DDP 691. Glenn P. Jenkins and Henry B.F. Lim. "An Integrated Analysis of a Power Purchase Agreement." April 1999. 60 pp.

A Power Purchase Agreement (PPA) is at the heart of any BOT or BOO type power generation project that is to be undertaken by an Independent Power Producer (IPP). During the past decade privately owned IPPs selling electricity to the power industry has become common place. Such arrangements require some version of a PPA. In this paper we model a multi-currency loan and equity financing package for a 100 MW combined-cycle gas turbine generation plant that is to be built in India. Using this financial model we evaluate a sophisticated power purchase agreement in order to identify the relative importance of each of the variables found in such an agreement. Variables become important if they represent major elements of costs or revenues or are significant sources of risk.

This paper provides an example of the benefits that an integrated financial-economic-stakeholder analysis can bring to the evaluation of a PPA and BOT contracts. The integrated approach allows various scenarios to be compared from different perspectives and points of view. The economic analysis looks at the project’s impact on a country’s overall economy. The financial analysis of such an infrastructure project checks on the profitability and sustainability of the project over time. Sensitivity and risk analyses are central to the evaluation of this project since they identify the most critical variables and allow a probability distribution of values to be used in the model, rather than a single predicted value. The distributive or stakeholder analysis identifies who would be the major winners and losers if the power plant project were undertaken. This approach enables the partners to the agreement to “test” the sustainability of the contract through the analysis of the project’s outcomes under a wide range of situations and combinations of scenarios before the PPA is entered into. The technique of testing contracts for their future sustainability is area of research of potentially great benefit to the parties entering into long term contractual arrangements for public services.

JEL Codes: D61, H43, L94

Keywords: India, electricity, agreement, foreign investment, privatization, appraisal.

Glenn Jenkins is an Institute Fellow and Director of the Program on Investment Appraisal and Management at HIID, and Director of the International Tax Program at Harvard Law School.

Henry Lim is a Research Fellow at the International Tax Program, Harvard Law School.