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Dabhol Project PPA: Structure and Techno-Economic ImplicationsAuthor(s): Girish Sant, Shantanu Dixit, Subodh WagleSource: Economic and Political Weekly, Vol. 30, No. 24 (Jun. 17, 1995), pp. 1449-1455Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4402880

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D a b b o l P r o j e c t P P AStructureand Techno-Economic mplications

Girish SantShantanu DixitSubodh WagleThispaperanalysesthepowerpurchaseagreement PPA)betweenDabholPower CompanyDPC), theEnron ubsidiarywhichis puttingup the Dabhol power project,and the MaharashtraElectricityBoard (MSEB). Thedifferentaspects ofthe PPA are examined and the techno-economic mplicationsbroughtout.The analysis shows that,contraryto the claims of DPC, the levelised tariff or DPC's power will vary rom Rs 3.44per kWh o Rs 4.68 per kWh,dependingon the-priceof oil, theplant loadfactor and the rupee-dollarexchangerate.ForpowerfromDPC to be viable or MSEB, he latter's averagetariffwillhaveto keeprisingbyover 14.5 per centperannumover the 20-yearperiod. And, ust on account of the bloatedcapitalcosts of DPC and the abnormallyhighprofitsassuredto it, AfSEBwill end up paying Rs 225 crore extra per year.

IN the debate over the techno-economicaspects of the Enron controversy,at everystage new information, arguments andallegationsarebeing providedbyboth sides.To help resolve the ensuing confusion, anindepth study ol the original documents ismandatory.Among variousdocuments, thepowerpurchase greement PPA) s theheartof any independentpowerproject (IPP). Itguaranteesmarketfor power produced bythe IPPand the tariff atwhichit will be soldto the purchaser.The PPA creates a legalobligationon both theparties o pertorm hepreviouslyaccepted asks na predeterminedmanner.Thispaperpresentsananalysisof thePPAbetween Dabhol Power Company (DPC),the Enronsubsidiaryhandling the Dabholproject, and MaharashtraState ElectricityBoard(MSEB). The analysis is carried outinthetechno-econonmicerspectiveanddoesnot dealwith issues like environmentalandlegal ones. The pturpose f the analysis isto clarify the structureof the PPA and itstechno-econolmic mplications. An aittemnptis madeto evolve a methodology to analysesuch issues. Apart from the PPA, theanalysisdraws infornmation rom other publiclyavailable docuimentsand communicationwith MSEB.l'he first three sections otthispaper elaborate various aspects of thestructureof the PPA, while the laitter oursections deal with the importaint echno-economic implications.Since, a lot has been written and saidabout the DPC project, a certain level otknowledge of terms and issues isassumed. To limit the length and reducecomplexityof thepaper, hepaper s toeusedonly on the fitst phase of the project with695 MW capacity aind using distillate oilas fuel.1.0 Salient Facts about PPA betweenDPC and MSEB

Thissectiondescribes ome mportantactsahoutDVl'(.ndI'P'Anorder o clarifysomcmisconceltions.

The DPC plant is a build-own-operate(BOO) type of plant.ThePPA betweenDPCand MSEB was signedon December8, 1993and was lateramendedonFebruary , 1995.The PPA assures DPC that MSEB will buypower from DPC for 20 years and makepayments tthenegotiated ariff.Afterexpiryof the contract, MSEB has an option ofbuyingthe plantfrom DPC.The methodtocompute this cost is not fully spelled out inthe PPA.The PPA assures MSEB that DPC willconstruct his 695 MW (625 MW base and70 MW peaking) plantin 33 monthsafterthe financial closurc. The financial closurewas effectedsometimeduring ebruary 995.DPC assures90 per cent availability of theplant. For calculating tariff, a minimumefficiency of 44.9 percent or base oadplantand 28.1 per cent for peaking plant will beconsidered.The c(st of fuiel will be passed on toMSEB. EnronFuels International as beenappointedas the fuel manager,andwill beresponsible oridentifying he least cost lfuelsupplier. It will be paid $ 2.5 million peryearby MSEB, throughDPC,fordoing this.MSEBcan exercise controlon this processand DPC will need MSEB's approval forthese purchase contracts.All contracts uring heconstruction eriodalso need obeapprovedbyMSEB.However,MSEB is allowed to object only if plantspeciticationsare materially from safetyoreconomic point of view) harmful to itsinterests.The PPA does not specify capital cost ofthe project. Change in capital cost (eitherdecrease or increase)will not be passedonto MSEB. Butchange ncosts ductochangein customs duty and other taxes will bepassed on to MSEB. The new governmentof India (OI) guidelines (whichassure 16per cent return onl equity, etc) are notapplicable otheDPCprojectand n this casetariff is based on negotiatedvalues agreedmutually by DPC and MSEB. Hence, theeconomnic analysis of the PPA and

comparisonof DPC's expected profitwiththe GOI guidelines become essential.2.0 DPC's Performance Guaranteesand Related Penalties

One of the main planksof the pro-Enronargument is the various performanceguaranteesfrom the DPC and the relatedpenalties it has agreed to pay in case ofdefault. As per the PPA, DPC will paypenalties or late completionof plant,short-fall in capacity, and efficiency lower thanthe agreed value. Additional penalties areapplicable n case the plantavailability allsbelow 90 per cent. This section lists andanalyses these guarantees and relatedpenalties. Table 1 shows the payment byDPC to MSEB and by DPC's contractorsto DPC for failure to give specifiedperformance. It must be noted that theagreed paranmeters,when these penaltiesbecome applicable, are different for DPCand for it's contractors. The implicationsof these penalties aregiven in the next fewsections.2.1 GuaranteeagainstDelav inConstruction

DPCassures plantconstructionwithin 33months.If the plantconstruction s delayedbeyond 33 months, for first six months ofdelay, DPC will pay $ 14,000/day (Rs 0.64/kW/day) to MSEB. After first six months,the penaltywill be increased to $ 1,10,000/day (Rs 5/kW/day). This is on the lowerside ot the range (Rs 5 to 7/kW/day)prescribed by Vanguard Capital, theconsultant to government of India (GOI)[VanguardCapital1994].On the otherhand,as per the constructioncontractsigned byDPC with Bechtel and General Electric(calledcontractor),DPC will receive muchlarger penalties from the contractor.Thecontractor assures construction in 33months,and for the delay upto six months,contractor will pay $ 2,50,000 per day toDPC and there after $ 3,40,000 per day[IDBI 1994]. In effect, DPC will retainnearly $ 2,30,000 per day after paying

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FIGURE 1: STRUCTUREOF DPC TARIFFCapacityCharge

$ (54.0 per cent)$ I$

Base capacity Peakingcapacitycharge (51.4 percent) charge (2.5 per cent)*

$ Rs/$Insurance LNG default Operationandpayments rebate(?) maintenance O andM)(1.8 per cent) (7.8 per cent)

Rs $Rs debt Capitalrecovery chargeservice RRCR*, RRTCR*,RRRCR(5.3 per cent) (36.5 per cent)

Energycharge$ (46.0 per cent)

$ $/Rs $Fees for Variable Oil take-or- Deliveredspecial 0 and M pay charge energy paymentoperations (0.3 per cent) (--) (DEP)(0.7 per cent)

$ 1$Base Peak(42.7 per cent) (2.3 per cent)

Notes: The valuesin parentheses ndicate theshareof thatcomponent n total paymentof Rs 1,299crofe in 1997. This calculation for base casedefinedin the text assumes90 percent PLF ofbase capacity (625 MW) and 27 percent PLF of peakingcapacity (70 MW).- $andRssymbols indicate hepredominant urrency n whichpaymentwill be denominated.- * indicatesa 4 percent back-loading (an increase of 4 per cent per annum).

penalty to MSEB. This sum of $ 2,30,000is sufficient for DPC to meet the dailyinterestpaymenton all debt and allows anadditionalmarginof Rs 13 lakh per day forotherexpenditures.neffect, incase ofdelay,DPC pays nothing from its pocket, neitheras intereston loans nor as the much talkedabout penalties to MSEB. Contractor'swillingness to assure such heavy penaltiesto DPC also indicates that guarantee forconstructing uch a plant n 33 monthsdoesnot involve a big risk.2.2 Guaranteeagainst Shortfall n Capacity

Between DPC and MSEB, the plant willbe consideredcommissioned only if it canoperate at a minimumof 80 percent of thenominal capacity (i e 80 per cent of 695MW= 556MW). In,case,thecommissionedcapacity s more than80 percentof nominalcapacitybut less thanthe nominalcapacity(695 MW), DPC is allowed to makerectifications n the plant,within 12months,to raise the capacity up to 695 MW. If itfails to do so even after 12 months, DPC

pays $ 100/kWof capacity shortfall. Thisis nearlyhalf of the penalty amount ($ 185to 200/kW) prescribedbyVanguardCapitalin such cases.As per the PPA(Schedule 1), the capacitybeing built at Dabhol is not 695 MW but725 MW(4.4 per cent more than695). DPCwill not accept the plant from its contractorif the capacity is below 696 MW. And thepenalties ordelayedconstruction describedabove) will applyto the contractor. f plantcanproducebetween696 MW and725MW,DPC will accept he plant,but the contractorwill be expected to make modifications intheplant o raisecapacity o725MW.Duringthisperiod,DPCwill receiveRs 28/kW/dayfor the short-fall below 725 MW.If thecontractor ails to deliver 725 MW,DPC gets $ 1,892 per kW of capacityshortage.It can be recalledthat DPC paysonly $ 100perkWas penaltyto MSEB(forshortfall below 695 MW). In effect, DPCearns Rs 6 crore per MW of the shortfall(below 725) but pays MSEB only Rs 0.32crore/MW for shortfall below 695!

If, for example, the final capacityis only700 MW, then DPC will receive $ 21,860per day from the contractorand, further, ncase of failure of the contractor o upgradecapacity to 725 MW, DPC will also receive$ 47.3 million. However, DPC will not payanything to MSEB on this account.RatherDPC has a option of selling this additional5 MWto MSEB as described ater.In suchcases, DPC make profits and not losses!2.3 Guarantee or Heat Rate

At full load and standard onditions, theGE(GeneralElectric)equipment sexpectedto operate at an efficiency of 53 per cent.Despite this claim, theGE guaranteesDPCa maximum heat rate of 7,243 Btu/kWh,called GuaranteedHR, i e, anefficiency of47.1 per cent. Heat ratesarebasedonhigherheatingvalues andaredefined orexportableenergy. The heat rate is defined as fuelrequired o produceone kWhof electricity,hence higher the heat rate, lower theefficiency.) Ifheatrate s is more,contractorwill pay DPC $ 1,21,000 per Btu/kWhofthe increase.DPC will notaccept plant romGE if the heat rate is higher than 7,533.However, DPC, in turn, promisesMSEB aheat rate of 7,605.*Iftheheat rate ncreasesbeyond7,605, DPCwill absorball the incremental uelcost. Butas per the design and the constructioncontract, he heat ratewill be far lower than7,605. If heat rate is lower than7,605, thenDPC gets the bonus for this. Thus byguaranteeinga considerably ower value ofHR, DPC assures itself a bonus for itsnormally expected performance.To illustrate the point, if the plantachieves a heat rate of only 7,500, DPCwill get $ 31.1 million from contractorascompensationforlowerefficiency, but willsimultaneously receive a bonus of $ 2.27million per year from MSEB for higherefficiency!*DPC may arguethat over the years withcontinuous usage, the plant efficiencydrops and the heat rate increases andhence DPC's assuredmaximum heat rateof 7605 for the contractperiod of 20 yearsis a reasonable offer. However, first, theexpected deterioration n efficiency (henceincrease in heatrate) s far ess and,second,if such a sharp rise in the heat rate isexpected, DPC could have assured anincreasing heatrate over the projectperiodinstead of the flat one it has assured now.2.4 Assured Plant Availability

If the plant availability is below 90 percent, DPC will give a rebateto MSEB.Foravailability n therangeof 86 to90 percent,the capacity payments will decrease* The heatratebasedon higherheating aluesand are defined or exportable nergy.Theheat ate s defined s, fuelrequiredoproduceone kWhofelectricity, ence,higherheheatrate, ower heefficiency.

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proportionally. n other words for each percent point decrease, the yearly capacitycharges reduce by $ 2.2 million. But ifavailability s even lower than86 per cent,the decrease in capacity charge will be atdouble thatrate,i e, $ 4.4 million per yearper percent decrease.But an availabilityof 90 per cent for gasturbines is an internationalnorm and notsomething extraordinary. In addition,according o theDPC's arguments,tsactualinstalled capacity being higher than 695MW(725 MW), the effective availability tis promisingon 725 MWis much ower than90 per cent, whichcould be easily achieved[IDBI 1994].To sum up, the said commendableperformancebeing assuredby DPC needsto be viewedcriticallybecause:(a) Inmanycases, DPC assures a performance(plantcapacity and efficiency, for example) thatis lower thanwhat s achievable n the worstcase. Thus, even if plant performs asexpected, DPC automaticallyget bonus forgood' performance.(b) Further,the so-called 'stiff penalties' that DPC is said tohave promised to MSEB are negligiblecompared to those it is getting from itscontractor. Thus DPC has thoroughlysheltered tself fromanyriskburden.Rather,it has manoeuvred itself into such anenviable position that, in many cases, itstands to gain handsomely even if it failsto attain the performance standards.

3.0 Tariff StructureThe price of electricity from DPC isoftenquotedas Rs 2.4 /kWh.Many attemptshave been made to comparethis price withthat of all other projects across the board.Before going into such comparisons, weneed to understand that DPC tariff is notone fixed number, rather it is highlysensitive to many factors, and is expectedto increase at a steep rate in future. Formost power projectsof SEBs in India, thetariffusually remainsconstantor increasesonly marginallywith passage of time. Tounderstand his crucial difference and itsimplications, it is essential to carry out adetailed analysis of the two-part tariffstructure n the PPA comprising capacityand energy charges.This tariff structuredescribed in PPA is*.;depictedn a simplerform in Figure 1.The.umbers n parentheses indicate the sharef that component in the total tariff for thebase case defined later.

3.1 Capacity Charge3.1.1 Componentsof Capacity Charge

Capacity charge, the first component ofthe tariff,can be understood as similar to'rent'. It is applicable in full, if plantavailability(for generation) of 90 per centis achieved.However, t shouldbe notedthatit is in no way related to the PLF (which

is ameasureof theextent to which theplantactually produceselectricity).Capacity charge includes various fixedcharges such as: (i) Capital repayment(denominated n $ and Rs). The capital re-payment, the single largest component ofcapacity charge, includes debt service andreturnon equity. The debt service of loanin rupees is separately dentified, while therest of capitalrepayment s in dollars. Thedollar component of capital repaymentisback loaded by 4 percent (increases4 percent per annum). (ii) Fixed operationandmaintenance OandM) charge in $ andRs).(iii) Insurance ees (in $). Theinsurance ndOand M paymentsareindexedto inflation(US or Indian nflation, as perthe denomi-natedcurrency). iv) An undefinedquantityof rebate pplicablencase of defaultbyLNG(liquefiednaturalgas)upplier.TheLNGdefaultrebate is defined for sharirig isk of LNGunavailability, ut it was undecided up tillFebruary1995) when PPA was amended.3.1 2BasisforCapacityChargeCalculations

Capacity charge is defined in termsof acombinationof Rs and $ /kW/hr.The 'kW'refers to the kw of 'Rated PlantCapacity',andthe 'hr' are 8760 in a year irrespectiveof thePLF.Thecapacityrating sdoneyearlythrough capacity est.Provisions orrevisingthe value of 'Rated Plant Capacity' arespecified in the PPA. (i) In case of frequentandserious orcedoutages, he rated apacityis to be revised through repeatedcapacitytests. ii)TheRatedCapacity ouldbe revisedvoluntarilybyDPC, ncase of DPC's failureto make full RatedCapacity available forgeneration or six consecutive months, andif DPC sees no chances of improvement nnext six months.The capacity charges will be calculatedhourlyand paid in monthly instalments.Ifplant capacity exceeds 695 MW (asexpected),MSEBhasoption,atthebeginningof eachyear,to eitherbuyorreject hatextracapacity.IfMSEBrejects t for theyear,thisadditionalcapacitywill not be available toMSEBduring the yeareven in case of direneed. IfMSEB'decides o buy thisadditionalcapacity, MSEB will make correspondingadditionalcapacity payments to DPC. Animportant point to be noted is that theadditionalcapacity carries same charge asthe first695 MW. Infact, these should havebeensubstantially ower,asDPC sinstallingthis additionalcapacity in the said capitalcostofRs 2912croreandwillnotbespendingany more for this.

If the DPC plant runs as expected, theadded 9 MW base and 20 MW peakingcapacitywillfetchDPC anadditional evenueof nearly $ 5.8 million/yr (which wouldprovide an additional 2 per cent returnonequity). Power plantcapacityderatesas timepasses, but the possibility of derating bymore than 5 per cent is small. And as in thecase of heat rate, this could have beenaccommodated implybyDPCassuringonly695 MW but offering additionalcapacity,if available, at a nominal charge.3.1.3 Adjustments o Capacity Charges3.1.3.1 AdjustmentsDue To the ExternalFactors

The majorchunk of DPC's profitaccruesfrom capacity charges. These charges areadjusted for a host of variables, such as(i) possibility of customs and sales taxTABLE 2: TARIFF SENSITIVITYTO OIL PRICE,Rs/$RATE AND PLF

90 PerCent 70 Per CentPLF PLF$ 4 per cent,oil -2 percent 3.44 3.99$ 4 per cent,oil 0 per cent 3.63* 4.18$ 6 per cent,oil 0 percent 4.06 4.68Notes:$ 4 percent = $ appreciatew r tRe @4 percent perannumOil 0 percent = Real oil price increaseis 0 percentper annum,etc.* = base case scenario.

TABLE : ExCESSPAYMENTSYMSEBCapita (Rs Crore/MW)Cost 3.0 3.75

Yearlyexcesspayment Rs cr/yr) 290 225One-time excesspayment (Rs cr) 1,350 1,050Note: The reduction ncorporate axfor the alter-nativeplantas compared o that of DPC isignored.

TABLE 4: COMPARISONOF LEVELISEDTARIFF OFDPC AND ALTERNATIVEPLANT

DPC AlternativePlant3.75 Cr/MW 3 Cr/MW

Basecase PLF90 percent 3.63 3.19 3.00Second case PLF70 percent 4.18 3.62 3.45TABLE 1: PENALTIESFORDPC AND CONTRACTORS OR FAILURE TO MEET AGREED PARAMETERSParameter DPC Pays MSEB ContractorsPay DPC$ $

(1) Delay in construction(a) Up to six months 14,000/day 2,50,000/day(b) After six months 1,10,000/day 3,60,000/day(2) Shortfall n capacity 100/kW 1,892/kW

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FIGURE2: ANNUAL PAYMENTBY MSEB SENSITIVITYTO OIL PRICE700600 =50() - _ _ _ _

= 400 - __I30020() -

0 I , , I I, , , , I I97 99 2001 2003 2005 2007 2009 2011 2013 2015

-+ - Fixed Cost 0- Total-A - Total-BReal oil price in $: A-not increasing;B-decreasing @ 2 percent perannum.

FIGURE3: DPC TARIFF(AT THE BUSBAR) SENSITIVITYTO PLFAND Rs/$ Ex RATE12

+ IA8-6 0-

097 99 2001 2003 2005 2007 2009 2011 2013 2015

-0- PLF90,$4percent - -PLF 90. $6 percent A PLF70, $4 percentPLF70= 70 percent PLF of base load plant;$ 4 percent =$appreciating @a percent perannum

FIGUJRE :ESTIMA'TIONOF DIRECT PROFITTo DPC250

Capital RepaymentCharge200

150 DPC Profits

100

50

97 99 200(1 200)3 20)05 20)07 2009 201 1 2013 2015

exemption, (ii) change in corporate tax(income tax), (iii) $/Rs. rate fluctuations,(iv) change in government regulation/lawregarding maintaining dividend reserve,(v) any other change in law/regulation hatwould alterDPC's costs or requireDPC toalter its business practices.The chargesareadjusted (presumably) to maintain DPC'sprofits n case of changein abovevariables.Some important implications of theseadjustmentsare as follows.If DPCwas grantedcustomsand sales taxexemptions, the capital repaymentchargewould have reduced by 14.23 per cent. In1997, this reductionwouldhavebeen$ 23.9million. Due to decrease in corporate taxfrom 57.5 per cent to 46 per cent, thetariffhas declined. This decline will materialiseonly after the 8th year.While signing PPA, the terms of IDBIloan to DPC were not decided. Thecalculations assumed interest on Indianloan at 20 percent per annum. In case theinterestrate s actually lower, it would savemoney, as is the case (IDBI interest rateon DPC loan is 17.5 percent). This savingis notbeingpassed on toMSEB, but s takenoff by DPC and that oo indollars(implyinga protection against exchange rate). Theresult s that he lower theIDBI interestrate,the more the direct profit to DPC.Ten and half years aftercommissioningof phase I, the 4 per cent yearly increase nthecapitalrepaymentwill cease, if GOIdoesnot req"ireDPC to maintain a 'dividendreserve' for paying dividends (i e. if GOIdoes notblock DPC's moneyin banks).Thecapital repayment charge will then startdeclining at 0.42 per cent per annumCommunication romMSEB indicates thatMSEB assumes that such reduction n tariffwill be applicable [MSEB 1995]. But it isnot clear whether the GOI exempted DPCfrom his reserveorDPCunilaterally ecidedto providethis concession. This rebatehasbeenconsidered nour calculations o arriveat the 'conservative' estimate. '3.1.3.2 Availability/Performance RelatedAdjustments

Before going into the availability rebateandbonus, we need to understandhow theavailability sdefined.DPCmakesanhourlydeclaration of available capacity. This'Declared Capacity' is considered to beactually available(available capacity, AC)unless DPC fails to meet MSEB's hourlysupply instructions (called clispatchinstructions). f DPC can supply95 percentor more than 95 per cent of MSEH'sinstructions,the generation level achievedis considercedo be the 'AvailableCapacity'(AC).Butwhensupply s below 95 percent.DPC has to prove that such a shortfalloccurred despite its best eff'ortsandlwasunawarethatsuch situationcoukld ccur. IfDPC fails to prove this, it is consideredas

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'False Declaration',and penalty s toreducethe AC achieved in past few days.The 'Average Availability' in any periodis theratioof averageAC to the rated apacity.In effect, the 'False Declaration' or supplylower than MSEB's instructioncan lead todecreasedavailability.And if this results inavailability lower than the assured, DPCpays a penalty. If this average availabilityfalls below the targetvalue (i e, 86 and 92percent for monsoon and rest of the year,respectively),capacity charges are reduced.The amount of reduction has been alreadydiscussed in section 2.4.In the PPA, there is provision for bonusfor higher hourly capacity utilisation. TheGOIguidelines does npt allow such bonus.TheDPC-MSEBagreementdoes notfollowGOI guidelines. Bonus is defined for peakhours (16 hours) in peaking season(8 months).Thebonusis orhourly capacityutilisation' in excess of target availability(TA). This bonusis definedwith a complexequation. The maximum value of thisexpression,withpresentclauses, can be 0.2to 0.5 percent of theyearlycapacitycharges.So, thepurposeof such a complex equationis unclear.3.2 Energy Payments

Second componentof the two-parttariffis the energy charges. This representthevariable hargesandare nearlyproportionalto the PLF. Itconsistof (i) payment or fuelconsumed (or deemed to have beenconsumed) called 'delivered energypayments' (DEP); (ii) variable 0 and Mcharge; (iii) take-or-pay charges for fuelsupplies; and (iv) special operation fees.The first part, DEP, is the largest (about97 per cent) of the energy payments, andis dealt in detail later.The variableO&Mcharges, which are small, are specifiedseparately n $/KWh and in Rs/KWh, andare indexed to US and Indian inflationrespectively.If the fuel purchaseagreementbetween DPC and the fuel supplier is of'Take-or-Pay'nature and MSEB does notoperate power plant for sufficient durationso as to consume the 'Minimum Take'quantityof fuel, thenthe chargesto be paidto fuelsupplierwillbe reimbursed yMSEB.MSEB would approve the fuel purchaseagreement. Whether the fuel purchaseagreementhas been signed and, if so, whatare its terms are not clear as yet.3.2.1 Delivered Enepgy Payments

The deliveredenergy payment DEP), i e,the fuel charge, is separatelyaccountedforthe baseandpeakingcapacity.Thedurationof operationof base andpeaking plantare,in turn, decided by MSEB's dispatchinstructions.3.2.1 1 Delivered Energy Payments forPeaking Energy

For peaking plantof 70 MW, a fixed heatrate of 12,150 BtulkWh (i e, 28.1 per cent

efficiency) has been agreed.Fuel consumedfor peaking operation s simply calculatedby multiplyingthis fixed heat rate with theenergy deliveredby peakingplant.This fuelconsumption ogetherwithpriceof fuelgivestheDEPpeak.DEPpeak= Priceof fuel x fuelconsumed.3.2.1 2DeliveredEnergyPaymentsforBaseLoad Plant

For 625 MW base load capacity, am'aximum heat rate of 7605 (minimumefficiencyof44.9 percent)will be consideredfor thepayments o DPC. Theexpectedheatrate s far lower as described n section 2.3.Aftercommissioning,heatratewill be tested(TestHR).Theheat rateusedforcalculatingfuel consumed or deemed to have beenconsumed is called Contract.HRand isestimatedas follows:ContractHR = 7605 - max [0.7725x (GuaranteedHRTestHR),O]where, GuaranteedHR is the heat rateguaranteed by contractors to DPC (7243Btu/kWh).Thisimplies thatDPCassuresa maximumHRof 7605, but f the operatingHR s lower,DPC will not pass the full benefit toMSEB.Forexample, f plantoperatesatHRof 7243,the effective HR at which DPCwill be paidwill be 5 per cent more than actualHR.Thisdifference will be passed on to DPC asbonus.In this situation,DPC will get bonusequivalent to 362 Btu/kWh of basegeneration. At oil price of $ 4.63/Btu, thiswill be Rs 0.054 /kWh.At 90 percentPLF,this snearly 8.26 millionperyear equivalentto returnon equityof 3.1 per cent).The GE turbines (frame 9FA), that arebeing used by the DPC, are said to havea 4 per cent higher efficiency than thesmaller turbines manufacturedby BHEL(frame9E). However, the savings achieveddue to thishigherefticiency are takenawayby DPC without even acknowledging it as'bonus'.Adjustments to Contract Heat Rate: Ifthe operating efficiency of the base loadplant changes, DPC can intimate MSEBand the ContractHR will be recalculatedthroughanefficiency test. ThecontractHRdiscussed above is defined for the full load

operation at systeni frequency of 50 Hz.As operating conditions change from timeto time, the ContractHR will be adjustedfor load andfrequency.This correctedheatrate is calculated on an hourly basis, andis used for payment calculations.3.2.2 Special Operation Fees

In addition to the above charges, MSEBpays fees to DPC for some specialoperations. The special operation feesinclude: (i) Fuel management tee of $ 2.5million peryear, increasingat US inflationrate. This fee was widely criticised on thegrounds that obtaining fuel is partof theplant operation and, hence, should becovered in 0 and M charges. (ii) Fees incase MSEB unnecessarily undertakesthecapacity test. If DPC proves that capacitytest was not needed MSEB pays $ 50,000.(iii) Fees for hot and cold starts.3.2.3 Relation between Hot and Cold StartFee And PLF

The PPA allows MSEB to shut off oneof the two gas turbinesof DPC plant.Thiscan reduceplantoutputby ahalf.RestartingthisGT mpliesahotoracold start dependingon the durationof shutdown). The hot startfees (applicable for shutdownof less than12 hours) are $ 10,429 for 9FA GT and $5,015 for steanmurbine. Such starts wouldbecome regular eatures f MSEBuses DPCplantas an intermediate oad plantin orderto make optimum usage of its own cheapcoal plants. In this case, hot and cold startfees would be as much as $ 3 million peryear, with some addition to DPC profits.Closing the GT can reduceplant output byhalf (i e, by 312.5 MW) making the costof reducing output equal to Rs 1.07/kW.This cost can be justified only if MSEBsaves more than these fees by running itscheapercoal plants.Considering(fuel) costof coal at Rs 0.7/kWh in 1997, and thatof DPC at Rs 1.01/kWh, savings will onlystartaccruing if the 9FA turbineis closedfor more than 3.5 hours. For medium loadoperation, closing down one GT, shouldbe possible for 9 to 10 hours. In such acase, savings for first 3.5 hours are usedANNNEXURE:INANCIALSSUMPTIONSORDPC PROFITABILITYSTIMATION

It has been assumed that 5 per cent of DPC equity is brought n the initial year and loan equivalentto 95 per cent of equity (with 12 per cent interest in US $) is brought in the next year. This loanis later replaced by real equity before commissioning.The financing package of DPC has been assumed as follows; The interest indicated is theeffective interest rate, and the term indicates repayment period after construction.Cr Rs Mn $ Interest Term (Yr)Per Cent Per Annum

Total cost 2,912 910Equity capital 266.2Indian oan 95.6 17.5 9.5US exim loan 298.2 8.4 8.5OPIC 100 10.0 12Other $ loan 150 11.0 7.5

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up for paying the hot start fees, in effectDPC eats away 35 to 45 per cent savingsof MSEB. Thus, even though technicallyMSEB is allowed to partially back-downthe DPC plant, these fees act as a majorbarrier.4.0 Price of Electricity from DPC

The DPCtariff s primarilydependentonthree factors: the Rs/$ exchange rate, oilprice,andplant oadfactor PLF).The changein corporate ax rate, exemption of customsand sales tax and exemption to DPC frommaintaining ividendreservewill alsoaffecttariffin a significant way. But, the IndianandUS inflationhave little direct effect onthe tariff.4.1 Base Case Definition

The most talkedaboutcase of 90 per centPLF, with some additionalassumptions, sdefined hereas the basecase. The assump-tions are:(i) Inflationrateof 8 percent perannumin Indiaand4 per cent per annumin USA. (ii) No change in realoil price.Inlast few years, international il prices havedropped (in real $). But for long-termplanning, the major international utilityplanning manuals assume a significantincrease n oil prices (increaseat 2 to 4 percentperannum nreal$). (iii) Redepreciatesat4 percentperannum n relation o US $.HistoricallyRe hasdepreciated ta minimumrateof4.5percentperannumanda maximumof morethan 8 percent per annum(iv) 90percent PLF for base capacity and 27 percentforpeaking capacity. (v) The dividendreserve rebateis applicable from the I1 thyear, i e, the capital recovery charges dec-reaseattherate.of0.42 percent per annum.4.2 Estimate of DPC Tariff and ItsComponents

The DPC tariff is applicable at the doorof DPC.MSEB sresponsible ortransmittingand distributing his power, and will bearthe associated cost and losses. For the basecase, this tariff n 1997 will be Rs 2.5/kWh.Implyinga totalpaymentof Rs 1,240 crore($ 387 million) n 1997.Figure2 shows totalyearly paymentsby MSEB to DPC forbasecase scenario and if the oil price (real)decreases at 2 per cent per annum. About5 percent of this payment s.in rupees andrest ndollar erms.Thecontribution o totaltariff from variouscomponents s shown inFigure 1.ForcalculatingMSEB'seffective cost forprovidingDPC' power oaverage onsumer,we need to considerT andD cost, T and Dlosses, and other expenses inctirred byMSEB. The T andD losses of 10 percentis assumed.As a conservativeestimate, thetotal downstream osts of T and D networkstrengthening, metering, billing etc, isconsidered 60 paisa/kWh (constant for 20years). The electricity* duty levied bygovernment of Maharashtra (GOM) isexpected to be around 25 paisa/kWth n

1997 which is assumed to increase withIndian inflation. Hence, in 1997 the totalcost to MSEB for supplyingDPC powertothe average consumer would be aboutRs 3.57/kWh.4.3 Sensitivity to PLF and $/Rs ExchanigeRate

Ingeneral, hecombined ycle gasturbines(CCGT)are not economical for base loadoperationas their fuel cost (oil in this case)is far more thanthat of coal plants.This isalso true in the case of the DPC's plant. Itis estimated hat,barring ransitionalperiodof next few years, it will be economical forMSEB to use DPC's basecapacityat a PLFof 65 to 70 per cent. The peakingplant,of70 MW, is likely to be used at 27 per centPLF. The most likely scenario,a PLFof 70percent for baseand27 percent forpeakingplant, i-staken here as the second case forsensitivity analysis.Figure3 shows yearly ariffat DPCbusbarfor base case (called 90-busbar)and for thesecond case (called 70-busbar).The Re depreciating n relation to $ at4 percent per annumhas been assumed. Iftheexchange ratevariation s different romthis, it will directly affect the tariffas morethan95 per cent of the tariff s denominatedin dollars.4.4 RepresentativePrice of Electricity romDPC

As mentionedearlier,usually the cost ofelectricity from power plants does notincrease hroughouttseconomic ife,(exceptfor change in fuel price) unlike in the caseof DPC. The capacity chargein DPC tariffhas an in-built increase of 4 per cent perannum.Hence it is inappropriateo directlycompare he said DPC tariffof Rs 2.4/kWhin 1997 with the cost of generation fromother projects.Only the tariff over the fulllife-time of projectcan be compared.Thislife time (levelised) tariff, for DPC plantisRs 4.1 8/kWh for 70 percent PLFscenario.(Throughoutheanalysis, he evelised costsand 'netpresentvalue' are calculatedusinga realdiscountrateof 12percentperannum;i e, nominaldiscount rate of 17 per cent for$ streams and 21 percent for Re streams.)This is the most representative price ofelectricity from DPC, and can be used forcomparison. While for the base case, thislevelised tariff is Rs 3.63/kWh. This tariffis later comparedto the alternativeplants.Table 2 indicates the sensitivity of thetariff to the major variables. The valuesindicate the levalised tariff in nominal Rs.Unless mentioned,the assumptionsare thesame as for the base case.5.0 Estima.ting Profitability of DPC

In this section, DPC's profitability isestimated or the base case specifiedearlier.The financialassumptionsused arespecifiedin the Annexture. DPC's profitability is

calculatedby deducting he DPC's paymentsfrom its revenue as defined below.Major income for DPC comes from:(i) capital repayment charges (RRCC),Rupeedebtrepayment RCR), ndirectbonusfor heat rate ower than heat rateassuredbyDPC to MSEB. While theDPC's paymentsare:(i) debt repaymentsand(ii) applicablecorporate tax.Figure 4 shows the debt repaymentandapplicable tax (superimposed on the debtrepayment).Differencebetween hesevalues(which is shaded) shows DPC profits. Forbetter picture of DPC's profitability, theyearly changing profits areconverted to astreamofconstantprofits levelised profits).This profit is equivalent to little over 40per cent of 'return on equity' (as definedby GOI).If theGOIguidelines wereadoptedDPC would have been allowed to receiveamaximum of 31 per cent returnonequity.5.1 IRREstimation

DPC's profitability in terms of internalrate of return(real, post tax IRR in $) isestimated o be around28 percent. This IRRdoes not include possible hiddenprofitstoDPC such as: (i) throughsale of additionalcapacity to MSEB (as much as 2 per centon the equity), (ii) constructionprofits, asobtainedby ENRON in Teeside plant.UK[Enron 1992], (iii) through use ;-:L lantinfrastructureorother ommerci i .1tivities,(iv) availability bonus, etc.A reportby VanguardCapital submittedto the GOI says that, afterconsideringtheperceived high business risk in India,foreign investors would expect an IRR ofabout 17 to 21 per cent (post tax, real $).This IRRassumesno hiddenbenefits.Usingthis estimate (IRR of 19 per cent), MSEBwill be paying $ 200 million extra to DPCover the 20-year period (1996 NPV).6.0 Whether DPC Project MakesEconomic Sense for MSEB

Usually in Indiacost of generationfromanewpower plant s higher han heexistingaverage ariff.Theaverage ariffreflectsthehistorical average cost of generation.Thedifference between .this average cost ofgeneration from all plants and the highercost of new plantcan be considered as theloss to the SEB owing to thif new plant.Usually, the cost of generation from anyplant does not increase rapidly. But theaverage tariff, keeps increasing due toaddition of new plants, increasingT andDcosts, etc. Hence, SEBs make losses in theinitialyears of operationof a power plant.But,withpassageof time,the ossesdecreaseand eventually SEBs start making profitsfrom selling power from the said plant.In this light, MSEB should take up anyproject if MSEB expects to make profit onit in the life-time of the project.Samelogicshould have been applicable o the decisionof accepting he DPC proposal.As expected,

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in this case also MSEB would make hugelosses by selling DPC power in the initialyears7 to 8 years. Later, f MSEB's tariffsincrease adequately, MSEB would startmakingprofitsthroughsale of DPC power.The concept of net-present-value NPV) isused to define profitability.As mentioned arlier,unlikemost projects,theDPC tariff s expectedto increaserapidlywithtime. Forthebasecase scenariodefinedearlier,DPC tariff increases from Rs 2.55/kWhin 1997 to Rs 8.6/kWh in 2016. Theeffective cost of DPC power by the time itreachesaverageconsumerwouldbe Rs 3.6/kwhandRs 11/kwh or the respectiveyears.The levelised cost at consumerend in basescenario will be Rs 4.88 /Kwh.The averagetariff of MSEB is expectedto be aroundRs 2.2 /kWh in 1997. Basedon this, an estimate could be made of therate at which MSEB tariff will need to beincreasedso thatMSEB makesa net profit(a positive NPV) on accountof DPC in thelifetime of the project.

For the base-case scenario, it has beenestimated hat,MSEB canmakeprofitfromDPCplantonly if itsaveragetariff ncreasesat a rate higher than 15.5 per cent perannum thiscanbecompared otheaveragetariff increaseof MSEB, in last decade, ofabout 12percent perannum).Hence, DPCproject makes economic sense for MSEBonly if averagetariff increase is more than15.5 per cent per annum for next twodecades. This would result in a tariff ofover Rs 30/kWh in 2016 (an increase of7.1 per cent per annumin real terms, anda tariff in 2016 of Rs 8. 1/kWh in constant1997 Rs). Even in most favourablecase ofRs depreciation by 2 per cent per annumand real oil price decrease by 2 per centperannumMSEBtaTiffwill haveto increaseby over 6 percent perannum (real). In thiscase the tariff by 2016 will be Rs 6;6 /Kwh(1997 Rs) If the increase in tariff is not sosharp,DPCprojectwill result in net lossesto MSEB.7.0 HowMuch n ExcessAreWePaying

The LNG/oil firedbase load plant is notan economicaloption for the powersector.In fact, the least cost plan for the state ofMaharashtra indicates very substantialsavings if we adopt options different fromsuch plants [Sant,Dixit 1994]. But for thetime being, it is assumed that project suchasDPC s inevitable.This sectionquantifiesthe excess paymentby MSEB on accountof DPC's high capital cost and highprofitability.(1) Someexpertshave argued hat a plantsimilar o DPC(inclusiveof the nfrastructurecosts) can be builtwith muchlesser capital.The figuresof Rs 3 to 3.75 crore per MWare claimedand supportedby these expertsagainst the estimated capital cost of 4.19crore/MW of the DPC project.

(2) As suggestedby VanguardCapitalan

IRR of 19 per cent can be consideredreasonable.The estimatedIRR of DPC isover 28 per cent (post tax, real, in $).Table 3 shows the excess payments byMSEB, if reduction n capitalcost andtheIRR is achieved. This is expressed in twoways: (a) theyearly saving in croreRs (thelevelised savings).Thiscanbe compared othe levelised capacity paymentof Rs 950crore to DPC;and (b) in termsof one timesaving (1996 NPV). This can be comparedto the capitalcost of the project,aroundRs2,910 crore.The evelise-dariff orthealternative lant(capitalcost of Rs 3.75/MW,andIRR of 19per cent) is compared with the levelisedtariff of DPC, for two assumptions.Thevalues below are in nominalRs (Table4).Conclusions

This paper presents the followingimportantresults:(i) Variousperformance uarantees romDPCand relatedpenalties t hasundertakendo not constituteanysubstantialburden orDPC. On the contrary,DPC would receivebonuses even for ordinarily expectedperformance.(ii)The evelised ariff orDPC' electricityvaries from Rs 3.44/kwh to Rs 4.68/kWhdepending upon the changes in oil prices,PLF, and Rs/$ exchange rate.

(iii) DPC's profitability (estimatedto behaving a real, post tax, IRR of 28 percent)is very high compared to that prescribedby GOI consultants (17 per cent to 21 percent).(iv) MSEB ends up paying aboutRs 225crore extra each year if only the effectsof higher capital cost and higherprofitability are considered.(v) The DPC projectwouldbe viable forMSEB only if MSEB's average tariffkeeps increasing at a rate more than 14.5percent per annumfor next two decades.This tariff rise is more thanthat of the lastdecade.

ReferencesEnron 1992):AnnualReport o theShareholdersand Customers.IDBI (1994): 'Detailed AppraisalNote - DabholPower Company (DPC)', IndustrialDevelopment Bank of India.Mark, Ribecca (1995): The Economic Times,March 23.MSEB (1995): Personal fax communications,May 16 and May 31.Sant, Girish,ShantanuDixit (1994): 'LeastCostPower Planning :A Case Study ofMaharashtra'.Vanguard Capital (1994): 'Principals to beadopted in Negotiating PPAs for IndianPrivate Power Projects', Report to theMinistry of Finance.

Qualifications/Experience requirements and pay scales are asprescribed by the University Grants Commission.1. READERS:a) Two posts in the DEPARTMENT OF PERSONNELMANAGEMENTAND INDUSTRIALRELATIONSb) One postin the UNIT FOR LABOUR STUDIES c) One pbst in theDEPARTMENT OF URBAN AND RURAL COMMUNITYDE\VELOPMENT d) One post in the DEPARTMENT OFSOCIAL WELFARE ADMINISTRATION,and e) One post inthe UNIT FOR RURAL STUDIES.2. LECTURER: Orne post in the DEPARTMENT OFPERSONNEL MANAGEMENTAND INDUSTRIALRELATIONS(reserved for SC)The prescribed application form alongwith the details ofspecialisations and other requirements for the posts can beobtained from the Assistant Registrar (Personnel) either inperson between 10.30 a.m. and 12.00 noon and 1.30 p.m. and2.00 p.m. on working days or by post by sending an applicationalongwith a stamped (Rs.4.00) self-addressed envelope andapplication fee of Rs. 150/- for Reader and Rs. 100/- for Lecturerby Demand Draft drawn in favour of Tata tnstitute of SocialSciences, Bombay. However, those who are interested, at thefirst instance, in obtaining separately the details ofspecialisations and other requirements for-the posts can do soin person during the timings mentioned above or by sending aself-addressed stamped (Rs.4.00) envelope to the AssistantRegistrar (Personnel). For SC/ST. candidates the applicationform will be supplied free of cost on the production of validcaste certificate.The completed applications together with copies of certificatesshould reach the Assistant Registrar (Personnel) on or before21st July,- 1995. Dr. S.K. BandyopadhyayRegistrar.

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