One of the key inputs into a financial analysis is an estimate of your city’s future energy expenses in the business-as-usual scenario (i.e., your city does not execute the deal). Since modeling future energy prices is difficult, you may want to consider implementing different types of models, evaluating several scenarios, and hiring an external consultant to assist in the process.
There are a few common methods to estimate how future energy prices may change over time:
Specialized consulting firms such as Ventyx (ABB), Wood Mackenzie, and Platts (McGraw Hill Financial) provide long-term price forecasts that can be used to evaluate future energy prices. While obtaining forecasts directly from these vendors may be prohibitively expensive, your project developer may be able to supply them to you.
You could create your own projections based on recent prices and assumptions regarding future price movements.
In many markets, natural gas generators are often the “marginal generators,” meaning that wholesale electricity prices are largely determined (or at least influenced) by the price of natural gas. As there is a long-term futures market for natural gas, it is possible to use these forward prices as a basis for estimating future electricity prices in your markets.
Some teams choose to develop a worst-case scenario instead of, or in addition to, forecasts produced via anticipated future market prices. A worst-case scenario provides the financial team with a maximum potential cost for the transaction, which allows your city to evaluate whether it is prepared to absorb the highest potential losses.
