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Bigger, better Dabhol facility is back on track

Issue 2 and Volume 4.

Bigger, better Dabhol facility is back on track

Enron`s massive Dabhol project has been watched as a `test case` for Indian power privatization, and it looks like passing marks are coming

By Ann Chambers, Assistant Editor

After long months of negotiations, the Dabhol project in India seems to be coming back on track, and with it there is a resurgence of faith in foreign investments there. A variety of cost-cutting measures have been applied to the project, allowing all participants to save face while rescuing the desperately needed electricity generation project.

Enron Corp. announced a working agreement with the state government of Maharashtra to revive the (US)$2 billion project in early January. The Houston, Texas, USA-based energy company said it will charge a lower price for the electricity and by cutting (US)$365 million in capital costs. Also, a planned regasification facility expected to cost more than (US)$400 million is being split off into a separate venture, a major part of cuts to reduce the capital budget from (US)$2.8 billion to a flat (US)$2 billion. The regasification facility will heat liquefied natural gas, transforming it into a gaseous state and will likely be built using other investors, according to Rebecca P. Mark, Enron Development Corp. chairman and CEO.

The original agreements for the Dabhol project have been criticized for a number of reasons, including: no primary local partners, no competitive bidding for equipment, no transparency in the PPA, high electricity rates, fuel management agreement, not following the two-part tariff system, and for cultural and political reasons, according to “The Future of Project Development in India in the Aftermath of Dabhol,” presented at POWER-GEN Americas(TM) in December 1995 by Vishvjeet Kanwarpal, Asia Consulting Group.

Under the new agreement, the Maharashtra State Electricity Board (MSEB) will pay approximately (US)5.28 cents per kWh for electricity, down from the (US)6.81 cents per kWh stipulated for the first year under the original power purchase agreement (PPA). Manohar Joshi, the state`s chief minister, estimated that the reduced rate would save customers about (US)$7 billion during the 20-year PPA. The rates are tied to the value of the US dollar, which was valued at approximately 32 rupees at this writing. The actual electricity expense could therefore vary from projections.

Technology changes were also agreed upon that are expected to boost the plant`s capacity to 2,450 MW.

The first phase of the project will run on locally produced naphtha or distillate. Naphtha is produced during the oil refining process. The second phase of the project, including the regasification facility, will be fueled by liquefied natural gas which Enron plans to bring in from Qatar.

Enron speculated at the time of the new agreement that construction would resume within 90 days.

Test case

A positive conclusion to the negotiations held as much weight for the state government as it did for the consortium building the facility, as the project has been portrayed as a test case for India`s quest for international investment.

The Dabhol project, sited approximately 100-miles south of Bombay, is still expected to earn a top return for Enron, as the company has repeatedly assured investors that it would not enter an international investment without assuring a minimum expected return, according to Carole Coale, Prudential Securities of Houston senior natural gas analyst. “Investors expect a 20-percent return on international investments,” Coale said. “Perhaps in a country like India that is not as progressive as other countries, approaching a project on such a large scale is a lot more risky than other fast-track projects.”

A 30-percent stake has been offered to the MSEB, although at the time of writing, the official documentation had not been completed. Originally Enron held an 80 percent stake in the project with Bechtel and General Electric each picking up 10 percent. Bechtel and GE`s stakes are expected to be unaffected by the MSEB offer.

Another adjustment to the original Dabhol setup is the inclusion of more Indian business, as the foreign exchange percentage has been reduced from 95 percent to 70 percent during renegotiations. Enron is to invite tenders for equipment in the second phase, with any savings from those tenders to be passed on to the tariff rate. Enron will also purchase Indian equipment for the second phase when possible. Enron is to source the naphtha for the first phase from Indian companies and will consult with the MSEB when purchasing LNG for the second phase.

Negotiations for this project began in 1992 when the Congress Party requested negotiated deals. Enron stepped up to bat with big ideas and a big purse. Lack of competitive bidding in the process was originally intended to speed the process along, but eventually became the largest bone of contention as the state government changed hands in an election, and the new government chose to cancel the project.

Construction of the first phase was in full swing, with approximately 2,200 people employed and more than (US)$300 million invested, when the cancellation occurred. The cancellation chilled other foreign investment in India. Other disputes continue as PepsiCo`s Kentucky Fried Chicken chain is under legal challenge from the groups that opposed Enron, and Coca-Cola and CNN have been reporting opposition.

India suffered under the cancellation as well, as banks began increasing risk premiums for other construction projects. Other multinational companies and outside governments, including Japan, where contracts are taken very seriously, closely watched the proceedings.

Careful, quiet negotiations allowed all parties to save face, as Enron, after several publicized political gaffes early on, solemnly insisted that it had legal recourse and offered no other comments.

“The Enron case is extremely unfortunate. But things do go wrong in democracies when parties change power,” said Frank Wisner, USA ambassador to India. “I believe the Enron project is good for India, and good for Maharashtra. There is a strong, broad consensus that India needs power, urgently.”

Background

India began opening its economy to outside investment in 1991, pursuing multinational firms to negotiate the fast-track electricity generation projects in an attempt to get some of the much-needed electricity on-line as quickly as possible. Several projects were approved, with Dabhol the first and largest. Although there has been considerably more media coverage of the floundering Dabhol project, the others have also hit unforeseen roadblocks that have caused delays (Table 1).

The Dabhol facility and the 420-MW Ib Valley coal-fueled plant planned by AES TransPower, USA, are considered the two most advanced of the fast-track projects, holding secured financing and PPAs backed by government guarantees. The AES PPA has a guaranteed 16-percent return on investment up to a plant load factor of 68.5 percent with additional profit for additional generation.

In January, the Maharashtra government also approved Mittal`s coal-fueled 1,082-MW Bhadrawati project in Chandrapur and Reliance`s gas-fueled 410-MW Pathalganga project. The government has authorized the MSEB to sign PPAs for both projects.

Enron Development Corp. negotiated the PPA on the Dabhol project in 18 months, a government guarantee in six months and completed financing seven months later. Delay caused by the temporary cancellation has pushed the startup date back to early 1999. It had originally been slated to enter operation in mid-1997.

India projections

India appears to have reached a crossroads, as leaders struggle to realize the potential of the economy, which has been touted as capable of becoming the world`s largest in 20 to 30 years. Skeptics claim India will lag behind other, more dynamic East Asian neighbors. A key factor for India is infrastructure, including ports, power and roads.

“Unless infrastructure is expanded substantially and soon, its absence will throttle the strong and promising start that the liberalized Indian economy has made,” Wisner said.

Industry estimates project investments of (US)$30 billion will be required in the next decade in India`s power sector alone. Resources of the state-owned public sector are limited, and the growing gap between supply and demand will only be bridged by private-sector investments. The fast-track projects initiated by the governmental call for participation in 1991 and 1992 are a large step in the right direction, with the nine main projects representing more than 7,000 MW of added capacity by the turn of the century. The main projects are Dabhol from Enron, Mangalore from Cogentrix, Vishakapatnam from Ashok Leyland, Paguthan from Gujrat Torrent, Ib Valley from AES TransPower, Jegurupadu from GVK Industries, Neyveli-Zero Unit from CMS Generation, Kakinada from Spectrum Technology and Bhadrawati from Nippon Denro (Table 2).

India`s per capita consumption rests at 270-kWh annually. Demand has, however, been rising at 9-percent annually, approximately double the rate of India`s economic growth. “Lack of access to financial markets for the power sector, arising from the poor finances of the state electricity boards (SEB), their weak track-record of meeting payment obligations and the lack of credit rating for international financial markets, are creating obstacles for private investment in power generation,” according to the US Department of Commerce`s National Trade Data Bank.

India`s current installed capacity of more than 80,000 MW needs to double in the next 10 to 15 years to accommodate rising demand, estimated to be growing by 9 percent annually. Installed capacity already falls 20 to 30 percent short of peak demand. Demand is projected to escalate past 90,000 MW by 2000. Approximately 85 percent of India`s estimated 579,000 villages are electrified, with agricultural and residential users subsidized.

Diversification

Coal is the predominant fuel in India, accounting for more than 70 percent of the generating capacity. However, shortages, transportation delays, and low thermal quality of coal supplies can disrupt generation and reduce average plant load factors. Average plant load factor for thermal plants in 1994 was 61 percent.

As new capacity is added, there is a drive to diversify the technologies and fuels involved with proposed projects estimated at 47 percent coal, 27 percent hydroelectric, 22 percent gas, 3 percent diesel and 1 percent all others (Figure 1).

Transmission and distribution losses are high, at 20 to 23 percent. SEBs generate and distribute power, set tariffs and collect revenues. Private investors often have reservations because they cannot control output prices, nor distribution and revenue collection. The SEBs are known to suffer from chronic financial problems stemming from rising generation costs, subsidies for agricultural electricity use, and nonpayment of electric bills.

One aspect of the answer to the chronic electricity shortage includes increases in use of energy efficient devices, especially in the steel, chemical and process industries, which are the largest electricity consumers. The potential to conserve generated power is estimated at 20 to 30 percent of total energy consumption, about 5,000-MW annually.

A US National Trade Data Bank report projects a strong market for energy efficient furnaces for the steel industry and for efficient pumps and electrical resistors for the chemical and process industries. Energy efficient lighting devices and energy demand management techniques are also thought to have a strong market. “The market potential for distribution transformers, capacitors and other energy-saving devices to minimize losses is excellent,” the Data Bank report stated. Most promising sub-sectors in 1996 and their associated estimated expenditures are listed as: power transmission equipment, (US)$418 million; energy efficient pumps, $375 million; capacitors, $350 million; and incandescent bulbs, $150 million.

The erratic power supply has affected industrial growth throughout the country as manufacturers and large service companies are forced to install back-up diesel generating units and voltage regulators to protect sensitive electronic equipment. Indian industrial output is expected to grow 10 percent in the fiscal year ending March 31, 1996, a jump from 8 percent in the previous fiscal year.

The economic reforms, instituted under Prime Minister Narasimha Rao, have made impressive advances, with exports growing by 27-percent annually, industrial output up more than 8 percent, and inflation reduced to single digits. After mortgaging its gold in 1991 to evade bankruptcy, India now has foreign currency reserves exceeding (US)$20 billion.

India`s struggle to meet the electricity and other infrastructure demands of its populace seems to be back on-line as the kinks are coming out of the fast-track electricity-generating facility agreements. The much-needed infrastructure to support the industrialization of the nation is beginning to come together as the multinational companies and the various state governments learn to communicate with each other and to understand that the needs of business and the needs of society can be mutually beneficial.

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