Financing the New Merchant Power Generation Business

Abstract

Restructuring of the electric power industry in the U.S. is creating a large new merchant power generation business – and a corresponding wave of financing innovations. While merchant generation involves potentially significant market risks, merchant generators are employing a variety of operating and financial structures to manage these risks and establish “stand-alone” capital structures with significant levels of limited or nonrecourse debt. By bundling assets into large, diverse gencos; hedging market exposures through offtake and supply arrangements; and using financial structures such as leases, commercial paper conduit funding, and project bonds, the new merchant players are achieving the competitive advantages of lower-cost funding, deferral of equity investment, enhanced earnings profiles, tax benefits, and increased financial flexibility.