DABHOL POWER PROJECT

Introduction: India power sector

 Pre 1991 era, energy sector was dominated by
government in a two tier system: Federal centre &
state ( SEB).
 Post 1991 NEP, Government opened the energy
sector for private companies.
 Demand for energy was increasing at an alarming
rate. Reasons for such stupendous surge in demand
were Industrialisation, urban migration, and
increase in population.
 Demand for energy
Demand
2010

2005

2000

1995
Demand

1990

1985

1980
80000 140,000
Continued.
 Average plant capacity used in 1990 was 57%. But
actual capacity required during peak time was
approx 87%.
 Dilapidated distribution networks also results into
loss of 20%.
 State electricity board was primarily responsible for
the distribution of 70% of national power.
 Mounting loss of about $ 2billion impeded the
investment in new capacity of SEB.
Enron Corporation
 Began its operation as pipeline distribution company. It
was basically delivering gas to power utilities business.

 Enron International was set up in 1990 as a subsidiary

to Enron for running power generation projects. Rebecca
Mark was appointed as its chief executive.

 Vision of mark for Enron was to make it the juggernaut

of LNG distribution. In this regard, the first LNG
terminal and regasifiaction unit was decided to be built
in Dhabol.
The Dhabol project
 It was to be built, owned and operated by Dabhol
power company, an Indian private company owned
entirely by foreign interests.

10%
10%

Enron
General electrics
80% Bechtel
Continued..
 On 20th June 1992, Enron and Maharashtra govt
signed a MOU to develop 2000mw LNG fired power
plant at Dhabol.
 Agreement worth of $ 3.1 billion was surprisingly made
in haste.
 According to a govt. official, Dhabol project sought
imported fuel and equipments, which were virgin
territory for the government. Even, govt did not bother
to inspect Enron’s history and past performance which
reflect the lackadaisical approach followed by
government.
Phase 1
 It involves construction of a 695mw gas fired power
station.
 This involves import of distillate oil and was scheduled
to commence production in December 1997.
 Financing of phase 1 was done by:
Bank of America & ABN Amro bank NV =$150mn
US Exim bank= $298mn
Overseas pvt investment corp (OPIC)=$ 100mn
IDBI= $98mn.
Phase 2
 Phase 2 will help in expanding power generating
capacity to 2015 mw.
 It involved construction of -1-320mw gas fired plant, a
regasification facility, & an LNG carrier.
 With the completion of phase 2, Dabhol would run on
Quatar source LNG where Enron was having vested
interest.
 Financing: IDBI as an arranger provided $333 million.
Domestic & offshore lending amounted to a syndicated
loan of $497 mn. Japan exim bank provided $258 mn
& $175mn was provided by commercial bank of japan.
Obstacles
 Before the phase 1 financing, world bank rose several issues
penetrating to the power project. Issues raised were:

a) Too much power at too high cost

b) Unwanted capacity compel MSEB to replace cheaper
coal fired power output with a source that was 5 times costly
c) MSEB was contracted to buy a minimum output even if the
plant’s output was unwanted
d)Baseload station though Maharashtra faced electricity
crunch only during peak hours.
e) Use of LNG when cheap coal was available was unviable
Power Purchase agreement
 PPA between Enron and Dabhol was a take or pay contract.
 MSEB would buy power from Dabhol for a period of 20
years.
 Each unit of electricity purchased was comprise of electricity
charge & capacity charge. Capacity charge covers
recovery of capital invested in dollar terms while MSEB
bearing all currency risks. Energy charge was a variable
component based upon volume of fuel, operation &
maintenance, take or pay charges etc.
 It assures DPC of an IRR approx 16%. However, Industry
analyst calculated IRR post tax was between 26 to 32%.
Revising Agreement
 Political shuffle led to the formation of new
government, a coalition of BJP and Shiv sena.
 New government made Dhabol a pawn and used it
for their political agenda by carrying out anti
dhabol campaign. As a result of which, it was got
cancel.
 Enron issued an arbitration notice demanding
compensation of $300 million that DC initaly had
injected.
Continued..
 Enron ran advertisement and solicited countrymen’s support
for carry on with the project.
 It also conducted a poll for this and results showed that 80%
of the state and 60% of nation wanted the project to
resume.
 Mark proposed a negotiation with the state which included:
New turbine which significantly reduced the capital cost.
Phase 1 would use naphtha instead of distillate oil.
Regasification unit would devolved into a separate venture.
MSEB was having an option to acquire 30% share of DPC.
Sponsors could sell regasified LNG to customers other than
MSEB.
Further Impediments
 In 1999, congress campaigned against Dhabol and
defeated BJP coalition govt. Moreover, Dabhol became
victim of political one upmanship.
 Godbole committee sought renegotiation of PPA.
 MSEB was unable to pay $ 20mn monthly bill.
 Naphtha was an expensive derivative of oil and crude
oil prices was shooting up at that time very fast.
 MSEB was buying only 33 to 60% of Dhabol output,
however its take or pay contract of 90% capacity take
up converted its low usage to higher avg. purchase
price.
Continued..
 Faced with the cash crunch, MSEB sold its 30% stake
in DPC to Enron.
 DC also invoked central government counter
indemnity to recover $17 million owned by MSEB.
 Enron tried to persuade federal and state
government to relax rules such as, cross state sales
and the likes.
UPA era post 2004
 In 2004, UPA central govt clear all the foreign
debts. By 2005, govt was able to conclude
arbitration and legal cases.
 Amount accruing to 19 overseas lenders were
settled for $230mn at 20% discount.
 Plant was restarted un April 2006.
Shortcomings in the project.
 Government would have deliberated painstakingly on
the project. This would have included inspection of
Enron’s books of accounts, past performance etc.
 Government would have done bidding process in order
to ensure a healthy competition.
 Foreign currency denomination of tariff payments was
economically unviable, govt. would have consider this
before entering into contract.
 MOU failed to specify beginning of 20 year period. It
showed a clear negligence on the govt part. It should
have done with great deliberations.
Continued..
 Govt. would have proposed provision for auditing.
It was missing in contract.
 Structure of payments was also not in the line of
central govt guidelines. Authority would have made
sure that all payments are conforming guidelines.
 MSEB guaranteed minimum purchase but supplier
was not bound to provide minimum quantity.
 MSEB did not find it necessary to verify fuel price
whether it is viable or not.
Key learning
 Separate the people from the problem

 Focus on interest not in positions.

 Invent options for mutual gains.

 Use objective criteria.