The Ratnagiri power plant, earlier Dabhol Power, grabbed headlines yet again this week only to consume more loans from banks and more concessions from governments just to stay afloat. Last week, Ratnagiri Gas and Power Private Limited entered its third avatar. It got split into a regasification company and a separate power company.
23-years ago its first avatar Dabhol Power Company was conceived by US gas company Enron as the 1970 megawatt gas-based power company. GE and Bechtel two other US companies who were constructing the plant were minor shareowners with 10 percent equity each. Realising that gas isn't available in or around India, Enron simultaneously worked with the US, Indian and other governments to lay a gas pipeline from the Middle East to Turkmenistan, Iran, Afghanistan and Pakistan to India. However, everything that could go wrong went wrong, environmental protests delayed the plant, political parties wanting bribes blocked and unblocked the plant. Enron and the US government pressured the Indian government. Then Enron went bankrupt.
Minority shareholders Bechtel and GE took the Indian government to court and finally by 2003-2004 India paid off the foreign holders and Dabhol became an Indian plant.
In 2005, it entered its next avatar with NTPC and GAIL as its shareholders. Lenders had to pump in a little more money and get some loans converted to equity. However, this time gas became the villain. It became expensive and scarce. Gas available under the administered price was less and KG-D6 gas supply didn't come as expected.
By 2013, accumulated debt and scarce gas brought the plant to a halt.
Now, with the coordination of the Union power ministry, the company is to be split into a gas unit and a power company. The turbine and re-gasification plant will form one company into which banks will pump in more money to make it viable. The power unit which has some gas from recent auctions has found a white knight in Indian Railways which will buy the somewhat uncompetitively-priced power.
However, the question is if even after 23 years and massive concessions from successive governments and banks, will the company be viable?
IDBI Bank deputy MD BK Batra says RLNG facilities will be demerged into a separate SPV. "They needed additional investment for the capacity to be fully used to 80 cargos. It cannot be done unless break water facilities are there," he told CNBC-TV18. Additionally, in the current situation, lenders were finding it difficult to lend additional money for that purpose, says Batra. "So, that is one reason why it became necessary to separate it out of the main plant, put it into a separate company, provide additional money, enable it to go to its full capacity and earn sufficient revenues to service the debt which is going to be allocated to it," he adds.
Meanwhile, former power secretary RV Shahi says with crude prices coming down it should be possible to access cheaper LNG. This will make it possible to have domestic gas pooled with LNG, with the government of India scheme to have more gas for this plant. "If the price of power is still higher than what normally state electricity boards would like to buy or the distribution companies would like to buy at then the railways can be a good customer. Railways purchase price today is very high in most of the states because every state has a traction tariff and traction tariff happens to be the highest," he explains.
Below is the verbatim transcript of RV Shahi and BK Batra's interview with CNBC-TV18's Latha Venkatesh.
Q: If you can tell us whether the gas turbine itself is viable as of now or it will become viable only after the break water infrastructure is put in?
Batra: Right now the way the scheme is being put in place is that, RLNG facilities will be demerged into a separate SPV. They needed additional investment for the capacity to be fully used to 80 cargos. It cannot be done unless break water facilities are there.
In the current dispensation, in the current situation, lenders were finding it difficult to lend additional money for that purpose. So, that is one reason why it became necessary to separate it out of the main plant, put it into a separate company, provide additional money, enable it to go to its full capacity and earn sufficient revenues to service the debt which is going to be allocated to it.
Q: The owners of the gas turbine remain NTPC and GAIL - 51 percent, the lenders 35 percent and MSEB the balance?
Batra: That is true and the shareholding pattern of the LNG company will mirror this shareholding pattern. So, it will remain the same as of now. However, as additional equity is required for that capex corresponding to whatever debt we would give gets infused, this may change. The offer is actually to all the shareholders.
Q: You were saying you could not lend extra money to the combined entity but once the gas turbine goes to a separate entity you are able to lend money, how does that work, after all it is the same shareholding?
Batra: Shareholding remains the same, but it becomes a new company with a separate agreement with GAIL, a framework long-term agreement which enables them to use LNG terminal. It is they who will actually be operating it, importing the LNG cargos, regasifying it and then selling it to the market. To the extent it can be used by power plants located there itself, it is fine but that may not be adequate. So, the balance cargo they will have to sell it to the open market.
So, it is therefore to be seen as a separate profit centre and lenders then are in a position to look at its viability independently.
Q: Are you convinced that it will be able to service your loans both at the moment and after the infrastructure is put in place?
Batra: Yes we are convinced that after the infrastructure is put in place it will be able to but without that it will be difficult. The capacity of the LNG terminal gets greatly constrained because of turbulence in sea and because of break water facility not being there.
Q: So, at the moment the interest will be capitalised or do they get a moratorium, what happens to the interest payments until the infrastructure is in place?
Batra: Interest for the additional capex only can be capitalised otherwise rest of the interest meter is running and that will need to be serviced. The portion of interest which will not get serviced will become part of the total cost which we are going to finance now. That total cost will be partly picked up by equity 50 percent and 50 percent by lenders in the ratio of their current outstanding debt.
Q: What about the power plant, do you expect it to start running very soon and will it be able to service its debt immediately this year itself?
Batra: The situation is somewhat similar with the power plant also. However, the good thing is that the power plant has been allocated gas for the next six months under the PSDF Scheme of government of India. Therefore, one turbine can be run partly on that basis. Correspondingly railways have come in as a buyer of up to 500 megawatt. They will pick up this power for their requirements in the state of Maharashtra as also in three other states. Everything else technically seems to be in place and therefore once the necessary approvals by the government of Maharashtra and other state governments are in place then the plant can use that gas, generate power and supply it to them, supply it to railways through these state grids.
Q: Who are the buyers, railways and the three state grids have to carry the power, is that the way it is envisaged?
Batra: That is right. The purchaser is only railways but they will be lifting part of it in Maharashtra and part of it in other three states.
Q: What is the capacity of the plant when it runs initially?
Batra: Capacity of one turbine is 660 megawatt, but it is envisaged to go up to 500 megawatt gradually as the requirement gets met.
Q: You said the capacity of one turbine is 660 megawatts?
Batra: That is right.
Q: With the allotted gas how much of the capacity will be used?
Batra: With the allotted gas I think they will be able to use may be about 60 percent of that particular capacity.
Q: Is this a viable arrangement for the power plant? Will it be able to service debt for any length of time?
Shahi: The cost of LNG became very high. Fortunately because of crude price going down it should be possible to access cheaper LNG and then it should be possible to have the domestic gas pooled with LNG, with the government of India scheme to have more gas for this plant. If the price of power is still higher than what normally state electricity boards would like to buy or the distribution companies would like to buy at then railway could be a good customer. Railways purchase price today is very high in most of the states because every state has a traction tariff and traction tariff happens to be the highest. In fact, in one of the programmes the railway minister Suresh Prabhu has started to economise on the procurement cost of power to save certain amount. Railway has a budget of the order of Rs 12000 crore per year on only purchase of power and in the last Budget Suresh Prabhu said that it is possible to reduce it by at least Rs 2500 crore. That will be possible only if railways are in a position to procure cheaper power from various sources. So, while the cost of power in this revised arrangement will still be higher so far as the Dabhol Power or Ratnagiri Power Project is concerned, if the railway is a direct buyer not necessary to go through the distribution companies they can afford a little higher price because that will be lower than the price at which they are buying power from other sources.
Q: Can you tell me the two rates? What is the average power rate at which railways buy and at what price have they committed to buy Ratnagiri Power?
Shahi: Railways are buying power today at rate which varies. The average itself is more than Rs 6-6.50. So, if you are able to do something in the range of below Rs 5 and then for that if everybody has to take a hit one should take. The return could be less, may be interest could be restructured.
In 2005 when we did the restructuring, at that time it was possible to procure gas, but unfortunately the gas domestic production went down and simultaneously the crude prices went up otherwise the restructuring that we did in 2005, I spent almost 6-7 months, every week a meeting with lenders, with NTPC, GAIL, none of them were prepared to take - NTPC was not prepared to touch this project. Then we convinced lenders also to take a haircut and others and equity holders to take a haircut, we gave certain equity to Maharashtra Electricity Board at that time and the whole thing was satisfactorily resolved. The plant was closed in 2000 and we brought it back in 2005-06. So, that restructuring was on the right track but I agree that if this LNG terminal itself has to be sustainable then its expansion and break water and all these things should be in place because the appetite for other industries to buy higher cost LNG and regasified gas from the LNG terminal is there. Power sector appetite for a higher cost is not there because you have other options but other industries could buy gas at higher rates. So, if we import LNG and re-gasify and distribute to other industries, they could buy at higher rate and in that case it should be possible to have a mix of price for power sector and to others. It should be possible to make it sustainable.
Q: From 1992 or 1995 onwards to now, how much money has been spent in this plant?
Batra: Total investment in this plant as of today is Rs 12000 crore. I must say that even at that level this is a very viable plant. It has nearly 2000 megawatt of gas based power capacity plus 5 million tonne of LNG capacity. Today if you look at per megawatt cost of 2000, it can come to nearly Rs 8500-9000 crore, plus the normative cost of 5 million tonne LNG plant. So, even today it will be difficult to setup within the same cost same facilities and leave alone the gestation period which is required to setup such large facilities.
I must mention that the plant also has provision and surplus land to double the capacities on both sides - on LNG side as also on the side of power. So, if all goes well even that possibility can be looked at.
Q: The bankers are still looking at having to do a refinancing through the 5/25 route, otherwise you don't expect the plant to be able to payback, even the power plant?
Batra: I agree but you must acknowledge the fact that even though this plant came into existence quite some time back, how much it has operated?
Q: It is a little of a stretch that a plant which is already 23 years old, you are going to give a scheme in which you are expecting it to survive another 25 years. That was not the purpose for the 5/25 scheme?
Batra: Let me clarify that in 2009 when it was restarted at that point of time the whole technical evaluation of the plant was done and whatever needed to be done to refurbish, to replace was done. So, it started in 2009 as virtually new plant. Then it operated only for three and half years and again shut down. So, overall a plant which has a life of 25-30 years has in aggregate operated only for 5 odd years. So, therefore there is enough life left in the plant and on that basis we can go for 5/25 scheme.
Q: Enron plant started in 1992, we are now sitting in 2015, it is already 23 years old and even now a lot of parties have to take a lot of haircuts, forego a lot of their interest payments and even then only an expensive buyer like railways is able to consume the power. Do you think on hindsight it would have been wiser to have scraped the plant altogether when it stopped functioning in 2002?
Shahi: I don't think so. Even at that time there were other developers who were developing the gas based power plants. We had 15000 megawatt of gas plant then in the power side, today you have 25000 megawatt. As power secretary I did caution people that unless there is reliability of gas supply and also predictability about its price you shouldn't go in a big way.
I think it needed to be supported. The arrangement that needs to be put in place is for the gas. Even now when we are separating the LNG terminal in this dispensation, GAIL should be able to access globally cheaper LNG now. Today\\'s situation is favourable. Crude was USD 100 per barrel just couple of months back, today you are in the range of USD 50 per barrel. So, this is the time that GAIL should be able to procure gas on a little longer term basis and in that case not only one unit but larger capacity can be done. So, much will depend on how GAIL is in a position to organise its gas procurement, LNG procurement. Due to massive amount of shale gas in USA, entire spectrum has changed globally and we should take advantage of that.
I think today is the right situation that we should do something to procure cheaper gas and that only GAIL can do.
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