Going by the numbers Enron’s Chief is quoting, Dabhol is the world’s most expensive gas-fired power plant.

Surfing the net the net, the other day, I came across an interesting debate. It emanated from a comment made by the California Attorney General Bill Lockyer, who is investigating the energy crisis in that state and has offered hundreds of millions of dollars in reward for information about law breaking in the energy business.

It is a comment that has had the gay rights groups, the prisoners’ rights groups and assorted other civil liberties groups up in arms. But it has even more interesting import for India.

So what us the comment anyway? Well talking about Enron and the way the energy major conducts its business Lockyer said, “I would love to personally escort (Enron Corp chairman Kenneth) Lay to an 8 x 10 cell that he could share with a tattooed dude who says, Hi honey! My name is Spike’.

Remember, this is the AG of the State of California. Not some money grabbing, ‘property expropriating’ communist ideologue from a third world country. Does he know something that we in India don’t?

Enron Corp has its back to the wall and has made it abundantly clear that it is desperate to get out of India. Good riddance all of us would say, except for the caveats attached for this exit. It has been claimed the project has been financed using a combination of debt(about $2.2 billion odd and the rest by equity. The equity number varies from time to time, but their claim is about billion plus, perhaps as much as 1.2 billion.

Enron wants the equivalent of 1.2 billion odd dollars (about Rs. 6,000 crore) to make an exit. On the face of it this would seem to be a perfectly reasonable argument. After all as a businessmen, if I want to exit a project a midway, the least I expect the buyer to pay is what I have invested in the project. But herein lies the problem.

If these numbers were correct, then the project cost of Dabhol is now adds up about n$3.4 billion that is, the equivalent of $1.7 million per MW. This would have the dubious honour of the most expensive gas fired power station in the history of the world and winning the honours without even a close competitor.
DABHOL SEOINCHON, Korea MALAKOFF Bhd. Poryong, Korea
Size (MW) 2,184 2,000 640 2,000
Cost/MW
($ mn/MW) 1.70 0.45 0.58 0.425
Cost/MW
(Rs. cr/MW) 8.20 2.20 2.80 2.00
Total Cost $3,400mn $900mn $370mn $850mn

“Malaysia’s Malakoff plant will offer energy at about Rs 1.54 a unit, or less than a third that of Enron’s Dabhol power plant.”
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Let us keep the Enron issue aside for a minute and look at three power plants that were set up over the last eight years in our part of the world.

Seoinchon, Korea has a 2,000 MW combined cycle gas turbine plant. In every technical sense, it is a clone of the Dabhol Plant. The same GE STAG 207 FA turbines are being used, as those in the Dabhol plant. Guess what is the cost of the plant? $900 million or $0.45 million/MW! Less than a third of the Dabhol cost.

Again in Korea, construction of the 2,000 MW combined cycle gas turbine plant at Poryong began in 1996 and the plant was commissioned in 1999. And the price. $850 million or $0.45 million/MW! Interestingly, the efficiency of the Pryong power plant is 60 per cent, while that of Dabhol is effectively 48 per cent.

As recently as this month, Malaysian state-owned utility Tenaga Nasional Bhd signed a PPA to buy power from Malakoff Bhd for its 640MW project. The project’s cost are estimated at about $370 million or about $0.58MW. This is slightly higher than the other two examples, but bigger plant would always be cheaper due to efficiencies of size.

Prayas, a tiny, three-member NGO from Pune, has studied project costs of about 40,000 MW of power projects between 1991 and 1998. The average project cost was in the region of $0.6 million/MW and this included small 30 MW plants as well.

As a businessman, the cost of electricity matter to me to run my business efficiently. The main reason for my interest in the subject is the ridiculously high cost of power and the decline of competitiveness on this among other reasons.

As a matter of interest, the energy from the Malaysian PPA is slated to be delivered at energy prices of about 3.2 cents/kWh under a 21-year PPA that is about Rs. 1.54/unit. This represents the cheapest power on this side of the world and less than a one-third of both Enron as well as the price my plants pay today. So let us look at the calculations for investment in Dabhol again. $900 million is cost of an identical plant (the first Korean one of the same size and using identical turbines that is nearly a clone).

‘Wait a minute,’ you make ask me here,’but did Enron not spend more money.’ Yes we would probably need to factor some ‘additional’ costs.

Let us add the cost of the LNG jetty, the regassification terminal and other add ons. (By the way these had very little to do with the Dabhol Power Plant. The LNG jetty was to the cornerstone of Enron’s energy distribution business in India. But like any good supplier Enron billed all of it’s costs to its client – Maharashtra State Electricity Board (MSEB) – which like any good public sector unit agreed to pay for things it did not need in the first place). Even with these add ons, the capital costs (proportionately) to MSEB ought not exceed $1.2 billion.

“An interesting quote on Enron comes from California’s Attorney General Bill Lockyer: “I would love to personally escort (Enron Chief Kenneth) Lay to an 8 x 10 cell that he could share with a tattooed dude who says, Hi Honey! May name is Spike”.

Now doing business in India is particularily difficult. As Enron itself said, it had to spend a lot of money to ‘educate’ Indian decision makers. (‘Educating’ IDBI and ICICI on how to lend. So let us assume that the cost of doing business in India is an additional one or two per cent of project cost – two per cent in this case, adds another 24 million – Enron had of course claimed about 20 million in these ‘additional’ costs (in other words ‘over and above project costs’ – the new infamous ‘education monies’ of 20 million). The figure does not budge. 1,224 million. This represents a difference of 250 odd per cent!.

Let me more generous and add, on say another 30 per cent to this –s ay $400 million. ($400 million is a very large number by the way, in today rupee terms nearly Rs 2,000 crore) for completely arbitrary costs. But this still brings us to $1,600 million odd. One would think the number above, $1,600 million, would be the cost of the project. However, we are not even close. Enron has claimed project costs to be nearly $3,400 million. I can think of perhaps a difference of a few per cent, but over 100 per cent?

The explanation perhaps lies in a little story that was related to a friend of mine. A few years ago, he was a consultant to an industrialist setting up a steel plant. He was looking at the numbers and felt that they did not add up. The industrialist put his headback, laughed and said ‘No one puts up projects in India so that you can make money after the project is commissioned and product starts selling. You put up a project so that you can make money while the project is being implemented.

I suspect that is exactly what has happened in the Enron project. The mission $1.7 billion odd has been probably siphoned off by over invoicing and other time honored tricks. In other words, Enron has already recovered all its money that it had invested and also made a very generous return on the money it actually invested.

At this stage, instead of demanding money at all, Enron should be worrying about returning the siphoned money in equity, perhaps about $400 million, and additionally, the $400 million it owes MSEB a result of the breach of its contractual obligations.

To summarise, an equitable settlement at this stage would be that Enron pays us $800 million (about Rs 3,800 crore) and in return, we agree to forget the whole issue!

Three days after the tragic events of September 11, when not only America but the entire world was in a state of deep shock, Lay ought to be told to stop screaming ‘expropriation’ and the threatening sanctions on us. Instead he ought to be grateful for small mercies, count the money he has already made and simple lay off. Otherwise he may have to worry about some Indian prosecution.