Powering ahead with competition

• Two decades ago, India introduced competitive bidding for power procurement, which marked a major shift in the country’s energy landscape.
• This move fostered greater competition, attracted new investments, and helped drive the transition to renewable energy (RE), particularly solar and wind.
• Through competitive bidding, tariffs for solar power fell dramatically, from ₹15/kWh in 2010 to ₹2.80/kWh by 2018, while wind energy tariffs dropped from ₹5.30/kWh to ₹2.50/kWh in just two years. Over 27 GW of renewable capacity was added, largely driven by the private sector.

Innovations in Renewable Energy and Storage:

• Since 2018, the RE sector has undergone several innovations, including storage-linked tenders aimed at addressing the intermittency challenges of solar and wind power.
• Over 9 GW of RE and 15 GWh of storage have been contracted, while the cost of battery energy storage has fallen sharply due to competitive procurement.
• The low entry barriers in the renewable sector, such as shorter gestation periods, lower investment requirements, and the absence of fuel-related risks, have attracted both large and small players.
• This sector has a modular nature, especially in solar and battery energy storage, making it more adaptable to technological advancements. Over time, tender conditions have improved, enhancing both capacity and price efficiency.

Challenges of Composite Bidding:

• However, recent developments could undermine the progress achieved through competitive bidding. Some states have started to adopt a composite bid structure, which bundles capacity from both coal and solar energy. This system requires bidders to supply both energy sources and selects winners based on the average tariff.
• For example, one state’s tender for 1600 MW of coal-based power and 5000 MW of solar power requires an investment of about ₹28,000 crore, while another tender demands 3200 MW of coal and 8000 MW of solar, requiring ₹52,000 crore.
• These massive financial requirements exclude smaller players, concentrating procurement in the hands of a few large companies. Additionally, the significantly different project timelines—6-7 years for coal plants versus 1.5-2 years for solar projects—create mismatched delivery schedules, further complicating the process.

Risks of Over-Concentration:

• The strategy of allocating a majority of future capacity to a few large bidders comes with significant risks.
• By concentrating power procurement into large tenders, states are effectively "putting all eggs in one basket", which stifles competition and innovation. Smaller developers, who may be competitive in the solar sector but lack expertise or capital for coal-based projects, are excluded.
• Moreover, concentrating procurement in large composite tenders means states will miss out on the benefits of phased procurement, such as tariff reductions and incremental technological improvements, particularly for solar energy, which has shorter gestation periods.

The Need for Continued Competitive Procurement:

• The evolution of competitive bidding has played a vital role in price discovery, helping India secure affordable and reliable power.
• It is crucial not to backtrack from this approach by adopting composite tenders that limit competition. Instead, states and distribution utilities should implement an annual procurement calendar, providing investors with greater clarity and certainty.
• A phased approach, allowing for smaller, more diverse tenders, would maintain competition, encourage innovation, and lead to lower tariffs in both the renewable and thermal sectors.
• By ensuring that competitive bidding continues to be a key feature of power procurement, India can meet its growing energy demand while supporting market development and promoting sustainable growth in the sector.