India’s use of competitive bidding in the electricity sector

Source: The post India’s use of competitive bidding in the electricity sector has been created, based on the article “Governments should encourage more players in the power sector, not less” published in “Indian Express” on 16th September is 2024

UPSC Syllabus Topic: GS Paper 3- Infrastructures (Energy)

Context: The article discusses how competitive bidding in India’s electricity sector has lowered costs, increased investments, and boosted renewable energy. However, recent composite tenders combining coal and solar threaten competition by excluding smaller players and stalling innovation.

For detailed information on Solutions to Address Power Sector Concerns read this article here

What Has Competitive Bidding Achieved in India’s Electricity Sector?

1. Significant Tariff Reductions: Solar power tariffs plummeted from Rs 15 per kWh in 2010 to Rs 2.80 per kWh by 2018, demonstrating the effectiveness of competitive bidding in lowering costs.
2. Increased Private Sector Investment: This approach attracted considerable private investment, adding approximately 27 GW of solar capacity.
3. Expansion in Wind Energy: In the wind sector, tariffs decreased sharply from Rs 5.30 per kWh to Rs 2.50 per kWh within just two years, showcasing rapid cost reductions akin to those seen in solar power.
4. Enhanced Market Competition: The competitive environment fostered by bidding has encouraged both larger and smaller players to participate, driving further innovations and investments in the sector.

What Are the Current Challenges with Composite Bidding?

1. Recently, some states have issued composite bids requiring suppliers to provide both coal and solar power, which could require massive investments—up to Rs 52,000 crore in some cases.
2. Coal projects take 6-7 years to become operational, while solar only takes 1.5-2 years, leading to different delivery timelines.
3. Concentrating large capacity in one or two tenders reduces competition and innovation potential, especially in solar.
4. This approach may restrict smaller players from participating and could slow down the reduction of tariffs and innovation in the sector, especially in solar power where technology and market conditions evolve rapidly.

What Should be Done?

1. Separate Coal and Solar Bids: Avoid composite bids that combine coal and solar projects, which hinder competition and innovation, especially as solar technology evolves rapidly.
2. Implement an Annual Procurement Calendar: Distribution utilities should establish a calendar for capacity acquisition to give investors clear timelines and certainty, promoting consistent market participation and investment.
3. Foster Smaller Player Inclusion: Structure tenders to allow smaller players to compete effectively, preventing market dominance by a few large firms and encouraging innovation.

Question for practice:

Discuss how competitive bidding has impacted tariffs and investment in India’s electricity sector.