ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Lessons from Dabhol

The invoking of the central government’s counterguarantee by Enron-promoted Dabhol Power Company for payment of dues by the Maharashtra State Electricity Board (MSEB) and the setting up of yet another committee to review the project are significant developments in the reform of the power sector. Of the problems specific to Dabhol, a clear picture may be expected to emerge after the second review committee, whose composition is reassuring in terms of expertise and balance, submits its report. However, the Dabhol imbroglio offers some general lessons for power sector reforms, which can be ignored only at great cost to the economy.

The invoking of the central government’s counter-guarantee by Enron-promoted Dabhol Power Company for payment of dues by the Maharashtra State Electricity Board (MSEB) and the setting up of yet another committee to review the project are significant developments in the reform of the power sector. Of the problems specific to Dabhol, a clear picture may be expected to emerge after the second review committee, whose composition is reassuring in terms of expertise and balance, submits its report. However, the Dabhol imbroglio offers some general lessons for power sector reforms, which can be ignored only at great cost to the economy.

The charges against the Dabhol project are many. It is designed as a base-load project whereas what Maharashtra needs is a plant that kicks in during peaking shortages. Offering the Dabhol Power Company guaranteed returns at 90 per cent availability of its 2100 MW capacity (of which 740 MW is currently operational as Phase 1 of the project) means that MSEB would have to back down its lower cost plants in order to draw power from Dabhol, which would raise the average cost of MSEB’s power. Fuel price is a pass-through, reflecting the dollar cost of the fuel used fully in the tariff, exposing the tariff to exchange rate volatility in variable costs. The use of liquid fuels is another source of price volatility. Then again, the Dabhol project in its present form is hedged against all risk. All power has to be evacuated by MSEB and Dabhol does not have to scout around for buyers. If MSEB does not evacuate the power available, it still has to pay for the fixed costs, as part of the two-part tariff formula. If MSEB fails to pay up, the state government has to do so. If even the state government fails to meet its contractual obligation to the Dabhol Power Company, the central government would make good the payment. Should a project without any risk be entitled to such high rewards as the ones that the Dabhol Power Company seems to be making, given the high tariffs?

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