Merchant power plants in India: risk analysis using simulation

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.

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.

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.

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.

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.