Governments should encourage more players in the power sector, not less

India's shift to competitive bidding for electricity procurement over the past two decades has significantly advanced the renewable energy (RE) sector by fostering competition and driving down tariffs. However, recent developments involving composite bidding structures for coal and solar capacities threaten to undermine these gains. This new approach could potentially hinder competition, innovation, and price reductions in the RE sector.

Achievements of Competitive Bidding:

• Tariff Reductions: Competitive bidding for solar power has dramatically reduced tariffs from Rs 15/kWh in 2010 to Rs 2.80/kWh by 2018, and in wind energy from Rs 5.30/kWh to Rs 2.50/kWh in two years.
• Capacity Addition: Approximately 27 GW of solar capacity and substantial wind capacity have been added through competitive procurement, driven by private sector investment.
• Innovation and Storage: Recent innovations in storage-linked tenders have led to the addition of over 9 GW of RE and 15 GWh of storage, improving the reliability of renewable power despite its intermittent nature.

Issues with Composite Bidding Structures:

• Investment Requirements: Composite bids requiring both coal and solar capacities involve massive investments, potentially Rs 28,000 crore to Rs 52,000 crore, which may exclude smaller players from participating.
• Operational Timelines: Coal plants, which require six to seven years to become operational, contrast sharply with solar projects that take only 1.5 to 2 years. Composite tenders create mismatches in power delivery timelines.
• Market Concentration: By centralizing procurement in large tenders, states risk concentrating market power, which could stifle competition and innovation, and may result in higher overall costs and reduced tariff benefits.

Recommendations for Future Procurement:

• Diversified Procurement: To maintain the benefits of competitive bidding, states should avoid large composite tenders and instead spread procurement across multiple smaller tenders. This approach would foster greater competition and innovation.
• Annual Procurement Calendar: Distribution utilities should implement an annual procurement calendar to offer greater clarity and stability for investors, which can promote more efficient and competitive bidding processes.
• Encourage Participation: Measures should be taken to ensure that smaller developers can compete effectively, including reducing entry barriers and encouraging a wider range of players to participate in the renewable energy market.

Practice Question:

Q. Evaluate the impact of recent composite bidding structures for coal and solar power on the competitive dynamics and pricing in India’s renewable energy sector. Discuss the potential challenges posed by these structures and propose measures to enhance competition and innovation in power procurement.