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 percent with mean IRR values ranging between 28.86 and 13.53 percent for different scenarios. The mean equity IRR for a comparative power plant with off-take agreements is 14.83 percent