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Overview
This document highlights some of the key characteristics and provisions of the Power Purchase Agreement signed between Dabhol Power Corporation (DPC) and the Maharashtra State Electricity Board (MSEB) relating to the baseload combined cycle liquid fuel-based power plant constructed near Dabhol, Maharashtra. The summary focuses on noteworthy aspects of the contract, and has interspersed some parenthetical comments.
The version of the PPA referenced is the Phase II Addendum Consolidation, which contains a restated version of the original PPA signed on December 8, 1993 amended by the following:
Amendments of February 2, 1995 (Prior to renegotiation)
Amendment of July 26, 1996 (renegotiated contract); and
Addendum dated December 9, 1998.
Definitions of terms and language referenced in the document.
DPC’s and MSEB’s obligations and liabilities, and indemnities
Description of the fuel supply contracts and provisions
Description of the necessary transmission system modifications required for operation of the project
Performance and rating requirements tests, measurements and standards for the power plant capacity, availability, and energization.
Rates of payment for capacity and energy, and related formulae, stipulations, adjustments, rebates and bonuses.
Tax stipulations and definitions
Insurance provisions
Conditions for the modification, adjustment or termination of the PPA
Force Majeure definitions and implications
Legal governance and dispute resolution
Confidentiality provisions
Appendix of schedules containing detailed descriptive formulate of capacity payments and energy charges, technical descriptions of the power plant, operating and dispatch procedures and characteristics, fuel facilities, support facilities and infrastructure, escrow account, depreciation terms, project milestones, project clearances, procedures for valuation and transfer of the power plant, and tax assumptions.
What the PPA Does NOT Contain
The PPA conspicuously omits the following, without which the PPA leaves MSEB’s financial liabilities unbound and unclear:
The estimated breakdown of project costs, including the underlying capital costs, engineering and construction costs, operation and maintenance costs, among others. Whatever numbers have been included have been provided as estimates, not binding commitments.
The numerical value or clear derivation of critical financial parameters underlying payment calculations, where applicable (for e.g., depreciation)
Clear description of DPC’s project capitalization, capital recovery charges, including among others: depreciation, interest capitalization, debt servicing costs and return on equity (in Phase II).
Thus, the unit cost of power is not a fixed value, and cannot be derived from the information in the PPA alone. The value of Rs. 2.40/kWh publicized in 1997 is mysterious and misleading, because it omits several key components of cost, as described further below, and its derivation is unclear.
Phase 1 has a nominal baseload capacity of 670 MW (including black start capability) and nominal peak capacity of 70 MW, and Phase II stipulates a nominal baseload of 2150 MW and nominal peak of 34 MW.
Project includes all fuel infrastructure costs, including those of for Phase I a single point mooring and tankage for liquid fuels, and for Phase II a breakwater jetty and facilities for receipt, storage and regassification of liquid fuels. (Note that the Liquefied Natural Gas (LNG) infrastructure has been sized to accommodate gas supply in support of up to 10,000 MW of power plants, and is being included fully in the Dabhol project, which is only 2150 MW. This is not mentioned in the PPA).
The project will initially be fueled by No. 2 Distillate Fuel oil and the Phase II involves construction of the two more blocks and conversion of the whole Power plant into natural gas firing one (to be fueled by LNG). According to clause 2.5 (b) of the Agreement, either party by giving a notice of 21 days may terminate the contract regarding Phase II due to non-fulfillment of condition precedent to Phase II. In case such termination occurs the Power plant will remain unconverted and hence continued to be run be distillate fuel oil, which is a costlier fuel. As a result the country will inherit costlier fuel run power plant.
The PPA does not contain a breakdown of project costs, either fixed or variable. The only mention is of a budgeted, cost for Phase II of $1,087,000,000 excluding LNG facility construction costs ($734/kW for 1480 MW. Typical costs for gas-fired combined cycle plants, including fuel infrastructure costs, is $500-$600/kW). Note that this cost is not binding, rather it is stated as a budget estimate. DPC will prepare a statement of actual total costs after completion of Phase II and any difference (Budgeted cost – total cost) will be credited back to the MSEB with some adjustments. (Notably, the total cost may be higher than the budgeted cost, in which case, as implicit in the provided formula, the Capacity Payments will increase).
MSEB will construct and pay for the transmission line (Rs. 323 crores) connecting Dabhol to the grid. (This is a dedicated transmission facility. In the US and most other countries, a transmission “extension cord” of this nature is always paid for by the developer of the power plant, since their choice of project location determines the cost of the transmission line connecting the power plant to the grid, MSEB will have to pay liquidated damages for delay in entry into commercial service into Phase I or either block of Phase II because of MSEB’s delay in construction of transmission lines (See Clause 4.8 of the Agreement).
As per agreement, MSEB will have to pay separately for Capacity Charges and Energy Charges. As per Schedule 9 of the Agreement, the Capacity Payment will include capital recovery, return on equity, debt servicing (principal and interest), fixed operation, maintenance cost, and, annual insurance premium. Although the Capacity Payment appears to be fixed, it actually is not, as the payment is price linked to price escalation and exchange rate fluctuation. Capacity Payment will be on the Rated Capacity of the power plant, which will be tested annually. If the available Capacity is reduced as a result of a Gas Force Majeure (which are circumstances outside and beyond the control of India that affect gas supply), MSEB will still be liable for payment based on the full Rated Capacity. The MSEB will have to also pay capacity charges based on Rated Capacity in the event of under-utilization of the plant capacity (i.e. in case of lower load factor).
As per Schedule 10 of the Agreement, the Energy Payment will include delivered energy payments in terms of BTU, “take or pay” fuel adjustments, various fees, such as, testing fees, fuel management fees, commissioning fees and variable operating and maintenance charges. The Energy Payment will be a “pass-through” and vary depending on price of the fuel i.e. distillate or LNG as the case may be. For Phase II, energy payments will be calculated on the basis of an assumed minimum gas dispatch regardless of how much the plant actually generates.
DPC will have no liability to MSEB in the event of not reaching Development Milestones or in facing delays in Financial closure unless DPC has failed to use “reasonable endeavors” (Section 3.3).
For any delay in the project commencement, DPC will pay MSEB fixed amounts: $14,000 in Phase I and $36,400 in Phase II per day until 180 days after Target Commencement, and $110K and $250K per day thereafter respectively.
If MSEB fails to complete construction of the transmission line or if GOM fails to comply with its obligation with respect to construction of the fresh water pipe line by project commencement for either, MSEB will as per Section 4.8(a)(i) pay DPC capacity payments as if the project was operational (this amount today would correspond to $600,000 per day for Phase I alone). Additionally, MSEB swill indemnify DPC against any valid demand to hold DPC liable for not delivering LNG under the Gas Supply Contract, and compensate DPC for any additional expenses incurred due to the delay.
As per Clause 5.2 (d) and (e) of the Agreement, the DPC will have a full 365 day grace period before paying liquidated damages if the Tested Baseload Capacity or Tested Peaking Capacity during performance test fails short of Nominal Baseload Capacity or Nominal Peaking Capacity. Upon expiry of such 365 days period. DPC will pay MSEB liquidated damages at the rate of US $100 per KW in respect of difference between Nominal Baseload Capacity and highest Baseload Capacity achieved during such 365 days period. But no such grace period is allowed to MSEB in case the MSEB fails to adhere to fulfill its obligation in the Agreement.
If MSEB fails to dispatch the project at a level specified in its monthly dispatch estimates, MSEB will indemnify DPC against any losses or additional expenses, or in other words has to pay for fuel at the estimated dispatch level, even if the reason for such a reduction in dispatch is not attributable to MSEB. However, if MSEB requires dispatch higher than the estimated level, DPC will undertake “reasonable endeavors” to provide the additional fuel but will not indemnify MSEB against any additionally incurred costs attributable to the failure to dispatch at the revised level.
The asset (i.e. the Power Plant) is owned by the DPC and will be insured by the DPC by a foreign Insurance Company but the annual insurance premium is paid by the MSEB through the Capacity Charges. Yet, according to Clause 15.4 of the Agreement, all insurance claims shall be paid to the DPC, who may apply the proceeds of such claims as it sees fit. There is no safeguard in the Agreement that the DPC shall apply (the word used is `may’) the proceeds of such claim to the assets. Secondly, it is also not clear why such proceeds should go to the DPC when the annual insurance premium will ultimately be paid by the MSEB. In doing so, DPC is recovering this value twice, once in the insurance claim, and second in the depreciation component of Capacity Charges being recovered from MSEB.
Regarding foreign exchange, DPC will use “reasonable endeavors” to maintain a ratio of US dollar-linked to Indian rupee-linked payments by MSEB of 40:60 until Phase II and 70:30 thereafter. Note that this ratio is not binding. This means that MSEB may pay from 70 percent up to the full amount of its payments in US dollars, and bear the corresponding exchange risk.
The PPA stipulates several processes for dispute resolution and also stipulates the circumstances under which each dispute resolution process will be invoked.
First, the parties (DPC and MSEB) will appoint two Experts by mutual agreement, and failing such agreement by the President of the Electricity Supply Industry Arbitration Association of England and Wales, one for technical matters and one for financial matters. The PPA explicitly states in specific provisions of the contract whether the Expert will be responsible for resolving any disputes related to those provisions. If parties have a disagreement in any such provision, the Expert will settle the dispute and such settlement will be binding on the parties.
Where disputes are not required (by DPC) to be settled by the Expert, and if parties cannot be settled by the parties themselves, disputes will be settled first by a Panel, which will consist of one or two nominated members each by DPC and MSEB. The parties may substitute members of the Panel at any time. If disputes cannot be settled with the help of the Panel, the dispute will go to Arbitration.
Arbitration will take place in London, England under British law and in accordance with the provisions of UNCITRAL Arbitration rules. The arbitration panel will consist of 3 members, one of whom cannot be a citizen of either India or the United States.
If any Competent Authority, defined as any authority within the GOI or GOM, declares any provision of the Agreement illegal or unenforceable, the parties will negotiate substitutions or changes to satisfy the Competent Authority. However, if such agreement is not reached, the dispute will not be susceptible to any of the dispute resolution processes described above, and such dispute will not prejudice the validity, legality or enforceability of any other provisions of the Agreement
The PPA prohibits any dispute between the parties to be publicized in any media (print, TV or radio) without written permission of the parties.
All information regarding terms and conditions as well as documents (technical or commercial) obtained by virtue of the agreement are confidential to the parties. (Note that in the US any agreement signed by the government, except if jeopardizing national security, is public under the Freedom of Information Act).
MSEB may terminate the contract if the Average Baseload Availability is less than 60% of the Target Baseload Capacity for the month for a consecutive 24 months, or if the Rated Baseload Capacity is less than 60% of the Tested Baseload Capacity. This means that if DPC falls short of Average Target Baseload Capacity by as much as 40% for 23 months, MSEB cannot terminate the contract.
In the event of a Force Majeure, the contract will terminate only if the Rated Baseload Capacity of the Power Plant is reduced to zero.
Under Force Majeure conditions, if the capacity of the Plant is anything but zero, MSEB is liable for continued Energy and Capacity Payments for up to 270 days after the event of Force Majeure. (For e.g., is a bomb destroys the transmission line from Dabhol to the grid, MSEB will still be liable for energy and capacity payments as detailed in the PPA under Force Majeure conditions – See Section 16.5).