The entry into commercial operation of Phase 1 of the Dabhol combined cycle power plant and the financial closure of Phase 2 (as reported in this month’s news) mark a major milestone in the development of India’s energy infrastructure and symbolize the rehabilitation of India as a place where you can get involved in large power projects without necessarily losing your shirt.
Considerable risks of course remain, in particular of the political variety, as demonstrated by the fall of the government last month and the fact that the country seems to be currently averaging about one national election per year. But India is in desperate need of more power generation capacity (currently it has 81 GWe for a population of 960 million) – and where there’s risk there’s reward. Risk managers par excellence are Enron and the champagne corks must have been popping in Houston in early May when their dogged persistence at Dabhol finally paid off.
When Phase 2 is completed (scheduled for 2001) Dabhol, with a total installed capacity of 2450 MWe, will be the world’s largest private power plant (and will, incidentally, have around 610 more megawatts than all India’s current nuclear stations combined). But its been a long and difficult journey to get to this point.
The plant was one of the eight so-called “fast track” private power projects first touted in 1991 as part of efforts to open up the Indian power market to private developers. Only two have so far achieved full commercial operation and the financing for five of them still has not reached closure.
The Dabhol project proper began in 1992 with a memorandum of understanding signed between Enron, lead developer, and Maharashtra State Electricity Board, which will buy all the electricity under a 20 year power purchase agreement. Owner operator is Dabhol Power Company, a consortium including Enron, Bechtel (designer and builder of the plant) and GE (main equipment supplier).
Right from the beginning of the project, the proposed plant, seen as being expensive and environmentally damaging, was fiercely opposed by environmentalists and nationalists and was the plaything of politicians. Articles about it appeared in the Indian press just about every day. There was a bomb attack on an Enron employees’ hotel in Bombay. The plant was the subject of endless law suits, although all of these were eventually dismissed or withdrawn.
Then in 1995, the Hindu nationalist BJP came to power in Maharashtra state, having campaigned vehemently against the project, and in August of that year issued a decree killing it – an alarming development for the world’s largest limited-recourse financed independent power project. Enron sought arbitration and compensation and Maharashtra state countered with a lawsuit claiming fraud, misrepresentation and corruption.
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“Dabhol will probably come to be seen as a watershed project” |
The picture looked bleak and the pessimists said the situation could not be recovered. However they were proved wrong. Enron embarked on about a year of diplomacy, cultivating the opponents and “mending fences”. A key role was played by Enron’s Rebecca Mark, who even took to wearing Indian national dress. On the other side the BJP, now in power and finding itself responsible for the economic development of the region, realised that the project had to be resuscitated. Eventually a deal was struck. Enron cut the project costs by $300 million and lowered electricity prices, while Maharashtra was sold a 30 per cent stake in the plant at a knockdown price. The BJP was transformed from opponent to one of the plant’s staunchest defenders. Both Enron and the plant’s critics seemed to have been unusually willing to learn from their mistakes and have ended up supporting each other. An Indian was promoted to head the project and the mood of popular democracy deliberately embraced by Enron, with the slogan “power to the people” appearing on project letterhead. The suspension was lifted in August 1996 and subsequently work was able to restart.
In addition to these dramatic political issues there were also a host of other smaller hurdles that had to be negotiated. For example, bureaucracy. No less than 140 clearances were required from 27 government departments. There was the problem of working in an extremely remote site – a volcanic bluff overlooking the Arabian sea – without any infrastructure to speak of and of course there was the monsoon to contend with. Some way into the project the site layout had to be changed, in the light of detailed modelling studies. Acquiring the necessary land and satisfying the needs of the many existing landholders not surprising proved lengthy and difficult. Then there was the change of primary fuel to naptha following lifting of the suspension, entailing changes to engineering design and specifications that were already close to completion (the whole plant will move to natural gas as primary fuel on completion of Phase 2).
Along the way, Enron has gained some hard-won experience in how and how not to conduct business in India and on the project management side Bechtel has picked up a number of useful lessons from Dabhol Phase 1 that will benefit future projects. For example on a modern construction site, traditional labour intensive Indian building methods can be very effective, particularly if used for non-critical-path items, alongside sophisticated imported equipment deployed on critical-path items.
Dabhol will probably come to be seen as a watershed project in the country’s modernization, but it is really only at the beginning of India’s private power era and the development of its energy infrastructure. One significant aspect is its role in gas supply. “Financial close of the second phase realizes Enron’s goal of bringing natural gas to the west coast of India,” says Joseph Sutton, chairman and CEO of Enron International, with LNG supplies secured from Oman and Abu Dhabi.
Phase 2 has had its brushes with uncertainty. For example one year ago there was the political fallout from India’s nuclear weapons test, which made US Exim financing unavailable. Enron moved quickly to plug the finance gap with Japanese and Belgian sources.
However, provided the current winning streak can be maintained, Dabhol is set to become a model of what can be, and must be, achieved in India’s power sector.
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