The Maharashtra government has offered some respite for the troubled Dabhol Power Project by agreeing to provide a guarantee for a Rs 300 crore (Rs 3 billion) loan that owner Ratnagiri Gas and Power Project Ltd is seeking from the Power Finance Corporation [Get Quote].

The revival of power generation from the plant is critical for Maharashtra, which is relying on Dabhol to bridge a 2,500 Mw monthly shortfall.

The 2,150 Mw plant has been operating below par since 2005 - generating 300 to 600 Mw - mainly owing to malfunctioning turbines, so the guarantee, which the state government had been reluctant to provide earlier, will mark a major step forward in restarting operations.

The loan guarantee is for two months, a senior RGPPL official said, because the company will be able to secure the loans on its own merit following a fuel supply agreement it expects to sign with Reliance Industries Ltd [Get Quote] for gas from the Krishna-Godavari basin.

Dabhol, which a consortium of state-owned banks, the Maharashtra government, GAIL India Ltd [Get Quote], NTPC Ltd [Get Quote] and financial institutions acquired from the scam-hit Enron, will be given priority in allocation of this gas.

The loan will be used to repair the turbines that were supplied by General Electric. The plant has three blocks with six gas turbines.

The cost of repair could be anywhere from Rs 50 crore (Rs 500 million) to Rs 200 crore (Rs 2 billion) per turbine. There have been six major turbine failures since the revival of the plant in 2005.

Further comfort to lenders comes from the fact that GE has also agreed to start negotiations on the Comprehensive Service Agreement for the equipment it has supplied to the plant.

Confirming the move, a senior Maharashtra government official close to the development said: "We have agreed to give the guarantee for two months to help them restore their capacity. Also, they are about to complete their gas supply agreement shortly."

The official added that the guarantee offer needed central government approval and the state's energy department was talking to the Union government for this.