Dabhol Project PPA: Structure and Techno-Economic Implications Author(s): Girish Sant, Shantanu Dixit, Subodh Wagle Source:

Economic and Political Weekly, Vol. 30, No. 24 (Jun. 17, 1995), pp. 1449-1455 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4402880 Accessed: 25/02/2010 02:20
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PPA Project Dabbol Implications Structure and Techno-Economic

Girish Sant Shantanu Dixit Subodh Wagle (DPC), theEnronsubsidiary Thispaperanalysesthepowerpurchaseagreement(PPA)betweenDabholPower Company which is putting up the Dabhol power project, and the MaharashtraElectricityBoard (MSEB). The differentaspects of the PPA are examinedand the techno-economicimplicationsbroughtout. The analysis shows that, contraryto the claims of DPC, the levelised tarifffor DPC's power will varyfrom Rs 3.44 per kWhto Rs 4.68 per kWh,dependingon the-priceof oil, the plant loadfactor and the rupee-dollarexchange rate. For powerfrom DPC to be viablefor MSEB,the latter'saverage tariffwill have to keep rising by over 14.5 per cent per annum over the 20-year period. And,just on account of the bloatedcapital costs of DPC and the abnormallyhigh profitsassured to it, AfSEBwill end up paying Rs 225 crore extra per year.
The DPC plant is a build-own-operate IN the debate over the techno-economic aspects of the Enron controversy, at every (BOO) type of plant.The PPA betweenDPC stage new information, arguments and andMSEB was signedon December8, 1993 2, allegationsarebeing providedby bothsides. andwas lateramendedon February 1995. To help resolve the ensuing confusion, an The PPA assures DPC that MSEB will buy indepth study ol the original documents is power from DPC for 20 years and make tariff.Afterexpiry mandatory.Among variousdocuments,the paymentsatthenegotiated agreement(PPA)is theheart of the contract, MSEB has an option of powerpurchase of any independentpower project (IPP). It buying the plant from DPC. The methodto guaranteesmarket for power produced by compute this cost is not fully spelled out in the IPPand the tariffat which it will be sold the PPA. The PPA assures MSEB that DPC will The PPA creates a legal to the purchaser. obligationon both the partiesto pertormthe constructthis 695 MW (625 MW base and previouslyacceptedtasksin a predetermined 70 MW peaking) plant in 33 months after the financial closurc. The financial closure manner. February 1995. This paperpresentsan analysisof the PPA waseffectedsometimeduring between Dabhol Power Company (DPC), DPC assures 90 per cent availabilityof the the Enron subsidiary handling the Dabhol plant. For calculating tariff, a minimum State Electricity efficiency of 44.9 percentforbase loadplant project, and Maharashtra Board(MSEB). The analysis is carriedout and 28.1 per cent for peaking plant will be in thetechno-econonmic perspectiveanddoes considered. The c(st of fuiel will be passed on to not deal with issues like environmentaland has of legal ones. The pturpose the analysis is MSEB. EnronFuels International been to clarify the structureof the PPA and its appointedas the fuel manager,and will be techno-econolmic implications. An aittemnpt responsiblelor identifyingthe leastcost lfuel is madeto evolve a methodology to analyse supplier. It will be paid $ 2.5 million per such issues. Apart from the PPA, theanalysis yearby MSEB,throughDPC, fordoing this. draws infornmationfrom other publicly MSEB can exercise control on this process available docuiments and communication and DPC will need MSEB's approval for with MSEB. l'he first three sections otthis these purchasecontracts. period All contracts during construction the paper elaborate various aspects of the MSEB.However, structureof the PPA, while the laittertour alsoneedtobe approvedby sections deal with the importainttechno- MSEB is allowed to object only if plant economic implications. speciticationsare materially(from safety or Since, a lot has been written and said economic point of view) harmful to its about the DPC project, a certain level ot interests. The PPA does not specify capital cost of knowledge of terms and issues is assumed. To limit the length and reduce the project. Change in capital cost (either decrease or increase) will not be passed on complexityof the paper,the paperis toeused only on the fitst phase of the project with to MSEB. But changein costs duc to change 695 MW capacity aind using distillate oil in customs duty and other taxes will be passed on to MSEB. The new government as fuel. of India((OI) guidelines (which assure 16 1.0 Salient Facts about PPA between per cent return onl equity, etc) are not DPC and MSEB applicableto the DPCprojectandin this case Thissectiondescribessome important facts tariff is based on negotiated values agreed and in ahoutDVl'(. I'P'A orderto clarify somc mutually by DPC and MSEB. Hence, the economnic analysis of the PPA and misconceltions. Economic aInd Political Weeklv June 17, i995 comparisonof DPC's expected profit with the GOI guidelines become essential.

2.0 DPC's Performance Guarantees and Related Penalties

One of the main planks of the pro-Enron argument is the various performance guarantees from the DPC and the related penalties it has agreed to pay in case of default. As per the PPA, DPC will pay penaltiesfor late completionof plant,shortfall in capacity, and efficiency lower than the agreed value. Additional penalties are applicablein case the plantavailabilityfalls below 90 per cent. This section lists and analyses these guarantees and related penalties. Table 1 shows the payment by DPC to MSEB and by DPC's contractors to DPC for failure to give specified performance. It must be noted that the when these penalties agreed paranmeters, become applicable, are different for DPC and for it's contractors. The implications of these penalties are given in the next few sections. 2.1 Guaranteeagainst Delav in Construction DPC assures plantconstructionwithin 33 months. If the plant constructionis delayed beyond 33 months, for first six months of delay, DPC will pay $ 14,000/day (Rs 0.64/ kW/day) to MSEB. After first six months, the penalty will be increasedto $ 1,10,000 /day (Rs 5/kW/day). This is on the lower side ot the range (Rs 5 to 7/kW/day) prescribed by Vanguard Capital, the consultant to government of India (GOI) Capital1994]. Ontheotherhand, [Vanguard as per the constructioncontract signed by DPC with Bechtel and General Electric (called contractor),DPC will receive much larger penalties from the contractor.The contractor assures construction in 33 months, and for the delay up to six months, contractor will pay $ 2,50,000 per day to DPC and there after $ 3,40,000 per day [IDBI 1994]. In effect, DPC will retain nearly $ 2,30,000 per day after paying 1449

FIGURE 1: STRUCTUREOF DPC TARIFF

CapacityCharge $ $ I$ Base capacity charge (51.4 per cent) Peaking capacity charge (2.5 per cent)* (54.0 per cent)

If, for example, the final capacity is only 700 MW, then DPC will receive $ 21,860 per day from the contractorand, further,in case of failure of the contractorto upgrade capacityto 725 MW, DPC will also receive $ 47.3 million. However, DPC will not pay anything to MSEB on this account. Rather DPC has a option of selling this additional 5 MW to MSEB as describedlater. In such cases, DPC make profits and not losses! 2.3 Guaranteefor Heat Rate

$ Insurance payments (1.8 per cent) LNG default rebate(?)

Rs/$ Operationand maintenance(O and M) (7.8 per cent)

At full load and standardconditions, the GE (GeneralElectric)equipmentis expected to operate at an efficiency of 53 per cent. Despite this claim, the GE guaranteesDPC a maximum heat rate of 7,243 Btu/kWh, Rs $ called GuaranteedHR, i e, an efficiency of 47.1 percent. Heatratesarebasedon higher Rs debt Capital recovery charge heatingvalues andaredefinedforexportable service RRCR*, RRTCR*,RRRCR energy. The heat rate is defined as fuel (36.5 per cent) (5.3 per cent) requiredto produceone kWh of electricity, hence higher the heat rate, lower the Energy charge efficiency.) If heat rateis is more,contractor (46.0 per cent) $ will pay DPC $ 1,21,000 per Btu/kWh of the increase.DPC will not accept plantfrom $ $/Rs $ GE if the heat rate is higher than 7,533. However, DPC, in turn, promises MSEB a Oil take-orFees for Variable Delivered heat rate of 7,605.* 0 and M special pay charge energy payment If the heatrateincreasesbeyond7,605, DPC (0.3 per cent) (--) operations (DEP) will absorball the incrementalfuel cost. But (0.7 per cent) as per the design and the construction contract,the heat ratewill be far lower than 7,605. If heat rate is lower than7,605, then $ 1$ DPC gets the bonus for this. Thus by Base Peak guaranteeinga considerablylower value of (2.3 per cent) HR, DPC assures itself a bonus for its (42.7 per cent) Notes: The values in parenthesesindicatethe shareof thatcomponentin total paymentof Rs 1,299 normally expected performance. crofe in 1997. This calculation for base case defined in the text assumes 90 per cent PLF of To illustrate the point, if the plant base capacity (625 MW) and 27 per cent PLF of peaking capacity (70 MW). - $ and Rs symbols indicatethe predominant in which paymentwill be denominated. achieves a heat rate of only 7,500, DPC currency - * indicates a 4 per cent back-loading (an increase of 4 per cent per annum). will get $ 31.1 million from contractoras compensationfor lower efficiency, but will penalty to MSEB. This sum of $ 2,30,000 pays $ 100/kW of capacity shortfall. This simultaneously receive a bonus of $ 2.27 is sufficient for DPC to meet the daily is nearly half of the penalty amount($ 185 million per year from MSEB for higher interestpaymenton all debt and allows an to 200/kW) prescribed Vanguard by Capital efficiency! * DPC may argue that over the years with additionalmarginof Rs 13 lakh per day for in such cases. continuous usage, the plant efficiency In As per the PPA (Schedule 1), the capacity otherexpenditures. effect, in case of delay, DPC pays nothing from its pocket, neither being built at Dabhol is not 695 MW but drops and the heat rate increases and as intereston loans nor as the much talked 725 MW (4.4 percent morethan695). DPC hence DPC's assured maximum heat rate about penalties to MSEB. Contractor's will not accept the plant from its contractor of 7605 for the contract period of 20 years willingness to assure such heavy penalties if the capacity is below 696 MW. And the is a reasonable offer. However, first, the to DPC also indicates that guarantee for penaltiesfordelayedconstruction (described expected deteriorationin efficiency (hence constructingsuch a plantin 33 monthsdoes above) will apply to the contractor.If plant increase in heat rate)is farless and, second, not involve a big risk. can producebetween696 MW and725 MW, if such a sharp rise in the heat rate is DPC will acceptthe plant,butthe contractor expected, DPC could have assured an 2.2 Guaranteeagainst Shortfallin Capacity will be expected to make modifications in increasing heat rate over the projectperiod Between DPC and MSEB, the plant will theplantto raisecapacityto 725 MW.During instead of the flat one it has assured now. be considered commissioned only if it can this period,DPC will receive Rs 28/kW/day 2.4 Assured Plant Availability operateat a minimumof 80 per cent of the for the short-fall below 725 MW. If the plant availability is below 90 per nominal capacity (i e 80 per cent of 695 If the contractorfails to deliver 725 MW, cent, DPC will give a rebateto MSEB. For MW = 556 MW).In,case, thecommissioned DPC gets $ 1,892 per kW of capacity availabilityin the rangeof 86 to 90 percent, capacityis morethan80 percent of nominal shortage. It can be recalled that DPC pays the capacity payments will decrease capacity but less than the nominal capacity only $ 100 per kW as penaltyto MSEB (for values (695 MW), DPC is allowed to make shortfall below 695 MW). In effect, DPC * The heatratebasedon higherheating and are definedfor exportable energy.The rectificationsin the plant,within 12 months, earns Rs 6 crore per MW of the shortfall heatrate defined fuelrequired produce is as, to to raise the capacity up to 695 MW. If it (below 725) but pays MSEB only Rs 0.32 one kWhof electricity, hence,higher heat the fails to do so even after 12 months, DPC crore/MW for shortfall below 695! rate,lowerthe efficiency.

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proportionally. other words for each per In cent point decrease, the yearly capacity charges reduce by $ 2.2 million. But if availability is even lower than 86 per cent, the decrease in capacity charge will be at double that rate, i e, $ 4.4 million per year per per cent decrease. But an availabilityof 90 per cent for gas turbines is an internationalnorm and not something extraordinary. In addition, its accordingto the DPC's arguments, actual installed capacity being higher than 695 MW (725 MW), the effective availabilityit is promisingon 725 MW is much lower than 90 per cent, which could be easily achieved [IDBI 1994]. To sum up, the said commendable performancebeing assured by DPC needs to be viewed criticallybecause: (a) In many cases, DPC assures a performance (plant capacity and efficiency, for example) that is lower thanwhatis achievablein the worst case. Thus, even if plant performs as expected, DPC automaticallyget bonus for good' performance. (b) Further, the socalled 'stiff penalties' that DPC is said to have promised to MSEB are negligible compared to those it is getting from its contractor. Thus DPC has thoroughly sheltereditself fromanyriskburden.Rather, it has manoeuvred itself into such an enviable position that, in many cases, it stands to gain handsomely even if it fails to attain the performance standards. 3.0 Tariff Structure The price of electricity from DPC is often quotedas Rs 2.4 /kWh. Manyattempts have been made to compare this price with that of all other projects across the board. Before going into such comparisons, we need to understandthat DPC tariff is not one fixed number, rather it is highly sensitive to many factors, and is expected to increase at a steep rate in future. For most power projects of SEBs in India, the tariff usually remains constantor increases only marginally with passage of time. To understandthis crucial difference and its implications, it is essential to carry out a detailed analysis of the two-part tariff structurein the PPA comprising capacity and energy charges. This tariff structuredescribed in PPA is in *.;depicteda simpler form in Figure 1. The .umbersin parentheses indicate the share
f that component in the total tariff for the

is a measureof the extent to which the plant If the DPC plant runs as expected, the actually produces electricity). added 9 MW base and 20 MW peaking Capacity charge includes various fixed capacitywill fetchDPCanadditional revenue charges such as: (i) Capital repayment of nearly $ 5.8 million/yr (which would (denominatedin $ and Rs). The capital re- provide an additional 2 per cent returnon payment, the single largest component of equity).Powerplantcapacityderatesas time capacity charge, includes debt service and passes, but the possibility of derating by returnon equity. The debt service of loan more than5 per cent is small. And as in the in rupees is separatelyidentified, while the case of heat rate, this could have been rest of capital repaymentis in dollars. The accommodated simplyby DPCassuringonly dollar component of capital repayment is 695 MW but offering additional capacity, back loaded by 4 per cent (increases 4 per if available, at a nominal charge. cent per annum). (ii) Fixed operation and 3.1.3 Adjustmentsto Capacity Charges maintenance andM) charge(in $ andRs). (O (iii) Insurance fees (in $). The insuranceand 3.1.3.1 AdjustmentsDue To the External Oand M paymentsare indexed to inflation Factors (US or Indianinflation, as per the denomiThe majorchunkof DPC's profitaccrues natedcurrency).(iv) An undefinedquantity from capacity charges. These charges are of rebate in applicable case of default LNG adjusted for a host of variables, such as by (liquefiednaturalgas) supplier.TheLNGdefault (i) possibility of customs and sales tax rebate is defined for sharirigrisk of LNG but unavailability, it was undecided(up till TABLE 2: TARIFF SENSITIVITYTO OIL PRICE, February1995) when PPA was amended. Rs/$RATE AND PLF 3.1.2 Basisfor CapacityChargeCalculations 90 Per Cent 70 Per Cent Capacity charge is defined in terms of a combinationof Rs and $ /kW/hr.The 'kW' refers to the kw of 'Rated Plant Capacity', and the 'hr' are 8760 in a year irrespective of thePLF.The capacityratingis doneyearly through acapacitytest.Provisions forrevising the value of 'Rated Plant Capacity' are specified in the PPA. (i) In case of frequent andseriousforcedoutages,theratedcapacity is to be revised through repeatedcapacity tests.(ii) TheRatedCapacity couldbe revised voluntarily DPC, in case of DPC's failure by to make full Rated Capacity available for generationfor six consecutive months, and if DPC sees no chances of improvementin next six months. The capacity charges will be calculated hourly and paid in monthly instalments.If plant capacity exceeds 695 MW (as expected),MSEBhasoption,atthebeginning of each year,to eitherbuy or rejectthatextra capacity.If MSEB rejectsit for the year,this additionalcapacity will not be available to MSEB duringthe year even in case of dire need. If MSEB'decides buy this additional to capacity, MSEB will make corresponding additional capacity payments to DPC. An important point to be noted is that the additionalcapacity carries same charge as the first 695 MW. In fact, these should have beensubstantially lower,as DPCis installing this additional capacity in the said capital cost ofRs 2912 croreandwill notbe spending any more for this.
Parameter (1) Delay in construction (a) Up to six months (b) After six months (2) Shortfallin capacity PLF $ 4 per cent, oil -2 per cent $ 4 per cent, oil 0 per cent $ 6 per cent, oil 0 per cent 3.44 3.63* 4.06 PLF 3.99 4.18 4.68

Notes:$ 4 per cent

= $ appreciatew r t Re @

4 per cent per annum Oil 0 per cent = Real oil price increase is 0 percent perannum, etc. = base case scenario. *
TABLE ExCESSPAYMENTS MSEB 3: BY

Capita Cost 3.0 Yearly excess payment(Rs cr/yr) One-time excess payment (Rs cr) 290 1,350

(Rs Crore/MW) 3.75 225 1,050

Note: The reductionin corporatetax forthe alternative plant as comparedto thatof DPC is ignored.
TABLE 4: COMPARISONOF LEVELISEDTARIFF OF DPC AND ALTERNATIVEPLANT

DPC Base case PLF 90 percent 3.63 Secondcase PLF 70 percent 4.18

AlternativePlant 3.75 Cr/MW 3 Cr/MW 3.19 3.62 3.00 3.45

base case defined later. 3.1 Capacity Charge 3.1.1 Componentsof Capacity Charge Capacity charge, the first component of the tariff, can be understood as similar to 'rent'. It is applicable in full, if plant availability(for generation) of 90 per cent is achieved.However,it shouldbe notedthat it is in no way related to the PLF (which

TABLE 1: PENALTIESFOR DPC AND CONTRACTORS FOR FAILURETO MEET AGREED PARAMETERS

DPC Pays MSEB $ 14,000/day 1,10,000/day 100/kW

ContractorsPay DPC $ 2,50,000/day 3,60,000/day 1,892/kW

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FIGURE 2: ANNUAL PAYMENT BY MSEB - SENSITIVITYTO OIL PRICE

700 600
50()
=
_ _ _ _

400 300

__I

20() -

097

I 99 -+ -

I 2001

, I

I,

I 2005

I ,

2003

2007 0-

2009 Total-A

2011 -

2013

2015 Total-B

Fixed Cost

Real oil price in $: A-not increasing;B-decreasing @ 2 per cent per annum.

FIGURE 3: DPC TARIFF (AT THE BUSBAR) SENSITIVITYTO PLF AND Rs/$ Ex RATE

12

+
8-

0-

0 97 -099 2001 2003 2005 -PLF 2007 2009 2011 2013 2015

PLF90,$4 per cent

90. $6 per cent

A PLF 70, $4 per cent

PLF70 = 70 per cent PLF of base load plant; 4 $ 4 per cent =$appreciating @a per cent per annum

exemption, (ii) change in corporate tax (income tax), (iii) $/Rs. rate fluctuations, (iv) change in government regulation/law regarding maintaining dividend reserve, (v) any other change in law/regulationthat would alter DPC's costs or requireDPC to alter its business practices.The charges are adjusted (presumably) to maintain DPC's profitsin case of change in above variables. Some important implications of these adjustmentsare as follows. If DPC was grantedcustoms and sales tax exemptions, the capital repaymentcharge would have reduced by 14.23 per cent. In 1997, this reductionwould have been $ 23.9 million. Due to decrease in corporate tax from 57.5 per cent to 46 per cent, the tariff has declined. This decline will materialise only after the 8th year. While signing PPA, the terms of IDBI loan to DPC were not decided. The calculations assumed interest on Indian loan at 20 per cent per annum. In case the interestrateis actually lower, it would save money, as is the case (IDBI interest rate on DPC loan is 17.5 per cent). This saving is not being passedon to MSEB, butis taken off by DPC andthattoo in dollars(implying a protection against exchange rate). The resultis thatthe lower the IDBI interestrate, the more the direct profit to DPC. Ten and half years after commissioning of phase I, the 4 per cent yearly increase in thecapitalrepayment cease, if GOIdoes will not req"ire DPC to maintain a 'dividend reserve' for paying dividends (i e. if GOI does not block DPC's money in banks).The capital repayment charge will then start declining at 0.42 per cent per annum Communicationfrom MSEB indicates that MSEB assumes thatsuch reductionin tariff will be applicable [MSEB 1995]. But it is not clear whether the GOI exempted DPC fromthisreserveorDPCunilaterally decided to provide this concession. This rebatehas been consideredin ourcalculationsto arrive at the 'conservative' estimate. ' 3.1.3.2 Availability/Performance Related Adjustments Before going into the availability rebate and bonus, we need to understandhow the availabilityis defined.DPC makesan hourly declaration of available capacity. This 'Declared Capacity' is considered to be actually available (available capacity, AC) unless DPC fails to meet MSEB's hourly supply instructions (called clispatch instructions).If DPC can supply 95 percent or more than 95 per cent of MSEH's instructions,the generation level achieved is considerced be the 'AvailableCapacity' to (AC). But when supplyis below 95 percent. DPC has to prove that such a shortfall occurred despite its best eff'ortsandl was unawarethat such situationcoukld occur. If DPC fails to prove this, it is consideredas

4: OF FIGUJRE ESTIMA'TION DIRECT PROFITTo

250

DPC

Capital Repayment Charge 200 97 150 99 200(1 200)3 20)05 20)07 2009 201 1 2013 2015

DPC Profits

100

50

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'FalseDeclaration',andpenaltyis to reduce the AC achieved in past few days. The 'Average Availability' in any period is theratioof averageAC to theratedcapacity. In effect, the 'False Declaration' or supply lower than MSEB's instructioncan lead to decreasedavailability.And if this results in availability lower than the assured, DPC pays a penalty. If this average availability falls below the target value (i e, 86 and 92 per cent for monsoon and rest of the year, respectively),capacity charges are reduced. The amountof reductionhas been already discussed in section 2.4. In the PPA, there is provision for bonus for higher hourly capacity utilisation. The GOI guidelines does npt allow such bonus. The DPC-MSEBagreementdoes not follow GOI guidelines. Bonus is defined for peak hours (16 hours) in peaking season (8 months).Thebonusisforhourly'capacity utilisation' in excess of target availability (TA). This bonus is defined with a complex equation. The maximum value of this expression, with presentclauses, can be 0.2 to 0.5 percentof the yearlycapacitycharges. So, the purposeof such a complex equation is unclear.

efficiency) has been agreed.Fuel consumed for peaking operation is simply calculated by multiplyingthis fixed heat rate with the energy deliveredby peakingplant.This fuel consumption togetherwithpriceof fuel gives the DEPpeak.DEPpeak= Priceof fuel x fuel consumed. 3.2.1 .2 DeliveredEnergyPaymentsforBase Load Plant For 625 MW base load capacity, a m'aximum heat rate of 7605 (minimum efficiencyof44.9 percent)will be considered for the paymentsto DPC. The expected heat rateis far lower as describedin section 2.3. Aftercommissioning,heatratewill be tested (TestHR).The heatrateused for calculating fuel consumed or deemed to have been consumed is called Contract.HRand is estimated as follows:
ContractHR = 7605 max [0.7725

operation at systeni frequency of 50 Hz. As operating conditions change from time to time, the ContractHR will be adjusted for load and frequency. This correctedheat rate is calculated on an hourly basis, and is used for payment calculations. 3.2.2 Special Operation Fees In addition to the above charges, MSEB pays fees to DPC for some special operations. The special operation fees include: (i) Fuel management tee of $ 2.5 million per year, increasing at US inflation rate. This fee was widely criticised on the grounds that obtaining fuel is part of the plant operation and, hence, should be covered in 0 and M charges. (ii) Fees in case MSEB unnecessarily undertakes the capacity test. If DPC proves that capacity test was not needed MSEB pays $ 50,000. (iii) Fees for hot and cold starts.

x (GuaranteedHR -TestHR),O] where, GuaranteedHR is the heat rate 3.2.3 Relation between Hot and Cold Start Fee And PLF guaranteed by contractors to DPC (7243 Btu/kWh). This impliesthatDPC assuresa maximum The PPA allows MSEB to shut off one HRof 7605, butif theoperatingHRis lower, of the two gas turbinesof DPC plant. This DPC will not pass the full benefit to MSEB. can reduceplantoutputby a half. Restarting Forexample,if plantoperatesat HRof 7243, thisGTimpliesa hotora cold start(depending 3.2 Energy Payments the effective HR at which DPC will be paid on the durationof shut down). The hot start Second component of the two-parttariff will be 5 per cent morethanactualHR. This fees (applicable for shutdown of less than is the energy charges. This represent the difference will be passed on to DPC as 12 hours) are $ 10,429 for 9FA GT and $ variablechargesandarenearlyproportional bonus. In this situation,DPC will get bonus 5,015 for steanm turbine.Such starts would to the PLF. It consist of (i) paymentfor fuel equivalent to 362 Btu/kWh of base become regularfeaturesif MSEB uses DPC consumed (or deemed to have been generation.At oil price of $ 4.63/Btu, this plant as an intermediateload plant in order consumed) called 'delivered energy will be Rs 0.054 /kWh. At 90 per cent PLF, to make optimum usage of its own cheap payments' (DEP); (ii) variable 0 and M thisis nearly 8.26millionperyear(equivalent coal plants. In this case, hot and cold start $ charge; (iii) take-or-pay charges for fuel to returnon equity of 3.1 per cent). fees would be as much as $ 3 million per supplies; and (iv) special operation fees. The GE turbines (frame 9FA), that are year, with some addition to DPC profits. The first part, DEP, is the largest (about being used by the DPC, are said to have Closing the GT can reduce plant output by 97 per cent) of the energy payments, and a 4 per cent higher efficiency than the half (i e, by 312.5 MW) making the cost is dealt in detail later. The variable O&M smaller turbines manufacturedby BHEL of reducing output equal to Rs 1.07/kW. charges, which are small, are specified (frame9E). However, the savings achieved This cost can be justified only if MSEB separatelyin $/KWh and in Rs/KWh, and due to this higherefticiency aretakenaway saves more than these fees by running its are indexed to US and Indian inflation by DPC without even acknowledging it as cheapercoal plants.Considering(fuel) cost respectively.If the fuel purchaseagreement 'bonus'. of coal at Rs 0.7/kWh in 1997, and that between DPC and the fuel supplier is of Adjustments to Contract Heat Rate: If of DPC at Rs 1.01/kWh, savings will only 'Take-or-Pay'nature and MSEB does not the operating efficiency of the base load start accruing if the 9FA turbine is closed operate power plant for sufficient duration plant changes, DPC can intimate MSEB for more than 3.5 hours. For medium load so as to consume the 'Minimum Take' and the ContractHR will be recalculated operation, closing down one GT, should quantityof fuel, then the charges to be paid throughan efficiency test. The contractHR be possible for 9 to 10 hours. In such a to fuel supplierwill be reimbursed MSEB. discussed above is defined for the full load case, savings for first 3.5 hours are used by MSEB would approve the fuel purchase agreement. Whether the fuel purchase ANNNEXURE: FINANCIAL ASSUMPTIONS DPC PROFITABILITY FOR ESTIMATION agreementhas been signed and, if so, what It has been assumed that 5 per cent of DPC equity is broughtin the initial year and loan equivalent are its terms are not clear as yet.
to 95 per cent of equity (with 12 per cent interest in US $) is brought in the next year. This loan

3.2.1 Delivered Enepgy Payments is later replaced by real equity before commissioning. The financing package of DPC has been assumed as follows; The interest indicated is the The deliveredenergy payment(DEP), i e, effective interest rate, and the term indicates repayment period after construction. the fuel charge, is separatelyaccounted for the base and peakingcapacity.The duration Cr Rs Mn $ Interest Term (Yr) Per Cent Per Annum of operationof base and peaking plant are, in turn, decided by MSEB's dispatch Total cost 2,912 910 instructions. Equity capital 266.2 3.2.1.1 Delivered Energy Payments for Peaking Energy For peakingplantof 70 MW, a fixed heat rate of 12,150 BtulkWh (i e, 28.1 per cent Economic and Political Weekly
Indianloan US exim loan OPIC Other $ loan 95.6 298.2 100 150 17.5 8.4 10.0 11.0 9.5 8.5 12 7.5

June 17, 1995

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up for paying the hot start fees, in effect DPC eats away 35 to 45 per cent savings of MSEB. Thus, even though technically MSEB is allowed to partially back-down the DPC plant, these fees act as a major barrier.

4.0 Price of Electricity from DPC

The DPC tariff is primarilydependenton three factors: the Rs/$ exchange rate, oil price,andplantloadfactor(PLF).Thechange in corporatetax rate,exemption of customs and sales tax and exemption to DPC from maintaining dividendreservewill also affect tariff in a significant way. But, the Indian and US inflation have little direct effect on the tariff. 4.1 Base Case Definition The most talkedaboutcase of 90 per cent PLF, with some additionalassumptions,is defined here as the base case. The assumptions are: (i) Inflationrate of 8 per cent per annum in India and 4 per cent per annum in USA. (ii) No change in real oil price. In oil last few years, international prices have dropped (in real $). But for long-term planning, the major international utility planning manuals assume a significant increasein oil prices (increase at 2 to 4 per centperannumin real$). (iii) Re depreciates at 4 percent per annumin relationto US $. at Re Historically hasdepreciated a minimum rateof 4.5 percentperannumanda maximum of more than 8 per cent per annum (iv) 90 per cent PLF for base capacity and 27 per cent for peakingcapacity. (v) The dividend reserve rebate is applicable from the I1 th year, i e, the capital recovery charges decrease at the rate.of0.42 per cent per annum. 4.2 Estimate of DPC Tariff and Its Components The DPC tariff is applicable at the door of DPC.MSEBis responsible fortransmitting and distributingthis power, and will bear the associatedcost and losses. For the base case, this tariffin 1997 will be Rs 2.5/kWh. Implying a total paymentof Rs 1,240 crore ($ 387 million)in 1997. Figure2 shows total yearly paymentsby MSEB to DPC for base case scenario and if the oil price (real) decreases at 2 per cent per annum. About 5 per cent of this payment is. in rupees and restin dollarterms.The contributionto total tariff from variouscomponents is shown in Figure 1. ForcalculatingMSEB's effective cost for DPC's powerto averageconsumer, providing we need to considerT and D cost, T and D losses, and other expenses inctirred by MSEB. The T and D losses of 10 per cent is assumed.As a conservativeestimate, the total downstreamcosts of T and D network strengthening, metering, billing etc, is considered 60 paisa/kWh (constant for 20 years). The electricity* duty levied by government of Maharashtra (GOM) is expected to be around 25 paisa/kWthin 1454

calculatedby deductingtheDPC's payments from its revenue as defined below. Major income for DPC comes from: (i) capital repayment charges (RRCC), Rupeedebtrepayment (RCR),indirectbonus for heat ratelower thanheat rateassuredby 4.3 Sensitivity to PLF and $/Rs Exchanige DPC to MSEB. While the DPC's payments Rate are: (i) debt repaymentsand (ii) applicable Ingeneral,thecombinedcycle gas turbines corporatetax. Figure 4 shows the debt repaymentand (CCGT) are not economical for base load operationas their fuel cost (oil in this case) applicable tax (superimposedon the debt Differencebetweenthesevalues is far more than that of coal plants. This is repayment). also true in the case of the DPC's plant. It (which is shaded) shows DPC profits. For is estimatedthat,barringtransitional period better picture of DPC's profitability, the of next few years, it will be economical for yearly changing profits are converted to a MSEB to use DPC's base capacity at a PLF streamof constantprofits(levelised profits). of 65 to 70 per cent. The peaking plant, of This profit is equivalent to little over 40 70 MW, is likely to be used at 27 per cent per cent of 'return on equity' (as defined PLF. The most likely scenario,a PLF of 70 by GOI). If the GOIguidelineswere adopted percent for base and27 percent for peaking DPC would have been allowed to receive plant, i-staken here as the second case for a maximum of 31 per cent returnon equity. sensitivity analysis. 5.1 IRR Estimation Figure3 shows yearlytariffat DPCbusbar DPC's profitability in terms of internal for base case (called 90-busbar)and for the rate of return (real, post tax IRR in $) is second case (called 70-busbar). The Re depreciatingin relation to $ at estimatedto be around28 percent.This IRR 4 per cent per annumhas been assumed. If does not include possible hidden profits to the exchange ratevariationis differentfrom DPC such as: (i) throughsale of additional this, it will directly affect the tariff as more capacity to MSEB (as much as 2 per cent than95 per cent of the tariffis denominated on the equity), (ii) constructionprofits, as obtained by ENRON in Teeside plant. UK in dollars. plant [Enron 1992], (iii) through use ;-:L 4.4 RepresentativePrice of Electricity from infrastructure forothercommerci .1tivities, ai DPC (iv) availability bonus, etc. A reportby VanguardCapital submitted As mentionedearlier, usually the cost of to the GOI says that, after considering the electricity from power plants does not increasethroughout economiclife, (except perceived high business risk in India, its for change in fuel price) unlike in the case foreign investors would expect an IRR of of DPC. The capacity charge in DPC tariff about 17 to 21 per cent (post tax, real $). has an in-built increase of 4 per cent per This IRR assumesno hiddenbenefits.Using annum.Hence it is inappropriate directly this estimate (IRR of 19 per cent), MSEB to comparethe said DPC tariffof Rs 2.4/kWh will be paying $ 200 million extra to DPC in 1997 with the cost of generation from over the 20-year period (1996 NPV). other projects. Only the tariff over the full 6.0 Whether DPC Project Makes life-time of projectcan be compared.This Economic Sense for MSEB life time (levelised) tariff, for DPC plant is Rs 4.1 8/kWh for 70 per cent PLF scenario. Usually in India cost of generationfrom the (Throughout analysis,the levelised costs a new powerplantis higherthanthe existing and 'net presentvalue' are calculatedusing averagetariff.The averagetariffreflects the a realdiscountrateof 12 percent perannum; historical average cost of generation. The i e, nominaldiscountrateof 17 per cent for difference between .this average cost of $ streamsand 21 per cent for Re streams.) generation from all plants and the higher This is the most representative price of cost of new plant can be considered as the electricity from DPC, and can be used for loss to the SEB owing to thif new plant. comparison. While for the base case, this Usually, the cost of generation from any levelised tariff is Rs 3.63/kWh. This tariff plant does not increase rapidly. But the is later comparedto the alternativeplants. average tariff, keeps increasing due to Table 2 indicates the sensitivity of the additionof new plants, increasingT and D tariff to the major variables. The values costs, etc. Hence, SEBs make losses in the indicate the levalised tariff in nominal Rs. initial years of operationof a power plant. Unless mentioned,the assumptionsare the But,withpassageof time,thelosses decrease same as for the base case. and eventually SEBs start making profits from selling power from the said plant. 5.0 Estima.ting Profitability of DPC In this light, MSEB should take up any In this section, DPC's profitability is project if MSEB expects to make profiton estimatedfor the base case specified earlier. it in the life-time of the project.Same logic The financialassumptions used arespecified should have been applicableto the decision in the Annexture. DPC's profitability is of acceptingthe DPC proposal.As expected, Economic and Political Weekly June 17, 1995

1997 which is assumed to increase with Indian inflation. Hence, in 1997 the total cost to MSEB for supplyingDPC power to the average consumer would be about Rs 3.57/kWh.

in this case also MSEB would make huge losses by selling DPC power in the initial years 7 to 8 years. Later,if MSEB's tariffs increase adequately, MSEB would start makingprofitsthroughsale of DPC power. The concept of net-present-value(NPV) is used to define profitability. earlier,unlikemostprojects, As mentioned theDPCtariffis expectedto increaserapidly withtime.Forthe base case scenariodefined earlier,DPC tariff increases from Rs 2.55/ kWh in 1997 to Rs 8.6/kWh in 2016. The effective cost of DPC power by the time it reachesaverageconsumerwould be Rs 3.6/ kwh andRs 11/kwhfor the respectiveyears. The levelised cost at consumer end in base scenario will be Rs 4.88 /Kwh. The average tariff of MSEB is expected to be aroundRs 2.2 /kWh in 1997. Based on this, an estimate could be made of the rate at which MSEB tariff will need to be increasedso that MSEB makes a net profit (a positive NPV) on account of DPC in the lifetime of the project. For the base-case scenario, it has been estimatedthat,MSEB can make profitfrom DPCplantonly if its averagetariffincreases at a rate higher than 15.5 per cent per annum(this can be comparedto the average tariff increase of MSEB, in last decade, of about 12 per cent per annum). Hence, DPC project makes economic sense for MSEB only if average tariff increase is more than 15.5 per cent per annum for next two decades. This would result in a tariff of over Rs 30/kWh in 2016 (an increase of 7.1 per cent per annum in real terms, and a tariff in 2016 of Rs 8. 1/kWh in constant 1997 Rs). Even in most favourable case of Rs depreciation by 2 per cent per annum and real oil price decrease by 2 per cent will perannumMSEBtaTiff have to increase by over 6 per cent per annum (real). In this case the tariff by 2016 will be Rs 6;6 /Kwh (1997 Rs) If the increase in tariff is not so sharp,DPC project will result in net losses to MSEB.

IRR of 19 per cent can be considered reasonable.The estimated IRR of DPC is over 28 per cent (post tax, real, in $). Table 3 shows the excess payments by MSEB, if reductionin capital cost and the IRR is achieved. This is expressed in two ways: (a) the yearly saving in crore Rs (the levelised savings). This can be comparedto the levelised capacity payment of Rs 950 crore to DPC; and (b) in termsof one time saving (1996 NPV). This can be compared to the capital cost of the project,aroundRs 2,910 crore. plant tariffforthealternative The levelise-d (capitalcost of Rs 3.75/MW, and IRRof 19 per cent) is compared with the levelised tariff of DPC, for two assumptions. The values below are in nominal Rs (Table 4). Conclusions This paper presents the following importantresults: guaranteesfrom (i) Various performance DPC and relatedpenaltiesit has undertaken do not constituteany substantialburdenfor DPC. On the contrary,DPC would receive bonuses even for ordinarily expected performance. (ii)ThelevelisedtariffforDPC's electricity varies from Rs 3.44/kwh to Rs 4.68/kWh depending upon the changes in oil prices, PLF, and Rs/$ exchange rate.

(iii) DPC's profitability (estimated to be having a real, post tax, IRR of 28 per cent) is very high compared to that prescribed by GOI consultants (17 per cent to 21 per cent). (iv) MSEB ends up paying about Rs 225 crore extra each year if only the effects of higher capital cost and higher profitability are considered. (v) The DPC project would be viable for MSEB only if MSEB's average tariff keeps increasing at a rate more than 14.5 per cent per annum for next two decades. This tariff rise is more than that of the last decade. References
Enron(1992): AnnualReportto the Shareholders and Customers. IDBI (1994): 'Detailed AppraisalNote - Dabhol Power Company (DPC)', Industrial Development Bank of India. Mark, Ribecca (1995): The Economic Times, March 23. MSEB (1995): Personal fax communications, May 16 and May 31. Sant, Girish, ShantanuDixit (1994): 'Least Cost Power Planning :A Case Study of Maharashtra'. Vanguard Capital (1994): 'Principals to be adopted in Negotiating PPAs for Indian Private Power Projects', Report to the Ministry of Finance.

7.0 HowMuchin ExcessAre We Paying

The LNG/oil fired base load plant is not an economical option for the power sector. In fact, the least cost plan for the state of Maharashtra indicates very substantial savings if we adopt options different from such plants [Sant, Dixit 1994]. But for the time being, it is assumed that project such as DPC is inevitable.This section quantifies the excess payment by MSEB on account of DPC's high capital cost and high
profitability.

(1) Some expertshave arguedthata plant similar DPC(inclusiveof theinfrastructure to costs) can be built with much lesser capital. The figures of Rs 3 to 3.75 crore per MW are claimed and supportedby these experts against the estimated capital cost of 4.19 crore /MW of the DPC project. (2) As suggestedby VanguardCapital an Economic and Political Weekly June 17, 1995

Qualifications/Experience requirements and pay scales are as prescribed by the University Grants Commission. 1. READERS: a) Two posts in the DEPARTMENT OF PERSONNEL MANAGEMENTAND INDUSTRIAL RELATIONS b) One post in the UNIT FOR LABOUR STUDIES c) One pbst in the DEPARTMENT OF URBAN AND RURAL COMMUNITY DE\VELOPMENT d) One post in the DEPARTMENT OF SOCIAL WELFARE ADMINISTRATION,and e) One post in the UNIT FOR RURAL STUDIES. 2. LECTURER: Orne post in the DEPARTMENT OF AND INDUSTRIALRELATIONS PERSONNEL MANAGEMENT (reserved for SC) The prescribed application form alongwith the details of specialisations and other requirements for the posts can be obtained from the Assistant Registrar (Personnel) either in person between 10.30 a.m. and 12.00 noon and 1.30 p.m. and 2.00 p.m. on working days or by post by sending an application alongwith a stamped (Rs.4.00) self-addressed envelope and application fee of Rs. 150/- for Reader and Rs. 100/- for Lecturer by Demand Draft drawn in favour of Tata tnstitute of Social Sciences, Bombay. However, those who are interested, at the the details of in obtaining separately first instance, specialisations and other requirements for-the posts can do so in person during the timings mentioned above or by sending a self-addressed stamped (Rs.4.00) envelope to the Assistant Registrar (Personnel). For SC/ST. candidates the application form will be supplied free of cost on the production of valid caste certificate. The completed applications together with copies of certificates should reach the Assistant Registrar (Personnel) on or before 21st July,- 1995. Dr. S.K. Bandyopadhyay Registrar.

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