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Dabhol Power Project: What next

S. Padmanabhan

ENOUGH HAS been said about the past. Whatever the blunders committed by the political parties, the fact remains that the Dabhol power project has not gone away. It is a good asset, the criticism of Enron notwithstanding. The project has been built by Bechtel and the turbines are from GE -- the two biggest and the best in the business. The project can serve the people of Maharashtra and India for the next 20 years at least.

Is a settlement possible on commercial lines? From Enron's point of view, this will mean redrawing the contracts and it would be at a great disadvantage while re-negotiating the deal. For Maharashtra, it will mean reduction in its commitment.

For Enron it will a major climb down on the following issues:

a) At one $=Rs 47, the project cost, as approved by the CEA, is Rs 13,294 crore ($2,828 million) for generating 2,184 MW and the LNG terminal. This works out to Rs 6.09 crore per MW. The LNG terminal and the power project are to be segregated as independent projects. Assuming a benchmark cost of Rs 3.50 crore per MW for naphtha projects, the power project segment will have to be at Rs 7,644.00 crore and the LNG plant Rs 5,650 crore. Can Enron justify such a high cost for the LNG terminal (5 million tonnes)? A comparison will surely be made between Enron and other LNG projects such as those at Dahej, Mumbai, and Cochin.

b) The current power tariff as per the PPA is 8.8 cents (assuming the crude price at $28 a barrel) -- Rs 4.13 per kWh (unit) on the assumption that the MSEB uses 90 per cent of the 2,184 MW. Assuming a naphtha price of $290 per tonne and a heat rate of 1,800 Kcal per kWh utilisation, a 6.50 per cent rupee depreciation and an auxilliary generation of 3.50 per cent, the variable component (fuel cost) per unit of the power works out to Rs 2.32 and the fixed cost to Rs 2.11. At 90 per cent of 2,184 MW -- 17.22 billion units -- Enron will recover an annual fixed cost of Rs 3,633 crore ($773 million at one $=Rs 47) what ever the utilisation level. When the power project cost is reduced to Rs 7,644 crore, there has to be a corresponding reduction in this fixed cost also. Can Enron afford to reduce this?

c) Enron's LNG terminal has a 5 million tonne capacity whereas the Dabhol power project will use only 2.1 million tonnes. The balance is to be sold to others. However, as per the PPA, Enron recovers the full fixed cost of the LNG project even though less than half the LNG capacity is dedicated to the power project. Enron will have to forego fixed cost recovery from a part of the LNG project. Perhaps, it will have to become a dedicated LNG supplier to Dabhol power which position may not allow Enron to recover any guaranteed fixed cost for its LNG segment. It will have to assume market risks. With not many projects in pipeline, where will Enron sell the balance of the fuel?Any re-negotiation and reduction in price will show up Enron as being weak and similarly threaten projects elsewhere. Enron knows that India is on a weak wicket and given its global plans of getting out of asset-based businesses, it stands to gain if it goes for arbitration. Perhaps, Enron will negotiate successfully a lower exit price than what it is eligible for as per the contract.

For Maharashtra it is a Hobson's choice on the following issues:

a) The Government cannot use so much power but having agreed to grant deemed generation at 90 per cent capacity it cannot at this stage ask for a lower capacity; at best it can ask for segregation of the project costs.

b) Naphtha is not an economic fuel at this time. However, LNG will also prove to be uneconomic if the oil prices stay at current levels. LNG prices are around $3.50 per million BTU at a base crude price of $18 and an additional 13 cents for every dollar increase in crude prices. Thus, at $28 to a barrel, the LNG prices will be $4.80 per million BTU which translates to a fuel cost of Rs 1.79 per kWh assuming a 2,000 kcal heat rate per kWh and one $=Rs 47. In addition the fixed charges will become payable.

c) The State Government cannot justify extending the federal guarantee to the LNG project -- at least on that portion which is not useful to Dabhol power. Obviously, this get the lenders up in arms as they would not like to lose their security. Credibility will be at stake.

Any re-negotiation will have to result in a significant benefit for the Maharashtra Government politically and economically and the decision will have to be justified in public. The Government may not have the political will and courage to come to a settlement and may try to pass the buck to the Centre.

Very soon, therefore, there will be a stalled project, a cancelled PPA, arbitration notices and the invocation of the Central guarantee and a lot of international media commentary from leading lenders and, of course, a set of harassed domestic financial institutions whose share prices will take a nosedive in the medium run because of higher NPA provisioning. The Centre will have to intervene to salvage its credibility arising out of the federal guarantee given to Enron and its lenders.

So where do we go?

A lot of people have said that there is no life after Enron envisaging a flight of a large number of foreign direct investors. Perhaps, this will also have a serious effect on the stock market which will dive further on the day of reckoning -- the day Enron cancels the PPA and invokes the federal guarantee.

Perhaps, life after Enron will be one of caution for the State and Central governments as well as the foreign investors. The Centre will have to tread carefully in untangling this mess carefully. Some of the steps it may have to take are:

a) Move quickly to respond to any public criticism -- that the Centre has reneged on its commitments. Perhaps, the Government is already moving in this direction by organising industry meets and seminars in India and abroad.b) Assure the international lenders that they are safe and that their liabilities would be met in full. The lenders have lent money to the project not out of love to Enron, but based on their analysis of India's credit rating. They have no part in this controversy and their sensitivities must be respected. Fortunately, India has more than $45 billions in reserves and that coupled with speedy action in assuring the lenders will resolve the problem. The emphasis should be in reassuring that Enron is only one of its kind and this is no across-the-board phenomenon.

c) A quick settlement with Enron will raise the confidence among investors. There has to be a greater sense of honour while retracting and recognising the loss -- particularly from a grave mistake.

d) A clear and sensible approach in dealing with the assets -- the power project and the LNG terminal. It is a useful asset built by reputed companies and, therefore, several players should come forward to take them over at a fair price.

e) The Centre must move fast to implement power sector reforms. We have several priorities -- primary is providing low-cost power. Experience has taught us that such fuels as naphtha, or natural gas are extremely price sensitive in a country that imports petroleum products and, hence, power plants based these fuels cannot be the mainstay. Over the last nine years we have not been able to implement even one power project based on imported coal for fear of the fluctuating currency rates.

The real answer is staring at us -- developing pithead coal-fired power plants. This means the projects can come up in the coal-belts of Bihar, Jharkand, Chhattisgarh, MP and West Bengal. The creditworthiness of these States is not clear and, therefore, it may be necessary to get Power Trading Corporation to become a proactive nodal agency for buying and distributing power and perhaps also act as a security provider.

This also means that the Centre will have to hold the hands of the investors for some more time in the process of developing low-cost power projects.

f) Last, there has to be a move towards the reform of the State governments and their electricity boards. Given our experience in Balco, privatisation of the public and power sectors would continue to be uneasy as they are sure to be politicised. While this cannot be avoided, we need to move ahead however slow the progress. This would mean that the States may not have the capability to support the private power projects till such time the reforms are introduced and till then the Centre would have to shoulder this responsibility to ensure an energised India.