Group Members

0006/50 ABHISHEK KATIYAR

0071/50 ANUJ SOOD0106/50 BHARAT

JAIN0169/50 KOUSTOOV

DUTTA0225/50 NISHANT

SOMYA0275/50 RAHUL

MITTAL0311/50 SANTANU

SHYAM4018/20 ASHUTOSH

SINGH IIM Calcutta

A case study on Dabhol Power Plant

Indian Power Sector - Characteristics

Central Govt.31%

State Govt.65%

Private4%

India's Power Generating Capacity• Huge energy demand outpacing supply

• Projected shortage of over 5,800 MW in Maharashtra only by 2001-2002 and around 50,000 MW nationwide

• Estimate of overall 3.1 % loss in industrial production

• Most SEBs close to insolvency: Average cost recovery of only 78%

• Different Tariffs for Industrial(High) and Agricultural(very low, waive offs) consumers

• High Transmission and Distribution losses

Dominated by Public Sector

Reforms

• Invitations to private sector companies allowing 100% foreign equity

• Protection against adverse exchange rate fluctuations

• Import of equipment was permitted

• Single window clearance mechanism was introduced

• Foreign Investment Promotion Board(FIPB) was created to negotiate and approve investments

Opening up of Indian Power sector for Foreign Investment

Enron’s Global Strategy

• Vision - “to become world’s leading energy company-creating innovative and efficient energy solutions for growing economies and a better environment worldwide”

• Focus on every aspect of natural gas – exploration, production, transportation, processing, marketing• EDC offered complete energy

solutions – generating addition opportunities for other Enron business units

• Introduce concept of PPP in energy industry

• All undertakings are Project Financed with long term contracts and appropriate measures for Economic, Financial risks etc..

• Usage of Natural gas to take care of environmental concerns

• India, being a growing economy with huge energy needs fit well with Enron’s vision

• By contracting the middle east for fuel supply, EDC ensured stake of EPP in Dabhol Project

• With reforms just coming in, India was welcoming private investment in Power sector

• Indian Govt. and MSEB providing for Currency risk, commercial feasibility etc.

• India’s coal considered environmentally unfriendly

Positioning in India

Risk factors for Enron

• Political instability• Lack of experience(In terms of foreign investments in India)• Fuel wasn’t locally available• Local opposition(because of environmental risks, displacing people)• Technical risks• Financial risks• Transparency/corruption related issues• Penalty payments on not meeting the targets• World bank report: labeled Dabhol project as a liability

Potential benefits for Enron

• Huge untapped market• Buying guarantee from MSEB• High tariff rates• Shielding from currency fluctuations (MSEB)• First mover advantage • Successful project completion would lead to future growth

opportunities

Potential benefits for India/Maharashtra

• Growth of Indian power sector• Development of sectors dependent on energy(Industry & Transport)• Ability to satisfy growing demand • Huge foreign Investments in India• Local Infrastructure and social development• Opening up to foreign investments in other sectors• Employment generation

Risk factors for India/Maharashtra

• High project costs as compared to other similar projects• Liability to pay in case of default• Commitment to purchase 90% of the generated power• Civil unrest• Environmental concerns• No prior FDI experience • Project failure might result in loosing out on future FDI opportunities• World bank report: Liability on the state

Enron Entry Strategy

Why Dabhol

State board was profitable and this reduced the revenue risk - the state board could pay Enron for power generated

A large demand for power existed in the state Maharashtra already generated close to 10,000MW (12% of India’s generation

capacity) Location was close to a port making it easy to transport fuel for the power

plant. Maharashtra was one of India’s more developed states – institutional risks

were comparatively lesserIn Dabhol

IAS officer in charge held talks with Enron Enron officials spoke to MSEB who were open to entering into an agreement Enron proposed a phased 2000 MW LNG plant. MSEB agreed to this. Phased plan was drawn out to first test the concept, and then to develop the

complete facility: 695 MW was to be developed in Phase 1 1320 MW was to be developed in Phase 2

Dabhol Project

LendersDebt repayment

Debt funds

Equity investors Returns to

investorsEquity funds

Suppliers Purchasers

Output

Purchase contracts

Supply contracts

Raw materials

Phase 1

Enron Power Corp. - $223 million (80%) / $182 million (65%)

Bechtel Inc. - $28 million (10%)

General Electric - $28 million (10%)

MSEB - $42 million (15%)

Bank of America - $150 million

Overseas Pvt. Inv. Corp. - $100 million

IDBI + other Indian banks - $95 million

Exim Bank of USA - $298 million

PPA based on Capacity Payments and Energy Payments

Enron - Rs. 2.40/KwH (initial)

Rs. 2.03/KwH (revised)

Ministerial Committee – Rs. 5/KwH (distribution + inflation accounted)

Cost:

Rs. 4.49 crore per MW (overall)

Rs. 3.65 crore per MW (core)

Total cost: $920 million out of $2.8 billion

695 MW (initial)

826 MW (revised)

Proposed: 26.52%

Revised: 25.22%

Proposed: Distillate fuel (Diesel) sourced locally; later switch to LNG

Revised: Naphtha

Dabhol Project

LendersDebt repayment

Debt funds

Equity investors Returns to

investorsEquity funds

Suppliers Purchasers

Output

Purchase contracts

Supply contracts

Raw materials

Phase 2

Forward Contracts with Qatar Govt. for LNG

To be worked out

To be worked outPPA based on Capacity Payments and Energy Payments

Enron - Rs. 2.40/KwH (initial)

Rs. 1.86/KwH (revised)

Ministerial Committee – Rs. 5/KwH (distribution + inflation accounted)

Cost:

Rs. 4.49 crore per MW (overall)

Rs. 3.65 crore per MW (core)

Total cost: $1.88 billion out of $2.8 billion

1320 MW (initial)

1624 MW (revised)

Proposed: 26.52%

Revised: 25.22%

LNG

Strengths of market entry strategy

• Maharashtra was one of the developed states and one of the 2 states which had a positive return on their fixed assets, thus revenue risk was relatively lower in Maharashtra than in other states

• Dabhol was a good location for the power plant to close proximity to a deep-water port which would require less dredging and save costs

• Dispute resolution clause in the PPA through international arbitration mitigated some of the local judicial risk in case of any disputes

• Enron had structured the project as a PPP very carefully, building in guarantees into the contract. Signing PPAs ensured that atleast 90% of the power generated would be bought and thus, ensured a constant demand throughout the operation of the plant

• The tariff structure mitigated all currency risk, inflationary risk and fuel price risk for DPC and was borne by MSEB/GoM/GoI

• They had partnered with firms like GE and Bechtel who could provide them sound technical expertise • They undertook the investment in two stages. This was a good step as any problems noted in the first phase of

the project could be rectified in the second phase• They had a strong financial backing for their project, through the strength of Enron’s own balance sheet and by

the support of well know credible global lenders.

Weaknesses of market entry strategy

• They didn’t have a transparent bidding process for their contracts• Enron didn’t consider the impact of the project on the local communities and the actual consumers of the

power they supply. • The possible repercussions of the high cost of power compared to other projects were not considered by Enron

• The MoU was drafted in a very short span of time and it was highly one sided, favouring DPC on most occasions. • Such an MoU was bound to fail as when the new government actually realized that it would cause MSEB huge

amount of losses if they went ahead with the project and honoured all the terms of the contract• No EIA (Environmental Impact Assessment) was carried out• Proposed use of LPG as compared to cheaper alternative indigenous fuels greatly increased the cost of the

energy supplied to MSEB• The return to equity of 25.22% was still a very high number compared to other previous power projects• A lot of responsibility and risk was on MSEB and GoM, in such a scenario it was only fair that Enron gave

MSEB an equity stake in their project which they failed to do in the first agreement• Enron didn’t take political risk into account.

• A changing political environment, inefficient, slow moving administration constant re-examination of projects and disputes over the approved contracts. All these factors actually end up causing major hindrances for Dabhol down the line

The Aftermath

• With the Enron bankruptcy, Enron's stake in DPC was bought out by GE and Bechtel.

• In 2005, it was taken over and revived by the RGPPL (Ratnagiri Gas and Power Private Limited), a company owned by the Government of India

• The power plant Phase I which was renamed Ratnagiri Gas and Power Pvt. Ltd (RGPPL) started operation in May 2006, after a hiatus of over 5 years. However, the Dabhol plant ran into further problems, with RGPPL shutting down the plant on 4 July 2006 due to a lack of naphtha supply. The Qatar based company RasGas Company Ltd. started supplying LNG to the plant in April 2007.

• The power station had resumed operations at 100% of its installed capacity of 1967 MW in 2010.

• The 1,980MW plant had closed down last March, but even when gas becomes available, the cost of power from the plant will be over Rs 5.50 per unit, which is far higher than other sources of power for MSEDCL. There is no incentive for MSEDCL to buy this power, since it is power surplus and is selling power to others.

•  It seems the project is en route to becoming another non-performing asset (NPA).

Thank You!