Study Depicts "Bleak" Future for Merchant Generation
June 21,2017
A study released today by the Wilkinson Barker Knauer LLP law firm and the Power Research Group paints a "bleak" picture for merchant generation, stating merchant generators are increasingly unable to recover fixed costs in electric power plants
The study, The Breakdown of the Merchant Generation Business Model, questioned the underlying finances of the industry. "In an atmosphere with flat demand for electricity, low gas prices and high penetrations of zero marginal cost renewables, the study breaks down the economics of the merchant model and explains how the dispatch or supply curve drives markets to the marginal cost of operation where merchants cannot recover fixed cost," the authors said
The study notes capacity markets have, to date, not solved this problem.
"Capacity markets are another 'solution' and are intended to provide the 'missing money' to cover fixed cash costs. But even capacity markets – particularly in light of their relatively short duration – provide no assurance to new market entrants that they will recover their capital investments. New generation is being built in regions with capacity markets, but that is based on hedging enough cash flow to secure financing and then believing that prices will eventually go higher, which would provide a return for the equity investors. Once the equity investors secure financing, the plant is essentially an option on the power markets. Recently, the only time these options have worked is when the plant is bought at a depressed price following an earlier default," the study states