Project Finance: Practical Case Studies

tion to produce electricity as cheaply as its contemporaries, but without any emission

constraints. The plant appeared to have no deficiencies in environmental compliance.

• The power plant had demonstrated the ability to burn coal from numerous sources while
  maintaining emissions within legal limits.


• The plant’s technology was well-proven and there appeared to be no problem with
  obtaining replacement parts during its expected operating life.


• The Drax power station was connected to the 400 kV grid, the principal power distribu-
  tion grid for the United Kingdom, and benefited from a good rail and road infrastructure.


• AES was well-qualified to operate the Drax power station through its considerable expe-
  rience in operating other coal-fired power plants and had demonstrated the ability to
  improve the operations of plants that it had acquired from others.
  •Transformers in Unit 3 of the power station had been damaged by fire in December 1999,
  after which replacement transformers had been acquired and similar transformers in
  other units had been inspected, with no generic equipment faults identified. The com-
  pany received about £20 million business interruption and damage insurance. Unit 3 was
  brought back to full load in May 2000.

Power Market Consultant’s Report

A bank base-case scenario and sensitivity analysis indicated average and minimum projected
debt service coverage ratios (DSCRs) over the life of the bonds, as shown in Exhibit 12.5.
Based on several different price models, the Power Market Consultant developed a
wholesale price forecast to support a base-case scenario, a bank base-case scenario and a low-
price scenario. As shown in Exhibit 12.6, prices in the base-case scenario decline from £23
per MWh to about £21 by about 2010; in the bank base case prices decline to £19.50 by 2005;
and in the low-price scenario they fall to £17.50 by 2003.
The consultant predicted that there was a 50 per cent probability that actual prices would
exceed those in the base-case model, a 70 per cent probability that they would exceed those
in the bank base case and an 80–85 per cent probability that they would exceed those in the
low-price scenario.
The report also reviewed the implications of NETA, including the aims of the regulator,
and the ways in which the forward market, the
balancing mechanism and the settlement
process were expected to operate. The consul-
tant noted that, historically, 70–80 per cent of
the market had been covered by contracts
with terms of one to five years and that it was
reasonable to expect a similarly high level of
forward contracting activity under NETA.
Therefore Drax was expected to have ample
opportunities to arrange contracts for the
plant output that was still uncontracted. The
report also contained a marginal cost curve
(see Exhibit 12.7) predicting the order in
which plants would be dispatched, depending
on the amount of power needed in the grid.

POWER PLANT

Exhibit 12.5

Bank base-case scenario

and sensitivity analysis

Average Minimum

DSCR DSCR

Bank base case 3.04 x 1.42 x

Availability reduced from 89% to 83% 2.78 1.19

Efficiency reduced from 38% to 37% 2.95 1.36

Coal price increase of 9% 2.80 1.36

10% increase in fixed O&M expense 2.93 1.38

25% sterling devaluation 2000–04 3.04 1.42

Power Market Consultant’s

low-price scenario 2.56 1.27