Can CFDs save the SECI bidding model

The writing on the wall is fairly clear. The time-tested SECI bidding model for renewables is faltering and needs urgent resuscitation. The model has been fairly simple. SECI runs an auction and discovers the prices for RE projects. After the price is discovered, SECI “markets” this power to Discoms and signs a Power Sales Agreement (PSA). Post PSA, PPA is signed between SECI and the auction winner. SECI takes trading margins but all risks and obligations of the PPA are passed on back to back to the Discoms. This bidding paradigm along with the PPA has been an unparalleled success until it has begun to falter of late.

SECI has been finding it difficult to find buyers for the power, and there is a big gap between auctioned capacity and the capacity for which PSA is to be tied up. Financially stressed Discoms have been unable to sign long-term PSAs for various reasons leading to a huge pile-up of capacity that been auctioned. . This gap is now purportedly to the north of 20 GW. SECI now has an existential problem. The famed model is no longer working and now the bidding paradigm needs a CPR !! CFDs which are contracts for difference (CFDs) can come to the rescue and can potentially resurrect the SECI model. CFDs are power contracts that assure a fixed reference price to the generator. The power is sold on the markets. When the price on the markets is lower than the reference price, the generator is paid, and vice-versa.

Imagine this alternative scenario:
1) SECI ditches the PSA-based model.
2) Bids are run as they are now, and prices are discovered
3) SECI enters into a CFD with the winning generators at the discovered price.
4) All power from the winning projects is sold on the markets
5) SECI compensates the generators when the price goes below the discovered price and gets paid by the Generators when it rises.
6) Discoms will only buy power from the markets on a need basis and not from SECI.

This will kill two birds with one stone – deepen the markets and solve the crisis that the bidding paradigm currently faces. How can SECI be funded for the exposure in the CFD contracts? I am sure that we can work a solution around that. A nationwide compensatory CFD cess could be an answer. Or a diversion from the central kitty – from the humongous tariffs being imposed on solar modules could be another source. It could even be from a new coal cess similar to that which existed earlier. I am sure there is no dearth of solutions for funding SECI’s CFD payments. This is very similar to the MBED approach that has been suggested to deepen the markets but with a slight twist. If implemented well, CFDs can potentially save the SECI model and deepen power markets.

It is time for new ideas !!

Source:Linkedin

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