A New Form of Power Generation Project, Merchant Power, is Gaining Popularity in the Global Power Marketplace. It
started in the United Kingdom, spread to Argentina and Chile, and took off this year in the United States.
Merchant power plants are a form of non-utility or independent power generation designed for competitive wholesale power marketplaces. Unlike conventional independent power projects, merchant plants do not have upfront, long-term power purchase agreements to cover their output. Merchant plants are being built to sell to competitive, spot markets. They may have power purchase agreements, but they are short term agreements. They are speculative power plants.
Lack of a guaranteed, long-term buyer requires a different approach to financing. Merchant project finance is not as highly leveraged as conventional independent power. It requires more of an equity investment from the developers. To date, merchant developers have tended to be consortia of large, deep-pockets firms such as major independent development companies, large oil/natural gas companies, and major equipment suppliers.
Most new merchant projects use natural gas fired combined cycle power plants based on the latest gas turbine technology to maximize efficiency. Availability of combined cycle power plants at a all-time low capital cost of roughly $350-400 per kW, with thermal efficiencies of 55-60 percent burning low-cost natural gas, has made the merchant movement possible.
Merchant plants are intended to displace existing high-cost generation in competitive wholesale markets. In the United States, for example, merchant developers feel they can generate electricity at a cost of less than three cents a kilowatt-hour, well below production costs in many regions. Merchant plants are expected to account for half the new U.S. generating capacity built in next few years.