Merchant power plants in India: risk analysis using simulation
International Journal of Energy Sector Management
ISSN: 1750-6220
Article publication date: 13 April 2010
Abstract
Purpose
The 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/approach
Information 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.
Findings
The 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/implications
The 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/value
MPP 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.
Keywords
Citation
Siddhartha Potluri, S. and Rajan A., T. (2010), "Merchant power plants in India: risk analysis using simulation", International Journal of Energy Sector Management, Vol. 4 No. 1, pp. 87-112. https://doi.org/10.1108/17506221011033116
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited