Lights Out for Enron

enron has made it clear that it wants to quit the dabhol power company (dpc), along with fellow foreign sponsors ge and bechtel.the controversy over high tariffs apart,dpc's 2,450 mw combined cycle, multi-fuel capable plant is a world class asset that the indian power sector cannot afford to junk. india just cannot afford to convert a $3,179 million plant into a stranded asset.the question is how to utilise dpc's assets after enron departs from the scene. the first step, of course, is for enron to find a buyer. this is not easy.the union ministry of power has decided to keep off enron and its stake in dpc. the project can do without further charges of favouritism by some political dispensation or the other.this means that ntpc, powergrid, etc are not available to buy out enron's stake in dpc. reliance power, another potential buyer, has announced that its sights are set on bses, mumbai's power distribution company, rather than on dpc. tata power has expressed willingness to buy out enron's stake in dpc, if the price is right. any number of agencies would be prepared to buy into dpc if the price is right. enron spokesmen have said that they would like to exit 'at cost'.the original cost estimate of the dabhol project, phases one and two combined, was $3,179 million, with the foreign sponsors bringing in $1,120 million of their funds as equity and additional support.with 90 per cent of the work over, the project has been stalled and faces time and cost overruns. there is likely to be a huge gap between enron's 'at cost' expectations and potential indian buyers' estimation of the right price. the right price is not just a question of how closely the eventual buyer can crop enron's head in the deal. the right price is a question of lowering dpc's capital costs to an extent where power from the dabhol plant becomes cheap enough to find buyers. it should be noted that the real problem with dabhol power is its high cost, on account of both capacity charges and fuel charges. this problem is not addressed by allowing third party sales by dpc or by improving the financial health of the maharashtra state electricity board through lower subsidies,t&d losses, etc. only by lowering capacity and fuel charges can the tariff be brought down. by selling enron equity at a discount, it is possible to bring down the cost of servicing equity. if lenders to the project also agree to write off part of the loan and/or accept lower interest rates, the cost of servicing debt would also come down. however, it is unlikely that the extent to which capacity charges can be brought down in this manner would suffice to lower the overall tariff of dpc power to a level that is acceptable to power consumers. supplementary measures are required to do this. one such measure is fairly straightforward, and has already been proposed by dpc.that is to accord dpc the status of a mega power project. a mega project is exempt from customs duties on capital equipment and gets a tenyear tax holiday.this would lower capacity charges. at present, the government's policy on what constitutes a mega power project is totally arbitrary. although a capacity of 1,500 mw has been stipulated as the basic consideration, that does not suffice for the status. just four projects have been declared mega projects. dpc would have, after completion of phase two, a capacity to produce 2,450 mw of power, of which 2,184 mw would be exportable. however, dpc has not been accorded mega project status. another option that needs to be explored is tapping a key quality of dabhol power that has found no commercial reflection so far.that is the fact that dpc would be one of the cleanest power producers in the world, because it would run on liquefied natural gas. dpc's environment-friendliness finds no commercial reflection because of policy failure. suppose it were the policy for governments around the world to penalise pollution with a tax, clean power would immediately get a significant boost in terms of relative prices vis-a-vis polluting power. however, taxing pollution is not easy. if a nation takes an individual initiative in taxing its polluters, it would immediately put its producers at a disadvantage vis-a-vis their competitors abroad who do not have to pay a tax on pollution. governments around the world have failed to tax pollution, including india's. however, there is no denying the gains to be had from using natural gas, rather than coal, to produce over 2,000 mw of power. this gain accrues to indian nationals, in the form of avoided pollution, and to the world at large, in the form of avoided greenhouse gas emissions that induce climate change. both sets of beneficiaries should be willing to pay for their benefit. the government of india could consider a subsidy or exemption from some more taxes for dpc.a mechanism for the rest of the world to pay for reduced greenhouse gas emissions does not exist right now. a potential means to this end is the clean development mechanism envisaged in the kyoto protocol, under which a developed country with an obligation to reduce its greenhouse gas emissions could take credit for lowering such emissions in a developing country by paying, at least in part, for such emission reduction. the kyoto protocol would have to be ratified by 50 developed countries before it comes into force.the dpc sale cannot be delayed indefinitely till that happens. some interim measure or the other would have to be adopted, which allows the rest of the world, particularly the developed world, to pay for dpc's contribution to pollution abatement. enron chairman kenneth lay's proximity to the current us president should come in handy to persuade the world bank or some other multilateral agency to devise such an interim measure.a facility could be set up that buys up pollution abatement credits from developing countries for future sale to developed country seekers of such credits. such options might be a little unusual but need to be pursued, if projects like dpc are to be salvaged.