DABHOL POWER PROJECT

INFRASTRUCTURE DEVELOPMENT The HBJ pipeline carries most of the India’s

liquid natural gas. Hazira in Gujarat, north of Mumbai would

have been the end terminal of the HBJ pipeline.

But in 1997, Enron international announced plans to link Dabhol because of its existing power generation facilities.

Moreover, Enron said they will add about 1500 miles to the HBJ pipeline, whose development costs $300 - $900 million.

FEASIBILITY STUDYNeed for a large power plant

in Maharashtra

India invites Enron Corp. to explore possibilities

(Generation of ideas)

(Initial screening)

(Is the idea prima facie promising?)

(YES)Feasibility analysis

(Enron ready to add 1500 miles

pipeline )Market analysis

(shareholders available)

Technical analysisFinancial

analysis

Economic and Ecological analysis

(Was the project worthwhile?

(NO)

INTRODUCTION

Dabhol power company was promoted in March 1993 as a 100% foreign owned private company incorporated in India by Enron corp. USA, Bechtel Enterprises Inc. USA (constructing the plant), and General Electric Co. USA (selling turbines).

In phase 1, DPC will set up a combined cycle power plant with an installed capacity of 695 MW at Dabhol, Guhagar Taluka, Ratnagiri district, Maharashtra. (total area- 1700 acres) The power generated by the plant will be sold to

Maharashtra State Electricity Board (MSEB). The cost is estimated at Rs 3029 crores (U.S $ 946.55 billion).

BACKGROUND

Enron is the majority owner of the project. Project was initiated in 1992 and took nine years to

commence operation. The project is 2184 MW which Enron says is the largest gas- fired power plant in the world. The plant closed in June 2001 due to a payment and contract dispute between the Maharashtra state government and the plant owners. Enron says it incurred 1 $billion in costs of the

plant.

REVIEW OF LITERATURE

The DPC project in India in the 1990’s is the case in point in the power sector.

The election of the new government that was not supportive of the project led to renegotiation of tariff rates that reduced the profitability of the private firm.

However, when a new govt. was reelected, the condition of the pre-existing agreement was revised, resulting in the private sector consortium – Dabhol power corporation (DPC) stopping the project.

PARTIES INVOLVED

SHAREHOLDING PATTERN

- Enron international

- MSEB

- Bechtel

- GE

50%

30%

10%

10%

TIMELINE OF THE PROJECT

1992 1993

1995

1996

1999

2000

2001

(G.O.M, Enron, Bechtel, GE sign MOU)

(PPA signed- power purchase agreement)

(construction of phase 1 begins; change of govt. in Mah; project scrapped)

(renegotiation; construction of phase 1 resumes)

(phase 1 becomes operational)

(MSEB begins to default)

(Enron files for bankruptcy; DPC shuts down)

DETAILS OF THE POWER PLANT PHASE 1 PHASE 2Capacity – 740 MW Capacity-

1,275 MWCost – $ 1.078 billion Cost- $ 3.5

billionFuel – Naphtha Fuel- LNG

Operations began- 1999 Construction suspended

Total capacity – 2,015 MW

Originally estimated cost of the plant - $ 2.8 billion

PPA DETAILS

Agreement for 20 years. Implemented on BOO basis (Build, Own, Operate). MSEB guaranteed to buy 90% of power produced. MSEB to receive 30% of the DPC profits

annually. MSEB to bear any increase in fuel price. MSEB to pay DPC $ 220 billion per year.

REASONS FOR NON-PERFORMANCE By early 2002, Enron was variously termed

‘radioactive’, ‘contaminated’. Maharashtra ordered the project to be halted

because of lack of transparency, alleged padded costs and environmental hazards. But by then Enron had invested $300 million.

The congress government in Maharashtra was defeated in the state polls in March 1995 and the new govt. of BJP and Shiv Sena came into power.

A committee led by deputy chief minister recommended scrapping of the project on Aug 3, 1995.

OTHER REASONS FOR CLOSURE Failure of GOI – it refused to commit

the resources to solve the problems raised through the project’s failure.

Failure of GOM – govt. of Maharashtra was the sole purchaser of power

under PPA and a 15% equity holder in the project. It utterly failed to participate in the long workout efforts.

REVIEWING OPTIONS

On February 23, 1996, Maharashtra and Enron announced a new agreement.

Enron cut the price of the power by over 20 percent, cut total capital costs from $2.8 billion to $2.5 billion, and increased Dabhol's output from 2,015 megawatts to 2,184 megawatts.

The first phase went online May 1999, almost two years behind schedule, and construction was started on phase two.

Costs would now ultimately climb to $3 billion. Then everything came to halt. The MSEB refused to pay for all the power, and it became clear that getting the government to honor the guarantees would not be an easy task.

Although Maharashtra still suffers from blackouts, it says it does not need and cannot afford Dabhol's power.

India's energy sector still loses roughly $5 billion a year. Today, Dabhol, in which Enron had invested some $900 million, sits silent.

CONTOVERSIES

Lack of competitive bidding (transparent procurement method)

No EIA (environmental impact assessment) was carried out.

One-sided MOU signed in favor of DPC (World bank).

WORLD BANK TURNED DOWN FINANCING (when sought by central govt.) It felt that the project was not ‘economically

viable’. Project did not satisfy the test of least cost power. It was too large for the power demands of

Maharashtra. Power tariffs higher than compared to other independent power projects in the country. Agreement was treated as confidential.

FINDINGS

Based on the analysis, the appropriate return to equity holders should not be much greater than the cost of foreign debt given the PPA and the counter guarantee by Government of India.

Payments by MSEB as per the PPA has been guaranteed by Govt. of Maharashtra and counter guaranteed by Govt. of India. Premium for equity appears excessive.

According to a McKinsey study by Chia and Mallick, ‘independent power producers (IPP’s) have been asking developing countries to pay higher prices than developed countries’.

DABHOL TODAY

The power plant phase 1, which was re-named ‘Ratnagiri gas and power pvt. Ltd.’ (RGPPL) on July 2005 started operations in May 2006 after a hiatus of over 5 yrs. It ran into further problems shutting down the plant on July 4, 2006 due to lack of naphtha supply. Qatar based ‘Rasgas company ltd.’ started supplying LNG to the plant in April 2007. The plant consists of 3 blocks, operational as on April 2009

with 900 MW running capacity, but there are problems due to non-availability of operational insurance and decisions are largely dependant on political developments.