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Dabhol running without cover against mechanical failure

Dabhol running without cover against mechanical failure
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First Published: Sun, Apr 11 2010. 10 54 PM IST

Insurance woes: The Dabhol power plant. RGPPL was asked by insurers to run the plant for a year without cover due to repeated breakdown of machinery. The project is covered against natural calamities
Insurance woes: The Dabhol power plant. RGPPL was asked by insurers to run the plant for a year without cover due to repeated breakdown of machinery. The project is covered against natural calamities
Updated: Sun, Apr 11 2010. 10 54 PM IST
New Delhi: Despite suffering from recurring turbine failures, the recently revived Dabhol power project in Maharashtra is running without insurance cover against mechanical breakdowns.
A top executive said Ratnagiri Gas and Power Pvt. Ltd (RGPPL), which runs the project, plans to opt for the cover next month.
Insurance woes: The Dabhol power plant. RGPPL was asked by insurers to run the plant for a year without cover due to repeated breakdown of machinery. The project is covered against natural calamities and theft. AFP
The capacity of the project, which is covered against natural calamities, fires, terrorist attacks and theft, has been derated from 2,150MW to 1,940MW after turbines supplied by General Electric Co. (GE) couldn’t work at optimal capacity, as reported by Mint on 15 October 2008.
Each of the project’s three blocks has two gas and one steam turbines. The gas turbines have suffered five failures, including three major ones.
“Around a year back, insurers such as National Insurance Co. Ltd and Oriental Insurance Co. Ltd had asked us to run the project for one year (without mechanical insurance cover) on account of repeated breakdown of machinery,” said managing director A.K. Ahuja.
“We plan to get the mechanical failure cover in May. It is also a well-thought-out decision on our part as we were only getting Rs80 crore liability cover after a premium payment of Rs40 crore for one incident. There was also a condition that after a failure takes place, we would have to seek cover again.”
RGPPL is paying an annual premium of around Rs10 crore for the cover already provided by insurers which is due for renewal on 19 May. It is looking at a liability cover of Rs600 crore against mechanical failure for six machines.
The utility has already signed a performance guarantee agreement under which it will pay a fee to GE to repair the turbines if they fail again. In return, GE has guaranteed the performance of the machines and agreed to absorb part of the cost of a breakdown.
“We have the comfort of GE bearing 50% of the cost in the event of anything going wrong,” said Ahuja. “We had taken the permission of the lenders and the board before not availing the insurance cover against mechanical breakdowns.”
RGPPL expects the premium to come down and the liability cover to go up since the project is operational, said Ahuja.
“It seems that the National Insurance Co. and Oriental Insurance had a problem with General Insurance Corp. of India Ltd (GIC), with whom the cover had to be reinsured. We already have had a meeting with GIC and they have told us that they will reinsure the cover in May,” he added.
Reinsurers like GIC underwrite risks taken by firms such as National Insurance and Oriental Insurance—who deal with end customers on the insurance chain—and share the premium with them.
Non-life insurers separately buy reinsurance cover from reinsurers, one of which is GIC. For such reinsurance, the insurers separately pay a premium to the reinsurer. It depends on the insurer whether it decides to add the reinsurance cost to the premium or not. While providing cover for risky projects, insurers typically buy reinsurance and add a part of the reinsurance cost with the premium.
RGPPL already floated the tenders for the complete insurance package in March and has received bids from 12 firms, which RGPPL declined to name.
“We expect to get a better premium rate. In case we don’t get good bids, we will continue with the present arrangement after taking the board’s approval,” Ahuja said.
While Oriental Insurance could not be contacted for comments, messages left for National Insurance’s chairman and managing director N.S.R. Chandra Prasad were not answered.
An official at one of the insurance firms, who did not want to be identified, said, “We are in discussions with GIC for reinsurance against mechanical failure cover in Dabhol project, but we have not received the terms for the cover from them.”
“For fire and loss of profit covers we have received the terms from GIC but we have not yet responded (to) them with an acceptance. We are studying the rates and terms and are in continuous discussion with GIC,” he added.
Yogesh Lohiya, chairman and managing director, GIC said, “We have provided them (Oriental Insurance and National Insurance) rates and terms for covers against fire and loss of profit. But, for cover against mechanical failure we have not given them the rates yet. There have been many issues about the project in the past due to discontinuation of operation, and we may need to look into the matter carefully before providing reinsurance for mechanical failure cover.”
State-run NTPC Ltd and GAIL (India) Ltd own 29.65% each of RGPPL. The Maharashtra government has a 15% stake, while the rest is owned by public sector banks and financial institutions.
A senior NTPC executive said the utility should be covered against mechanical breakdowns. He did not want to be identified.
B.C. Tripathi, chairman and managing director of GAIL, asked Mint to contact RGPPL for comments.
Amol Kotwal, deputy director, energy and power systems practice, Frost and Sullivan, said: “Most of the projects are insured against both mechanical failure and natural calamities. The current situation of limited insurance with the Dabhol project is because of controversies associated with the project.”
The Dabhol project was fully commissioned on 31 March.
utpal.b@livemint.com
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First Published: Sun, Apr 11 2010. 10 54 PM IST