Price definitions in energy contracts with investor owned generation

Nowadays IPP´s power plant construction is encouraged by the current deregulatory climate, and the financing technique employed to implement these projects is often the project financing formula. This means that an investor consortium, usually foreigner, plan, build, operate the power plant, and sell the generated electricity to the host utility. The sale price is determined from the expected IPP´s production cost, enhanced of the expected welfare obtainable by selling electricity. This paper proposes a methodology for linking the uncertainty of the future production cost with the price of the electricity generated by an IPP. This is a stochastic approach to the sale price definition problem, while usually a deterministic procedure is used.