The Hindu Business Line : Is the re-start of Dabhol project viable?

The restart of the Dabhol Plant and the Maharashtra Government's decision to buy power from the facility at Rs 2.30 per unit may not be tenable. The ultimate losers will be the Indian financial institutions, which would have to write off not only the Rs 10,250-crore now being spent, but also the further outlays bound to be made on the second phase of the project, says S. Padmanabhan.

THE Dabhol Project revamp is costing both the Central and Maharashtra governments crores of rupees. As of July 1, around $754 million has been accounted for — the international contribution being $229 million, GE $145 million, OPIC $220 million and Bechtel $160 million (at Rs 45 to a dollar this amounts to Rs 3393 crore).

A couple of years ago, Indian financial institutions had to recover from the project loans of Rs 6,204 crore, the break-up being IDBI Rs 2,121 crore, ICICI Rs 1,473 crore, State Bank of India Rs 1,749 crore, IFCI Rs 454 crore and Canara Bank Rs 407 crore. Interest for more than three-four years has not been added to this.

The cost of final settlement, without interest but including the foreign currency outgo will be around Rs 9,600 crore. The start-up cost for Phase-I of 740 MW will be around Rs 675 crore and this would peg the cost of the revised project at Rs 10,275 crore.

It is not known yet how much the second phase, of 1,440 MW, and the LNG (liquefied natural gas) facility will cost.

The settlement lays to rest more than a decade-old dispute among owners of the project. It has been possible perhaps due to the Union Government's resolve and also because larger claims would have piled up had the arbitration process continued. More important, the process was hastened in view of the power crisis in Maharashtra.

The large demand-supply gap consequent to the State Government's dismal handling of the power sector, threatened to lead to riots across Maharashtra including Mumbai, and this has been averted with the timely intervention of NTPC to tackle the State's power requirements.

But now another farce in unfolding — the restart of the Dabhol Plant and the State government's resolve to buy power from the weather-ravaged Dabhol facility at Rs 2.30 per unit. It is a farce because the tariff is clearly not tenable. The the ultimate losers will be the FIs which would have to write off not only the current Rs 10,250-crore outlay, but the crores of rupees that are bound to be sunk in the second phase of the project. Not to mention the huge revenue losses that the project would suffer because of the totally uneconomic tariff proposal.

The project will have to use naphtha till such time the LNG facility is ready, and the plight of projects using naphtha needs no explanation. One only hopes that the Maharashtra government will not insist on the use of naphtha for the project. This brings us to the use of LNG on a long-term basis for the new Dabhol project.

It appears that gas as delivered, excluding State taxes, will not be for less than $5 per MMBTU. Though the supply contracts are signed for far less, they do not account for transport, re-gassification and pipeline costs. At $5, the variable cost of fuel per unit of electricity will not be less than Rs 1.70-1.80 and this leaves only Rs 0.50-0.60 per unit to cover the cost of repayment, interest and O&M of the new facility.

At 740 MW and 85 per cent capacity, this would mean Rs 330 crore to cover these heads and at 2084 MW, Rs 930 crore though we it is not known yet what the capital cost is going to be for the second phase of 1,444 MW and the LNG plant.

At conservative estimates the project needs to recover at least 7.50 per cent of the capital cost per annum as depreciation, so that it can be used for repayment. This would work out to Rs 770 crore for the first phase. Further, add the interest, O&M and administrative costs. Can the project recover all these at Rs 2.30 per unit?

Both, the governments of Maharahstra and India are creating this make-believe story to settle the project debt as well as to take the people down the garden path of restart. The reality however is that the Rs 2.30 tariff does not make economic sense and the government will end up subsidising this.

Having settled all the foreign dues it is best that the project is closed and both the Central and State governments guarantee the FIs repayment of their loans over the next 15 years or so. They debt can be converted into government borrowings and long dated notes issued.

Simultaneously, the FIs may be allowed to sell the plant to willing buyers on as is where is basis so that they can recover a part of their losses. The turbines, the boilers and other project assets including the LNG terminal should fetch significant money if sold in parts.

If the project is allowed to restart, the money needed to subsidise the annual losses arising out of the unviable Rs 2.30 tariff would be significantly large, which again will result in heavy losses for the FIs.

Alternatively, the tariff will have to be much higher than the Rs 2.30 — say, in the region of Rs 3.40-3.50. Even then, the uncertainty of the fuel price will remain as LNG would continue to be pegged to crude prices which does not show any movement southwards on a long-term basis.

If any, the movement would be north bound targeting a crude price of $80-100 over the next three years which would force the project to close down any way. Maharashtra cannot afford this project and will have to look at alternative long- and short-term strategies to meet the State's demand for electricity.

According to Power Ministry statistics, successive governments in the State have displayed a callous disregard to power sector development and that has brought the State to its current pass.

The Western region grid — Gujarat, Maharashtra, Madhya Pradesh, Chhattisgarh and Goa — have a combined gross capacity of 33,533 MW of which Maharashtra has 15,301 MW — 45 per cent of the total. Energy shortage in the Western region has increased from 10.7 per cent in 2003 to 15.80 per cent in 2005 while that in Maharashtra has risen from 8.8 per cent to 17.9 per cent and the peak shortage from 12.5 per cent to 31 per cent in the same period.

Maharashtra, which is the largest and the most industrialised State in the Western Region grid, has the distinction of not adding any generation capacity in any sector — private, public and central — since 2001. The last expansion in capacity took place in 2001— of 420MW.

Maharashtra has not added any private power projects to the grid in all of the 14 years the Independent Power Production policy has been around. Capacity addition in the Tenth Plan period in the State sector is 750 MW and the capacity addition in the Eleventh is 3,660 MW in the State sector with most of them scheduled to join the grid in 2008-2010.

There are no significant R&M plans in both Plan periods.

Still, however, all this does not call for a restart of the Dabhol project — it has no viability in terms of fuel or locational. With more than two LNG terminals in the west coast, the Dabhol terminal will be superfluous anyway.

As it is, the LNG terminals are grossly underutilised. The gas pipelines start in Gujarat and it makes economic sense to buy LNG from one of the Gujarat terminals instead of developing new infrastructure in Dabhol.

Maharashtra has to fast-track all its Eleventh Plan projects — 3,660 MW, coal-based — and complete them in the next three years instead of exhuming projects such as Dabhol.

(The author, a power consultant, can be contacted at paddy8@vsnl.com)

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