 1 bidding norms notified by the power ministry under which the developer will be free to pass any additional fuel costs to the buyers in case of a shortfall in supplies from linked sources. An inter-ministerial panel has completed vetting of the new Case 1 norms and Union power minister Jyotiraditya Scindia is expected to approve them soon.
An analysis would make it clear that developers are quoting unrealistic prices for power. For example, price offers received by Rajasthan Rajya Vidyut Utpadan Nigam ( RRVUPN) for 1,000 MW power supply in a recent tendering are in the range of R4.52-7/unit. In seven out of the 10 bids received by the Rajasthan utility, prices quoted by the generators are more than R5.
The utility may end up tying up requisitioned power supply at the weighted average price of R5 a unit, double the price ruling in the spot market (electricity sale prices quoted by companies at the Indian Energy Exchange).
An FE study shows that RRVUPN’s power purchase costs should ideally not exceed R4 a unit given that all the generating stations that have participated in bidding for power supply to the Rajasthan discom depend on domestic coal.
Bidders are required to quote power price along with transmission charges for delivering electricity to the discom. Power price is quoted in two parts, fixed charges and fuel costs. According to industry