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Dabhol Power Project

Dabhol Power Project. “…it [ICF] is a mix of finance, economics and, like it or not, politics.”. Reforms Galore. India opened her power sector to private foreign investors in 1991-92 Monopolistic, loss-making SEB’s abound

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Dabhol Power Project

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  1. Dabhol Power Project

  2. “…it [ICF] is a mix of finance, economics and, like it or not, politics.”

  3. Reforms Galore • India opened her power sector to private foreign investors in 1991-92 • Monopolistic, loss-making SEB’s abound • Need to strengthen the grid, integrate the power systems and make better use of installed capacities • Did we really need an IPP?

  4. The Birth of DPC • DPC formed in 1992 (80% Enron, 10% each GE and International Generation Co) • A negotiated project under the government’s scheme of “fast track” projects – no bidding

  5. The Agreement • 1993: PPA between DPC and MSEB signed after necessary govt approvals obtained • After Enron spends millions “educating” the Indians about the benefits of such a project • Despite the World Bank evaluating it as “not economically viable” saying it would produce too much power at too high a price for the state • Despite the fact that the plant’s annual requirement of LNG (3m tonnes) would cause immense strain on India's forex reserves • State government guarantee backed up by one from the national government

  6. State Elections And All That • 1995: BJP/Shiv Sena ousts the Congress using “We’ll throw Enron into the Arabian Sea” as a campaign platform • The Project scrapped following the Munde committee report • US Ambassador deplores the cancellation • Renegotiation committee appointed following Rebecca Mark’s meeting with Thackeray • Central government re-ratifies it’s counter guarantee on the last day of it’s 13-day tenure

  7. The Renegotiated Terms • Phase I increased in capacity from 695MW to 740MW. Overall project increased from 2015MW to 2184MW • What about Enron and the Arabian Sea?? • Thrice the original size approved by the new govt within a month (original deal took nearly a year) • Phase II to use LNG from an Enron project in Qatar • Reduced capital costs or transfer pricing gains?? • Switching from distillate to naphtha for Phase I • State to still bear exchange rate risk and fluc-tuations in international fuel prices

  8. The Price of Power • MSEB to pay DPC a fixed component of Rs 95 cr every month irrespective of consumption • At 90% PLF, approx Rs 2.80 per unit • An ROE of more than 30% - nearly twice that of other power projects • Would MSEB distribute that much electricity to consumers?

  9. Meanwhile… • Congress comes to power again in 1999 • Election campaign promises to halt DPC and renegotiate tariff if necessary • Complete turnaround in Dec when faced with a power shortage • MSEB starts purchasing 33-60% of DPC’s output • Government says reduced offtake due to slow growth of demand for power in the state

  10. The Outcome • MSEB runs up abominable electricity bills… • …which it simply cannot afford • Gets rapped by the MERC for buying expensive power from DPC • Dues amount to Rs 300+ cr for Nov 2000 to Jan 2001 • Exchange of a volley of notices – the judicial system gets dragged into the matter • Feb 2001: Enron decides to invoke counter guarantee

  11. And Finally… • April 2001: MSEB clears March bill after threat from DPC to cut off supply totally • MSEB stops buying power from DPC in July • “The venture was always too big and too expensive for the state of Maharashtra to handle” – Godbole committee (Aug 2001) • Phase 2 remains 95% complete as thousands are laid off

  12. “Our experience would indicate that contracts with governmental authorities in India really do not seem to represent anything more than a starting point for a later renegotiation and are broken by Indian governmental authorities whenever and as often as they prove inconvenient or burdensome.”

  13. Repudiation of the PPA following a change of government • Should not happen • Defeats the entire purpose of attracting such investment – will scare potential investors away from India • Message to the overseas investor: India does not have the legal and administrative infrastructure to resolve a DPC type problem quickly

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