Rethinking Contracts for Purchasing Power: The Economic Advantages of Dispatchability

Abstract

The purpose of this article is to evaluate and compare the incremental cost of purchased power from non-utility generators (NUG) versus utility built generation considering a variety of contracts for energy purchases. Four types of contracts are evaluated: (1) Flat Rate Produce and Pay, (2) On-Peak/Off-Peak, (3) Basic Dispatchable, and 4) Actual Cycle Energy Dispatch. An analysis conducted for a representative utility calculates the effects of NUG power purchases on a utility's energy production costs and the cost of new debt issuances. Dispatchable energy contracts are shown to provide significant economic and operating advantages over Flat Rate and On-Peak/Off-Peak energy contracts. The analysis also shows that NUG purchases based on the actual costs of dispatch cost less than utility-built generation financed at the utility's weighted average cost of capital. NUG contracts for a utility which already has significant risk exposure are shown to parallel a capital lease. Under these conditions, additional payment obligations to NUGs increase the cost of new debt issuances making an equity issuance for utility built capacity a more attractive option.

Keywords

Power purchase contracts Dispatchability Non-utility generation Electricity prices

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