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Risk Management and the Stated Capital Costs by Independent Power Producers

Listed author(s):
  • Bahman Kashi

    ()

    (Eastern Mediterranean University, Cyprus and Queen's University, Canada)

In this article we argue that the conventional financing and contractual arrangements in private power generation projects encourage the independent power producers (IPPs) to overstate the capital cost as a risk-mitigation strategy. Since the markup is only added to the capital cost, and not to the operating costs, it promotes the use of cheaper and less efficient power plants. The distortion in the choice of technology results in economic losses over the life of the plants. The findings of this research have important policy implications that can assist regulatory bodies, governments, and international financing agencies to adopt a more informed approach to the integration of private investment into the electricity generation capacity of developing countries.

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File URL: http://www.queensjdiexec.org/publications/qed_dp_248.pdf
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Paper provided by JDI Executive Programs in its series Development Discussion Papers with number 2014-03.

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Length: 30 pages
Date of creation: Mar 2014
Handle: RePEc:qed:dpaper:248
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Web page: http://www.econ.queensu.ca/
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  1. Stefano Paleari & Renato Redondi, 2005. "Regulation Effects on Company Beta Components," Working Papers 0502, Department of Economics and Technology Management, University of Bergamo.
  2. Fernando T. Camacho & Flavio M. Menezes, 2013. "The Impact of Price Regulation on the Cost of Capital," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 84(2), pages 139-158, June.
  3. Stern, David I. & Enflo, Kerstin, 2013. "Causality between energy and output in the long-run," Energy Economics, Elsevier, vol. 39(C), pages 135-146.
  4. Estache, Antonio & Gomez-Lobo, Andres & Leipziger, Danny, 2001. "Utilities Privatization and the Poor: Lessons and Evidence from Latin America," World Development, Elsevier, vol. 29(7), pages 1179-1198, July.
  5. Alexander, Ian & Estache, Antonio & Oliveri, Adele, 2000. "A few things transport regulators should know about risk and the cost of capital," Utilities Policy, Elsevier, vol. 9(1), pages 1-13, March.
  6. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
  7. Alexander, Ian & Mayer, Colin & Weeds, Helen, 1996. "Regulatory structure and risk and infrastructure firms : an international comparison," Policy Research Working Paper Series 1698, The World Bank.
  8. Rao, Narasimha D., 2013. "Does (better) electricity supply increase household enterprise income in India?," Energy Policy, Elsevier, vol. 57(C), pages 532-541.
  9. Katharine Nawaal Gratwick & Anton Eberhard, 2008. "An Analysis of Independent Power Projects in Africa: Understanding Development and Investment Outcomes," Development Policy Review, Overseas Development Institute, vol. 26(3), pages 309-338, May.
  10. Stefano Paleari & Renato Redondi, 2005. "Regulation Effects on Company Beta Components ," Bulletin of Economic Research, Wiley Blackwell, vol. 57(4), pages 317-346, October.
  11. Andersen, Thomas Barnebeck & Dalgaard, Carl-Johan, 2013. "Power outages and economic growth in Africa," Energy Economics, Elsevier, vol. 38(C), pages 19-23.
  12. Phadke, Amol, 2009. "How many Enrons? Mark-ups in the stated capital cost of independent power producers' (IPPs') power projects in developing countries," Energy, Elsevier, vol. 34(11), pages 1917-1924.
  13. Koenker, Roger, 1981. "A note on studentizing a test for heteroscedasticity," Journal of Econometrics, Elsevier, vol. 17(1), pages 107-112, September.
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