Power to the Fiscal? An Exploration of the Use of Credit Ratings to Estimate the Expected Cost of a Guarantee of a Power-Purchase Agreement
Ministries of finance are often asked to guarantee a state-owned electricity utility's payments to an independent power producer under a power-purchase agreement. To decide whether to grant the guarantee, the ministry should have at least a ro...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/865871591378220034/Power-to-the-Fiscal-An-Exploration-of-the-Use-of-Credit-Ratings-to-Estimate-the-Expected-Cost-of-a-Guarantee-of-a-Power-Purchase-Agreement http://hdl.handle.net/10986/33873 |
| Summary: | Ministries of finance are often asked to
guarantee a state-owned electricity utility's payments
to an independent power producer under a power-purchase
agreement. To decide whether to grant the guarantee, the
ministry should have at least a rough estimate of the
guarantee's expected cost. Making use of an analogy
between a power-purchase agreement and a debt contract, this
paper shows how the ministry can get such an estimate by
applying a method developed to estimate the expected cost of
debt guarantees. An estimate of the probability of the
utility's not being able to meet its obligations under
the power-purchase agreement can be derived from the
utility's actual or estimated credit rating in the
absence of government support. The government's
expected payments under the guarantee can then be estimated
by multiplying the utility's payments under the
power-purchase agreement by this probability. The estimates
produced by the method will be imprecise, but the method may
be easier to apply than alternative methods, and an
imprecise estimate may be better for policy makers than no estimate. |
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