Advisory & Consulting Services Case Studies

Valuing generation assets

Issue

The director of infrastructure investments at a large financial services company was considering purchasing a number of electricity power plants, but was unsure what prices would represent good value and provide the returns needed.

On the advice of the company’s energy trading team, it was decided to supplement the asset valuation estimates made by the deal team with an additional view, based on the optionality values inherent in the power plants.

The energy trading team recognised that it needed very high quality analytical work performed which was outside its normal area of expertise. A decision was therefore made to use the services of a consultancy with specialist energy valuation, hedging, and risk analytics capabilities.

Solution

Lacima was identified as having proven plant modelling abilities, being able to incorporate multiple real-world factors into a complex pricing process.

Using Lacima's Single Factor Simulation Engine, the fuel and power prices were modelled for the market where each power plant was located.

Lacima’s plant model was then used to value the optionality inherent in the power plant’s fuel supply, various management strategies for running the plants, and the hedging strategies around the energy contracts associated with each power plant.

Benefits

As a result of Lacima’s work, it was clear that the prices being offered by rival investors would not yield a good return on the investment, and the decision was taken not to continue negotiations, thereby averting an uneconomic purchase as well as saving valuable time and effort on behalf of the deal team.

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