How Much to Discount Merchant Power Prices?

Abstract

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.