The Role of Volatility Value in Power Plant Financing

Abstract

Volatility value refers to the ability of merchant plants to extract value beyond normal pro forma levels by virtue of their participation in volatile power and fuel markets. Volatility value is derived from the ability to convert a MMBtu to a MWh in both spot and forward power markets, i.e., to participate in the power project's “spark spread.” The spark spread refers to the difference between the price of power received (in #/MWh) and the price of fuel and variable O&M converted to #/MWh at the plant's heat rate. The ability to engage in spark-spread trading, in turn, should enable the asset manager to enhance project value by capturing spark-spread value in excess of basic prop forma levels, assuming that pro forma values provide a reasonably accurate forecast of average fuel, variable O&M, and power-price levels.