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 STUDY
(Generation of
Need for a large power plant in Maharashtra
ideas)

(Initial
India invites Enron Corp. to explore possibilities
screening)

(Is the idea prima facie

promising?)
(YES)

Feasibility analysis
(Enron ready to add 1500 miles pipeline )
Market analysis Technical analysis
(shareholders available)
Financial analysis

Economic and Ecological analysis

(Was the project

worthwhile?
(NO)
 INTRODUCTION

 Dabholpower 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
 50%


 - MSEB
30%

 - Bechtel
10%

 10% - GE
 TIMELINE OF THE PROJECT
(G.O.M, Enron, Bechtel, GE (PPA signed- power purchase
sign MOU) agreement)
1992 1993

(Enron files for (construction of phase 1 begins;

bankruptcy; DPC shuts change of govt. in Mah; project
down) scrapped) 1995
2001

(renegotiation; construction
of phase 1 resumes)
(MSEB begins to
default)
2000
(phase 1 becomes operational) 1996
1999
DETAILS OF THE POWER PLANT

 PHASE 1 PHASE 2
Capacity – 740 MW Capacity-
1,275 MW
Cost – $ 1.078 billion Cost- $ 3.5
billion
Fuel – Naphtha Fuel- LNG
Operations began- 1999 Construction
suspended


Total capacity – 2,015 MW

Originally estimated cost of the plant - $ 2.8
 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.