Merchant Power Explodes Onto The Domestic Market

Issue 10 and Volume 101.

Merchant Power Explodes Onto The Domestic Market

In a market long stagnant, a new driving force is causing quite a stir. Merchant power plants have taken off in the past several months, and they are developing into a force to be reckoned with. Merchant power is a whole new way of conducting a generation business. These merchant plants are being built, or refurbished, with no utility or power purchase agreement. Most have no ties to utilities.

A few of these plants are in operation today, but they are pieces of independent power plants or of existing utility plant capacity. For example, last November Allegheny Power System`s unregulated subsidiary bought half the capacity of the 552 MW Fort Martin Power Station from Duquesne Light for $170 million and started selling the output in the competitive wholesale market. The other half of the plant`s capacity is owned by Allegheny Power and remains under conventional regulation.

New construction is the more important part of this trend, however. Industry experts expect it to revive the U.S. power generation marketplace. And this trend is driven by a quest for profits. Low-cost merchant plants are being planned to replace high-cost plants in competitive bulk power markets. These plants will compete in spot markets, pool markets or short-term contract markets.

“No one wants to sign long-term power contracts any more,” said Reid & Priest`s Michael Hornstein at a recent merchant power conference sponsored by the Center for Business Intelligence.

The merchant trend started in the United Kingdom with the advent of wholesale power competition in 1990. It spread to Argentina, Chile and other countries that adopted competitive bulk power supply systems. Now it is spreading to California, New England and other regions of the United States where competitive wholesale power generation is on the rise.

Several dozen new merchant plants totaling more than 10 GW have been announced in the United States. Some examples:

Duke Energy, United Illuminating and Siemens Power Ventures announced plans to build 520 MW of merchant power in Bridgeport, Conn. The $260 million, gas-fired combined-cycle project will be built in two phases with the first phase operational in 1998.

US Generating Co. (USGen), the independent power producer subsidiary of Pacific Gas & Electric Co., announced plansto build a 400 MW naturalgas-fired merchant plant, the “Millennium” project, in Massachusetts for operation in 2000. The firm has also announced plans for a 700 MW gas-fired, peaking merchant plant to be located south of San Diego.

Associated Electric Cooperative plans to build a 250 MW gas-fired merchant plant in Missouri to operate in 1999.

Ida-West Energy Co. and TransCanada Pipelines are planning a combined-cycle, gas-fired merchant plant in eastern Oregon called the Hermiston Power Project.

Constellation Energy and Inland Energy want to build a 68 to 830 MW gas-fired merchant plant in San Bernardino County, Calif.

Calpine Corp. is constructinga partial-merchant, 240 MW cogeneration plant near Houston for operation in 1998 and is developing a full-merchant, 480 MW power plant in California.

“Merchant plants are the wave of new power generation facilities in the U.S.,” Peter Cartwright, Calpine chairman, testified at a recent hearing held by the House Energy and Power Subcommittee. “Merchant plants shift the risks from utilities and their ratepayers to developers and investors and offer a low-cost, risk-free, clean source of electricity.”

Gary Lambert, USGen`s Marketing and Project Development director, said that in the past his firm built power plants to meet incremental demand. Now they are building power plants to meet market need based on how well the plant can compete. Power plants will be built to displace capacity that should have been shut down.

“In the past,” said Lambert, “power purchase agreements were the holy grail. Now there`s no PPA. Fuel price volatility is the single greatest concern.” Merchant power is financeable, said Lambert, if enough equity is committed. S