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Competitive bidding as means to energy law

Abstract:

Competitive bidding is one of the most prominent methods of selecting the best contractor for the project. It is used for the purpose of securing best goods and services at lower practicable price and to stimulate competition in market. There are two types of competitive bidding – open tender and selective tender. The energy sector is a category of stocks that relate to producing or supplying energy. It includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, and refining. The GICS further divides the energy sector into the energy equipment & services industry and the oil, gas & consumable fuels industry. Till now it is coal sector where it is seen the usage of auction in allocating projects which can gradually be used in other energy sectors for regulation and effective results.

Keywords:

Competitive bidding, energy sector, coal mining, auction, bid, resources, consumption

Introduction:

Bidding in laymen term refers to offering a particular price for something amongst other available prices for same thing whereas competitive bidding can be considered as formal process to identify products and services the applicants need, it is to determine the cost or value of something[1]. Bidding can be performed by a person under influence of a product or service based on the context of auction. Competitive bid is associated with proposal and price submitted by a service provider to the user. A draft of bid includes a detailed proposal with both operational and cost aspects of deal.

Also now shifts towards another aspect of topic that is energy, which simply means ability to do work. Whereas energy sector involves industries involved in exploitation, storage, production, transportation and distribution of energy. The external purview also includes the economic activity, weather, raw materials, which are governed by government regulations and organization policies. The energy sector is subject to risks in changing environmental policies which leads to a trend of investing in natural resources. The legislation covering these aspects are termed as energy laws.

Objectives:

Large proportion of the discussion is about independent concepts that are competitive bidding and energy laws which are explained with the process of mining allocation of coal through auction by government of India. The explanation also connects both the procedure and how it can be used to yield an effective result that is an attempt made to analyse through paper.

Methodology:

A mixed methodology comprising secondary and doctrinal research with critical analysis of the existing literature on competitive bidding and energy laws along with procedure of obtaining mining lease through auction is done. From the position of different energy laws and procedure of auction followed, all the things is to be understood and with analysis and rational thinking the interdependence of bidding process in energy law is derived.

Legislation referred:

Electricity act

Mines and minerals regulation and development act

Auction process covered under sales of goods act

Process of competitive bidding:

Competitive bidding is one of the most prominent methods of selecting the best contractor for the project. It is used for the purpose of prevent favourism, secure best goods and services at lower practicable price and to stimulate competition in market.

There are two types of competitive bidding:

 Open tender and selective tender.

Open tender is a tender open to all qualified bidder, opened in public for scrutiny which is chosen on the basis of prove and quality and is also known as comparative or public tender in market. It is mostly used for purpose of providing more choices to client in term of price.

Process of open tender includes,

  1. Advertisement: at this stage tender for project from the contractor is invited.
  2. Here interested contractor purchases tender documents prices and submits it back to register or show its interest.
  3. Here there is analysis and scrutinising of all submitted documents is carried out.
  4. Last step includes selecting suitable contractor for awarding the project.

Selective tender is a tender where only certain numbers of company or contractors are invited for bidding, here there is a limitation of tendering process and short listing of contractors is done for awarding of contract. It is done for purpose of improving quality of bids received, ensuring the contractor with experience and competence is awarded the contract and it makes tendering process more manageable with less burden.

Process of selective tender includes,

  1. Procurement a list of potential contractors for pre qualification.
  2. To select a number of pre qualified tender from the list and invites them into tendering process.
  3. After the evaluation process, one preferred contractor is selected.
  4. Further negotiations are carried out.

Parties to the competitive bidding involve contractor, client and the consultant.

Criteria for use of competitive bidding:

  1. The value of procurement should be high.
  2. The specification must be clear.
  3. There must be an adequate number of potential suppliers in market.
  4.  The potential suppliers must be both technically qualified and keen to win the business.
  5. There must be sufficient time available for all the process.

Advantages:

  1. Lowest bid price selected
  2. Simplified bid evaluation method
  3. Open for any contractor

Disadvantages:

  1. Sometimes potential risk of project is not identified.
  2. Qualification of the contractor is not evaluated.
  3. Project experiences not used for further work.

Energy sectors and laws:

The energy sector is a category of stocks that relate to producing or supplying energy. The energy sector or industry includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, and refining.

“The energy sector consists of a large group of inter-related companies that cover a wide variety of energy. The two major types of energy are as follows:

  1. One is non-renewable energy, which includes oil and petroleum products, gasoline, natural gas, diesel fuel, and nuclear.
  2. The other one is renewable energy, such as hydropower, solar power, and wind power.

Energy businesses incur large capital expenditures, and they own large amounts of fixed assets. Such assets include land for oil reserves, plants and equipment for crude oil and raw natural gas processing, and infrastructure or transportation.

Energy companies also make substantial spending on research and development (R&D) to update technology in drilling and processing to improve efficiency and adapt to the changing environmental policies.

Components of the Energy Sector

The GICS further divides the energy sector into the energy equipment & services industry and the oil, gas & consumable fuels industry.

1. Energy Equipment & Services Industry

The energy equipment & services industry comprises oil and gas drilling contractors, manufacturers of drilling equipment, and businesses that provide services related to drilling and completion of oil or gas wells. Helmerich & Payne, Inc., Unit Corporation, and Exterran Corp. are some of the players in the U.S. energy equipment & services industry.

2. Oil, Gas & Consumable Fuels Industry

Companies in the oil and gas industry can be categorized into the upstream, the midstream, and the downstream. They have different positions in the supply chain.

  • The upstream companies are involved in exploring potential crude oil and natural gas fields. They also exploit these energy resources through drilling and operating wells. Mergers, acquisitions, and divestitures happen in the upstream frequently.
  • The midstream provides storage, transportation, and wholesale marketing for oil, gas, and petroleum products. Transportation providers include pipeline transportation companies, barge companies, railroad companies, and other logistics companies.
  • The downstream is involved in post-production activities. The downstream companies refine crude oil and raw natural gas into consumable fuels, such as gasoline, diesel fuel, and jet fuel. They also distribute derived products such as waxes, lubricants, and many other petrochemicals. The midstream is often considered a part of the downstream.

The energy sector is highly cyclical and sensitive to the macroeconomic environment. The level of economic activities exerts a significant impact on the demand for oil and gas. GDP, disposable income, employment, new housing, and the industrial production index are some of the macroeconomic drivers.

During expansion periods, an increasing amount of business activities and production inflates the demand and price of oil. During recessions, decreasing production level lowers the demand and price, and thus weakens the sector.

In addition to the economic condition, the weather and seasons also impact the energy sector. Gas prices are usually higher in the summer than in the winter. It is partially due to more traveling in the summer, and partially due to higher production costs for the summer-grade fuels. Severe weather conditions, such as hurricanes, and natural disasters can damage infrastructures and disrupt the supply of energy.

Strong and stable oil prices usually indicate economic health. Thus, some organizations coordinate energy suppliers and stabilize the markets. The Organization of Petroleum Exporting Countries (OPEC) is one of them. It is an intergovernmental organization that accounts for more than 40% of the oil production all over the world. It coordinates 13 member countries to regulate oil production and supply to impact the oil price.”

“On the other hand Energy laws govern the use and taxation of energy, both renewable and non renewable. These laws are the primary authorities (such as case lawstatutes, rules, regulations and edicts) related to energy. In contrast, energy policy refers to the policy and politics of energy. Energy law includes the legal provision for oil, gasoline, and “extraction taxes.” The practice of energy law includes contracts for sitting, extraction, licenses for the acquisition and ownership rights in oil and gas both under the soil before discovery and after its capture, and adjudication regarding those rights.”

“In general, India’s strategy is the encouragement of the development of renewable sources of energy by the use of incentives by the federal and state governments. With the abundant solar energy resource combined with adequate high head pumped hydroelectric energy storage potential, India is capable to meet the ultimate energy requirements of its peak population from its renewable energy sources alone. In 2021, the government has upped India’s target to 500GW of renewable energy by 2030. A long-term energy policy perspective is provided by the Integrated Energy Policy Report 2006 which provides policy guidance on energy-sector growth. Increasing energy consumption associated primarily with activities in transport, mining, and manufacturing in India needs rethinking on India’s energy production.”

Coal mining auctions:

“Auctions invite participants to mine coal blocks by bids on the percentage value of coal sold that they will be willing to share with the government. Successful bidders will obtain leasing rights from State governments to mine a coal block for a certain period. India has a long history of commercial mining, for about 200 years starting from 1774. In the second half of the 20th century, the government took note of the inadequate capital investments from private players to meet the burgeoning energy needs of the country. Some private coal miners were found to be using unscientific coal mining practices and providing poor working conditions for labour. This led to the Central Government taking a decision to nationalize private coal mines. The nationalization was done in two phases, from 1971-1973. That’s how the Coal Mines (Nationalization) Act, 1973 was enacted, which restricted coal mining operations mainly to government entities. The recent decision to allow private firms to participate in the bidding process[2] with a reduced upfront amount, the facility of adjustment of upfront amount against royalty, liberal operational efficiency parameters, and 100 per cent FDI through automatic route is a watershed moment for India’s energy industry. Further, allowing a revenue-sharing basis (a percentage of revenue shares (final bid) has to be paid to the government on the sale of coal) as against the current mechanism of paying fixed rupee per ton may also encourage private players to take participation in the auction process.”

India’s energy policy:

“The energy policy of India is to increase energy in India and reduce energy poverty, with more focus on developing alternative sources of energy, particularly nuclear, solar and wind energy. India attained 63% overall energy self-sufficiency in 2017.

The primary energy consumption in India grew by 10.4% in CY2021 and is the third biggest with 6% global share after China and USA . The total primary energy consumption from coal (452.2 Mtoe; 45.88%), crude oil (239.1 Mtoe; 29.55%), natural gas (49.9 Mtoe; 6.17%), nuclear energy (8.8 Mtoe; 1.09%), hydro electricity (31.6 Mtoe; 3.91%) and renewable power (27.5 Mtoe; 3.40%) is 809.2 Mtoe (excluding traditional biomass use) in the calendar year 2018. In 2018, India’s net imports are nearly 205.3 million tons of crude oil and its products, 26.3 Mtoe of LNG and 141.7 Mtoe coal totaling to 373.3 Mtoe of primary energy which is equal to 46.13% of total primary energy consumption. India is largely dependent on fossil fuel imports to meet its energy demands – by 2030, India’s dependence on energy imports is expected to exceed 53% of the country’s total energy consumption. About 80% of India’s electricity generation is from fossil fuels. India is surplus in electricity generation and also marginal exporter of electricity in 2017. Since the end of calendar year 2015, huge power generation capacity has been idling for want of electricity demand. India ranks second after China in renewables production with 208.7 Mtoe in 2016. The carbon intensity in India was 0.29 kg of CO2 per kWhe in 2016 which is more than that of USA, China and EU. The total manmade CO2 emissions from energy, process emissions, methane, and flaring are 2797.2 million tons of CO2 in CY2021 which is 7.2% of global emission.

In 2020-21, the per-capita energy consumption is 0.6557 excluding traditional biomass use and the energy intensity of the Indian economy is 0.2233 Mega Joules per INR (53.4 kcal/INR). Net energy import dependency was 41.2 in 2020-21. Due to rapid economic expansion, India has one of the world’s fastest growing energy markets and is expected to be the second-largest contributor to the increase in global energy demand by 2035, accounting for 18% of the rise in global energy consumption. Given India’s growing energy demands and limited domestic oil and gas reserves, the country has ambitious plans to expand its renewable and most worked out nuclear power programme. India has the world’s fourth largest wind power market and also plans to add about 100,000 MW of solar power capacity by 2022. India also envisages to increase the contribution of nuclear power to overall electricity generation capacity from 4.2% to 9% within 25 years. The country has five nuclear reactors under construction (third highest in the world) and plans to construct 18 additional nuclear reactors (second highest in the world) by 2025. During the year 2018, the total investment in energy sector by India was 4.1% (US$75 billion) of US$1.85 trillion global investment.

Indian solar power PV tariff has fallen to ₹2.44 (3.1¢ US) per kWh in May 2017 which is lower than any other type of power generation in India. In the year 2020, the levelized tariff in US dollars for solar PV electricity has fallen to 1.35 percent. Also the international tariff of solar thermal storage power plants has fallen to US$0.063/kWh, which is cheaper than fossil fuel plants. The cheaper hybrid solar power (mix of solar PV and solar thermal storage power) need not depend on costly and polluting coal/gas fired power generation for ensuring stable grid operation. Solar electricity price is going to become the benchmark price for deciding the other fuel prices (petroleum products, natural gas/biogas/LNG, CNG, LPG, coal, lignite, biomass, etc.) based on their ultimate use and advantages.

The energy policy of India is characterized by trade-offs between four major drivers: Rapidly growing economy, with a need for dependable and reliable supply of electricity, gas, and petroleum products; Increasing household incomes, with a need for an affordable and adequate supply of electricity, and clean cooking fuels; limited domestic reserves of fossil fuels, and the need to import a vast fraction of the natural gas, and crude oil, and recently the need to import coal as well; and indoor, urban and regional environmental impacts, necessitating the need for the adoption of cleaner fuels and cleaner technologies. In recent years, these challenges have led to a major set of continuing reforms, restructuring, and a focus on energy conservation.”

Conclusion:

The policy and recent data reveals high use of energy consumption and usage because of development. With more demand there is need for more supply of energy with more production and needed legislation for regulating the whole sector. A concept of bidding for procurement of energy is highly sustainable method which is felt as it reduce burden on government and creating more opportunity of employment and production can also be managed effectively. The need is strong legislation and proper implementation for production and consumption of energy. Hence less dependency on imports and it can be generated in our country only.

Submitted by: Yuvraj Goswami

Semester III, B.A.LL.B


[1] https://en.wikipedia.org

[2] MMRA ACT, 2021