Rethinking Contracts for Purchasing Power: The Economic Advantages of Dispatchability

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.