“Dispatch rights” refers to the ability of a distribution utility that has contracted for power output from an Independent Power Producer’s (IPP) generating plant to schedule that output on a daily or hourly basis – i.e. to tell the generator how many megawatts, if any, it wants to take in each hour.
There is a fundamental principal in power system economics that certain types of plants are more economical (relative to other types) at high capacity factors (or baseload) and other types are more economical at low capacity factors (or as peaking units). Since power plant contracts are typically for long terms (like 20 years), a common practice is to forecast out what the relative economic mix of baseload and peaking units might be for a certain system and then procure that mix. The problem arises because that mix is just a forecast; making certain assumptions on technological change and fuel prices. The baseload plant you contract for now, that appears to be economical at a 65% capacity factor for its lifetime, might turn out to be economical at only 50% annual capacity factor ten years from now given the resource mix available to you at that point in time. By siging a power purchase agreement that has a minimum monthly energy off-take, you are essentially waiving your dispatch rights – or, more specifically, those of the future managers of your utility.The future managers of your utility should have the right to determine the economic dispatch of that unit to achieve least cost to his/her ratepayers at that future point in time. But to get dispatch rights, you have to pay for them. And that is exactly what a “capacity payment” is structured to do. (We’re starting to get to the disruptive part; just hold on a bit more). A capacity payment is a fixed monthly amount in pesos that is paid to the IPP for the right (not the obligation) to dispatch the plant, when and if it’s economical to do so – it doesn’t include any fuel costs. If you do dispatch the plant, then you also pay the costs associated with the dispatch – such as fuel. This structure allows the utility to continually (or adaptively) make the decision on economic capacity factor for the plant throughout its life. It’s not locked in. The IPP SHOULD be indifferent. As long as they get their capacity fees to cover their investment and make their profit on the investment, and as long as they get their fuel and other dispatch-related expenses covered, why should they care when, how often, or even if, the utility dispatches the plant? One reason I can imagine is that the IPP is in the fuel business too (or has an interest in the fuel supply chain). Then it would matter. If they are tying to structure a guaranteed market for the fuel consumption, then they don’t want the utility to have dispatch rights. They want a long-term “fuel purchase” agreement too. There’s the disruption.