Two issues dominate the Dabhol discussion -- the power tariff and the power shortage in Maharashtra, particularly Mumbai. However, little light has shone on either.

The debate on the tariff is all about the government's promise of Rs 2.50 per unit and the current expected price of Rs 4 to Rs 7 per unit. But there is little talk on why this should be so.

First, the price depends on the base for the recovery of fixed charges, that is, the servicing of debt and equity. This depends on whether the plant will be used as a baseload plant (which generates power continuously) or as an intermediate load plant (which does not generate power at night, producing 30 per cent less power).

Higher power output from a baseload plant means tariff can be reduced by 25 per cent, that is, if the fixed charge per unit is Re 1 for an intermediate load plant, it can be 75 paise for a baseload plant. Also, long-tenor and low-interest rate loans can help a little.

Second, it depends on the cost of fuel. Every dollar increase in price of gas raises the cost of power by about 40 paise per unit. At $4 per million metric British thermal unit (mmbtu), that is, about the expected price at the time of the government's promise, the variable cost is about Rs 1.60, or a total cost of Rs 2.35 to Rs 2.60 per unit, depending on the load factor.

However, at $10 per mmbtu, a common spot price today (Korea and Japan have reportedly bought LNG cargoes at twice this price!), the variable cost goes up to Rs 4 per unit and the total price to about Rs 5 per unit. Incidentally, what happened to Dabhol's gas contracts?

But wait. This is only if Dabhol uses gas. For this, either both the regasification plant and the LNG port have to be operational or a gas pipeline, for example the Dahej-Uran-Dabhol link, has to be completed (why is there no talk about using Uran intensively?).

Neither is likely this summer -- so the plant will run on naphtha -- and we are back to 2000. The price can then be Rs 7 per unit, maybe more.

Before we turn away from the price of power, why should Dabhol not run as a baseload plant? Because there is little shortage of baseload power and unless there are transmission constraints, it is cheaper to purchase power from usual suppliers like coal plants, which supply power at around Rs 2 per unit.

Indeed, one reason for cancelling the Dabhol contract was alleged technical deficiency in its power equipment (why do you almost never hear of this?), which inhibited quick ramp-up, a feature necessary for intermediate and peaking plants but less relevant for baseload plants.

Remember, however, that this affects the tariff only by about 25 paise, equal to a 60-cent change in gas price!

At this price, can you afford Dabhol? That depends on who is buying. If it is averaged with the rest of Maharashtra's power purchase, one can expect it to increase the cost of power procured by 10 per cent (when the first unit comes on line) to 25 per cent (when other units come on line -- in about a year or so?).

Given that only a portion is recovered because of T&D losses, the additional burden on MSEDCL (Maharashtra State Electricity Distribution Company Limited) can be considerable. However, with open access, this power can be channelled directly to REL, BEST, and even large and industrial, commercial and domestic consumers (for instance, apartment blocks) who pay their bills; in Mumbai, and in other parts of Maharashtra.

Today, for such consumers, the cost per unit of generating power from standby DG sets is around Rs 8 and may exceed Rs 10, given the high sales taxes in Maharashtra. Even without open access, but with TOD (time of day) meters, it should be possible to tailor any increase narrowly, by charging a differential tariff for increased consumption during, says, 10 am to 10 pm.

But, there has been slack in installing TOD meters and so MERC is forced to propose less refined approaches, such as sharply increasing block tariffs.

This brings us to the power shortage in Maharashtra and proposed power cuts in Mumbai. The reason is not, as commonly bandied, Dabhol, or the lack of investment in generation by Maharashtra.

Mumbai's anticipated shortage is less than 300 MW and much of the current problem can be attributed to the lack of inter-regional transmission, and links into Mumbai. For instance, pole-II of the East-West HVDC link is presently non-functional due to the "failure of converter transformers" and is not expected to be operational before end-April.

Our existing procedures keep a critical transmission link inoperative for months! Also, as MERC recently noted, referring to the delay in the Bhadravati-Chandrapur link: "inefficiencies of the MSETCL (Maharashtra State Electricity Transmission Company Limited) are in some way responsible for the current situation". Transmission aside, there is little connection between the power problems of Mumbai and the rest of Maharashtra.

Indeed, for Mumbai, TPC (Tata Power Company [Get Quote]) can bypass MSEDCL and directly procure, wheel the power through MSETCL, and supply to REL (Reliance Energy [Get Quote]) and BEST. For Dabhol, transmission is less of a problem for it is part of the MSETCL grid. However, it may become an issue if Dabhol sells to other states.

One must also realise that it is not necessary for Maharashtra to build plants to have power. Indeed, the whole point of Powergrid's investment in transmission is to ensure that power generation in states with large energy reserves -- mainly in the east -- is connected to the energy consuming pockets elsewhere.

This was also why PTC (Power Trading Corporation) was established -- to seek out mutually beneficial exchanges of power between states and foster a national power market. This would be negated if each state went back to building plants in their backyard, with the signal exception of peaking plants near load centres. Rather, Maharashtra needs to contract with existing and new power plants in the east.

But, to contract power, one needs money. Today, MSEDCL loses money on every marginal unit of power sold by it and power cuts actually help it to reduce its losses. Despite (or because of) the power deficit the Maharashtra government's support to energy over the past year fell by almost Rs 1,000 crore (Rs 10 billion).

A peak shortage does exist to some extent because of an unprecedented rise in industrial consumption driven, perhaps, by the rising cost of captive DG power. But much of the rest is artifact. At Rs 2.50 per unit, even a 3000 MW energy shortfall translates into a Rs 5,000 crore (Rs 500 billion) unmet demand.

If power were to become miraculously available tomorrow, do we expect that MSEDCL will collect an extra Rs 5,000 crore from its consumers or the government of Maharastra to make up the difference?

As the revival of Dabhol turns the spotlight on to power again, it is important to ask the right questions. These relate to the cost and availability of fuel, consumers' willingness to pay, new plant investment and availability of inter-regional transmission links. For, if we don't, the history of Dabhol will repeat itself.

The writer is with the Centre for Policy Research.

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