The Emergence of Merchant Power Plants

by Steve Hoffman,

Power plants have traditionally been the stronghold of the old monopolies, but since the advent of deregulation, merchant power plants are emerging to meet the growing electricity needs of the United States and other countries. Commercial operations, merchant plants are independent power plants competing to sell power. These plants are replacing older, less-efficient units as well as serving demand growth and ancillary services. Promising low costs and efficient designs, the merchant plant boom has been driven in part by the failure of existing energy companies to augment generating capacity to keep up with demand.

  • Regulatory Process
  • Not So Easy Access
  • Money is Power

    Merchant plants bode well for residential and commercial electricity consumers in that the plants have demonstrated they can provide low cost, reliable, and environmentally sound power. In one example, Calpine Corporation and Bechtel Enterprises teamed up last year to build or renovate four natural gas-fired power plants in Northern California. These power plants are expected to use up to 40% less fuel (compared to gas-fired plants in operation today), and will utilize advanced emissions control technology, emitting 93% less nitrogen oxide and 40% less carbon dioxide per megawatt.

    According to the Electric Power Supply Association of Washington, D.C., by late 1998 there were plans to build 109 merchant plants in the United States to generate 56,368 MW, though most of these proposed plants are still on the drawing board. Ron Walter, senior vice president of business development for Calpine Corporation of San Jose, CA points out that "there is 750,000 MW installed in the United States, and 45% of that capacity is more than 25 years old. If you add to that the increase in demand of some 13,000 MW to 15,000 MW per year, you'll have to replace a million megawatts in this country" in the next 16 years.

    With opportunity, however, come a number of hurdles. Before we see these merchant plants in action, there are questions that need to be answered:

    • How many of these projects will clear licensing hurdles and break ground?
    • Will fuels and turbines be available to power these plants?
    • Are there sufficient links to the transmission grids?
    • Who will finance the projects?

    According to some project developers, these uncertainties suggest that "survival of the fittest" will yield a small pool of major, integrated players during the coming decade. N/A="1">Regulatory Process

    The state utility commissions that require reviews are examining the first wave of merchant plant proposals. While the regulatory process varies from state to state, the trend is towards a quicker, less cumbersome process. For example, in Tennessee, Enron Corporation applied for a merchant plant in June and broke ground in November. Bill Riley, chief of the electric section of the Illinois Commerce Commission's energy department says that in Illinois, "there is no certification process for merchant power plants. They just need to comply with local zoning and EPA regulations." California, with its lengthier environmental review, can take as long as two years to site a plant. And Massachusetts, which also has a thorough approval procedure, "takes about nine months to site a plant", according to Janet Gail Besser, chair of the Department of Telecommunications and Energy.

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    N/A="2">Not So Easy Access

    Grid connection has become problematic, and restructuring of transmission systems has changed pricing mechanisms, operating rules, and contracting practices. The deluge of potential plants means that those who enter the fray first have the greatest likelihood of beating out the competition for access to the limited available electrical transmission infrastructure and gas pipelines. The competition is fierce, the resources are limited, and the cost of investing in new or enhanced links to the transmission grid may prove to be a major factor in discouraging a number of merchant plant proposals.

    The good news is that new gas pipeline proposals are arising in parallel with merchant power plant proposals in some states. In Massachusetts, for instance, two new pipelines are being developed. There is agreement among project developers that the key to success is based on the coordination of gas pipelines to feed the plants with fuel and electrical transmission line access to transport the end product to users.

    However, hardware, such as gas turbines, is in short supply due to overwhelming demand. Public Utilities Fortnightly reports that "gas turbine makers like General Electric Co. and Siemens A.G. have backlogs into summer 2001." Manufacturers are requiring large down payments, too. This has become such an important issue that some developers are touting their place in the order line with turbine makers as a competitive edge.

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    N/A="3">Money is Power

    Many merchant power plants are being financed without power purchase agreements in place, which is an unusual step in the financing arena. Here, the location selected for a plant is key. Many merchant power plants take on limited power purchase agreements with neighbors rather than purely selling into the grid. According to Paul Champagne, vice president of business development at PP&L Resources' global division in Fairfax, VA, "A lot of them have contracts from large industrial plants or anchor tenants that make the banks less concerned about the project."

    The bottom line is that merchant power plants are stepping forward to assume the responsibility of providing low cost, clean, efficient power. For the benefit of the energy consumer, we can only hope that the hurdles merchant plant projects face can be overcome.

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    N/A="steve">Steve Hoffman is president of <%=company%>, a California-based firm that specializes in writing for the energy industry. His column appears every Monday on poweronline.

    To respond to this column or to contact the author please send an e-mail to

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