Merchant Power Plants Research Articles

Role of Indian power markets in energy transition

India's power sector is transforming rapidly, marked by rising demand and a growing share of renewables. The short-term power market provides option for power distribution utilities to meet demand exigency. The paper presents trends and perspectives of short-term electricity trading of select states of India. Market transactions reflect seasonal demand variations, higher during summer-monsoon months, dipping in winters. Analysis of data highlights substantial share of short-term power in the total procurement. Quantum of power traded correlates inversely with operational performance of thermal plants as well as grid share of renewable energy. Suggested policy measures include honing of demand forecasting skills using advanced metering infrastructure, deploying energy storage technologies, including decentralized solar, ensuring sustained supply of coal and preventive maintenance of thermal power plants, initiating seasonal procurement contracts with merchant power plants, encouraging power banking arrangements and including storage component in solar and wind tenders. Power markets, if employed appropriately, can help minimize the demand-supply gap, facilitate energy access, and accommodate higher quantum of green power, thus fulfilling SDG-7 targets.

Financial Hedges in Merchant Power Project Finance

The authors explain the elements of financial hedges used by generators in merchant power markets. The revenue put and the heat-rate call option (HRCO) are two hedge contracts frequently employed as an element of market risk mitigation in project financings for merchant power plants. The revenue put is a financial contract that effectively provides the generator with a floor on variable cash flows, while the HRCO is a swap of variable cash flows for a fixed payment stream. These hedges induce project finance lenders to provide more non-recourse leverage in financings by limiting the variability of a merchant generator’s energy margin. The authors use a hypothetical example of a combined-cycle power plant in the PJM power market to illustrate how a merchant plant’s energy margin may vary in a particular market based on natural gas prices, weather, and supply of generation in the market. They analyze the counterparty risk presented by these contracts for the generator and its financial counterpart, how counterparty exposure is measured and secured, and the factors that drive premiums for these hedges and their availability.

Electric Power Plant Valuation Based on Day-Ahead Spark Spreads

With recent regulatory changes in the electric power industry toward a competitive market, there have been significant increases in sales and purchases of merchant power plants. To support utilities’ decisions on such transactions, we develop an option-based valuation model that better reflects the current practices of plant operations in utilities. What distinguishes our approach from the extant literature is that, rather than conventionally assuming that theoretically optimal decisions can or will be followed through by practitioners, our model explicitly incorporates the actual practices in the utility operations areas such as unit commitments and startups.

Is the Merchant Power Producer a broken model?

Deregulated energy markets were founded on the Merchant Power Producer, a stand-alone generator that sold its production to the spot and short-term forward markets, underpinned by long-dated project finance. The initial enthusiasm that existed for investment in existing and new merchant power plant capacity shortly after power system deregulation has progressively dissipated, following an excess entry result. In this article, we demonstrate why this has become a global trend. Using debt-sizing parameters typically used by project banks, we model a benchmark plant, then re-simulate its performance using live energy market price data and find that such financings are no longer feasible in the absence of long-term Power Purchase Agreements.

The Merchant Power Plant “Rag”

The Merchant Power Plant “Rag”

Merchant power plants in India: risk analysis using simulation

PurposeThe purpose of this paper is to understand the risk‐return profile of merchant power plants (MPPs) as compared to power plants with off‐take agreements in the Indian context.Design/methodology/approachInformation from the literature was analyzed to identify major risks associated with MPPs. Literature pertaining to risk analysis of capital investments and simulation technique to analyze risks was studied. Financial models for a power plant with off‐take agreements and that for an MPP were developed and risks have been analyzed by incorporating uncertainties. The risk analysis was performed with the application of stochastic simulations using the Monte Carlo technique.FindingsThe results indicate that risk‐return profile differs significantly for a MPP as compared to a power plant with off‐take agreements. The model indicates that equity internal rate of return (IRR) for MPP ranges between 49.33 and 0.43 per cent with mean IRR values ranging between 28.86 and 13.53 per cent for different scenarios. The mean equity IRR for a comparative power plant with off‐take agreements is 14.83 per cent.Research limitations/implicationsThe project financial models are developed using typical values for the Indian context. The robustness of the results can be improved by considering project‐specific variables in the financial model. Owing to limited availability of past data, power price fluctuation scenarios have been generated based on expert opinion. When additional data on power price become available, these could be incorporated in the simulation analysis.Originality/valueMPP is a new concept for India. There is very little research in this area. This paper makes an attempt to understand the financial risk and return from MPPs in more detail.

Valuation of investment and opportunity‐to‐ invest in power generation assets with spikes in electricity price

We address the problem of valuing electricity generation capacity and the opportunities to invest in power generation assets in the deregulated electric power industry. The spark spread option‐based valuation framework is extended to take into consideration the electricity price spikes. This framework provides a valuable tool for merchant power plant owners to perform hedging and risk management. With jumps in the value process of power generation capacity, we demonstrate how to determine the value of an opportunity to invest in acquiring the generation capacity and the threshold value above which a firm should invest. We illustrate the implications of price spikes on the value of electricity generating capacity and the investment timing decisions on when to invest in such capacity.

RETURNS ON PROJECT‐FINANCED INVESTMENTS: EVOLUTION AND MANAGERIAL IMPLICATIONS

In the past, project finance was used primarily to fund relatively low‐risk natural resource projects with highly predictable cash flows. Today project finance is used for a wide range of assets, such as satellite telecommunications systems, amusement parks, and microprocessor factories, and in developing as well as developed countries. The author explores how the evolution into riskier assets has changed expected returns on project‐financed investments. Higher return variability and greater failure rates have caused project debt capacities to fall. What is notable about project‐financed investments, however, is that the best returns are not very high. And because the nature of most projects limits the upside potential, a much higher fraction of project‐financed investments must be successful for capital providers to earn acceptable returns on their investments.The move into riskier assets has also led to increased emphasis on the risk management role of project finance; that is, through careful structure and design, a firm can use project finance to reduce the collateral damage caused by a failing investment and also to limit sovereign risks. But even so, the author suggests that the original structures were never designed to handle projects with significant asset risk. For this reason, in cases of riskier projects, single‐asset project loans are likely to be replaced by either traditional corporate financing vehicles or hybrid structures involving elements of both project and corporate finance. One example of such hybrid financing is Calpine's revolving construction facilities that are used to finance portfolios of merchant power plants.

Environmental Permitting for Cogeneration and Merchant Power Plants

Obtaining the environmental permits for a cogeneration facility isessential to the overall project’s success. This article reviews first-handexperience gained in obtaining environmental permits for more than 80different power production facilities

Environmental Permitting for Cogeneration and Merchant Power Plants

ABSTRACT Obtaining the environmental permits for a cogeneration facility is essential to the overall project's success. This article reviews first-hand experience gained in obtaining environmental permits for more than 80 different power production facilities.

Environmental Permitting for Cogeneration and Merchant Power Plants

ABSTRACT Obtaining the environmental permits for a cogeneration facility is essential to the overall project's success. This article reviews first-hand experience gained in obtaining environmental permits for more than 80 different power production facilities.

How Much to Discount Merchant Power Prices?

With little relevant price history, developers and their lenders have relied upon price forecasts from market consultants when constructing downside scenarios for merchant power plants. However, no one has known how reliable these forecasts would really turn out to be. The real question appears to be where the generator is located on the dispatch curve. For plants with high dispatch factors (baseload capacities), a 10% price decrease may be a satisfactory downside assumption, whereas for mid-merit or peaking plants, because of decreases in both prices and dispatch factors, a 30% discount could be too light. Consequently, rules of thumb suggested by rating agencies that plants should be able to tolerate revenue discounts to break-even (DTBE) of 30 % would not be applicable across the cost curve.

The Due Diligence Process for Acquiring and Building Power Plants

The ultimate success of an acquisition bid for merchant power plants can hinge on the quality of the due diligence process that precedes the bid. To succeed, bidders must assemble a team comprising personnel from diverse disciplines who have strong project management skills.

Merchant Power: "The New Kid on the Block"

The term "merchant power producer" is a relatively new concept,which has evolved from the Independent Power Producer, IPP, classifica-tion to specifically describe a particular type or 'class' of an electricpower generation facility.A more formal definition of a merchant power plant would be "apower plant built or purchased with private equity that does not havefirm customers (i.e. captive ratepayers similar to a utility) which willattempt to sell most or all of its product in the open market." The puremerchant plant would initially have no customers while a "hybrid mer-chant" would have some but not all of its capacity initially contracted toa customer(s). This can easily be contrasted to an Independent Power Pro-ducer , IPP, defined as " a power plant with all or the majority of itsoutput dedicated to contract customerts)." For discussion we will clarifya cogeneration facility (Federal Energy Regulatory Commission, FERC,qualified facility or 'QF') as "a power plant primarily constructed tomeet a given site's thermal and electric needs which meets the requiredFERC efficiency standards for a 'QF', and generally not exporting muchif any power for external sale."In summary , we'll say a utility has captive ratepayers, an IPP hascontract customers, a cogenerator has its own site as the 'customer ', anda merchant plant attempts to sell into the open market establishing cus-tomers as it produces its product.

Merchant Power Plants

Two years ago, Standard & Poor9s published its first criteria for rating proposed project financing of merchant power plants (MPP). To further facilitate the development and project financing of MPPs, the agency recently has revised those criteria. Because the forces affecting market share are the essence of business risk in power generation, the criteria emphasize competitive analysis. As sponsors develop mechanisms to unbundled the risk introduced by competition, stronger MPPs can - as some have - reach investment-grade or near investment-grade ratings. However, the fact that only a few projects have attained investment-grade ratings indicate just how challenging and risky MPP project financing may turn out to be.

T he Merchant Power Plant "Rag"

" Ragtime," the musical abou t the converging lives of people w ithdiffer ent back grounds but essentially similar aspirations, at the turn ofthe last c entur y, wa s a rec ent Broadway hit. M erchant P ower Plant de-velopm ent is the ragtime of our coming millenniaI decade. Th is art icle,by focu sing on three chara cters in the musical (and how their per sp ec-tive s-l evitati on , s yncopati on and calculation ) pro vid es in si ght s onmer chant pow er plant pro spects. The concepts are ba sed on per sonalexperi en ce.