Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Merchant Power: Promise or Reality?

Fortnightly Magazine - January 1 1999

that make the banks less concerned about the project," he explains, describing the tendency for merchant plants to take on limited power purchase agreements rather than purely selling into the grid. "We're not going to see many 90/10 [percent] debt-equity deals, but we are going to see a lot of them leveraged 60 percent, and a lot are being given investment grade [risk-analysis ratings]," Champagne adds.

Overseas Activity Mixed

The United Kingdom, which initiated deregulation in 1990, nominally has encouraged merchant power plants for most of the decade. But now, the political clout of the coal lobby has pressured the government to place a moratorium on gas-fired plants until April 2000, according to David Lewis, vice president of Enron Europe in London.

"We've obviously got a couple of major projects in the queue, stuck in the moratorium, but we haven't given up hope of getting one or two through because policy always has a couple of chinks in it," he says. "It will take another two or three months to see," he adds.

If the United Kingdom doesn't shape up as a welcome market for gas-fired merchant plants, "we'll have to take our activity elsewhere in Europe," Lewis says. Emerging electricity trading markets in the Netherlands, Germany and Poland make those countries interesting, he notes. In emerging markets, demand for merchant plants is strong, although the risks are higher. In Brazil, the mid-term future seems bright for merchant plants, once recently privatized utility plants reach optimal output.

"Latin America will have a fairly robust demand," says Champagne.

But in some emerging market countries, like Pakistan, government interference in already-signed contracts has dampened future proposals. Allegations of bribery there landed some of the staff of one merchant plant project in jail, one developer says.

In other emerging markets, especially where gas and hydroelectric potential are great, merchant plants may not thrive.

"In Argentina, both hydroelectric [power] and natural gas are extremely cheap, which is causing prices to slump to between $20 to $18 per kilowatt-hour," says David Hurd of Merrill Lynch & Co. in Sao Paulo, Brazil. "Argentina has got too much capacity now - double what it needs - which is why it's trying to export electricity to Brazil."

Charles W. Thurston is a freelance writer who lives in Willow, N.Y.

California Certification: Still a two-step process?

In a precedent-setting case, the California Energy Commission ruled 3-2 in an August decision that U.S. Generating Co.'s La Paloma Generating Project, as a gas-fired plant that will sell into the California Power Exchange, was exempt from filing the required Notice of Intent with the Commission. The Energy Commission decided sales through the PX qualified the plant as having its output sold through a negotiated process. As the Public Resources Code is written, the exemption applies to gas-fired power plants that are "the result of a competitive solicitation or negotiation for new generation resources." Calling the PX - with its hourly bids for energy sales - the "very quintessence of competitive solicitation," the Commission granted La Paloma the exemption. Docket No. 98-SIT-1, Aug. 12, 1998