Merchant power plants differ from traditional rate-based power plants as to: 1) how they are financed and 2) where they sell the electricity they generate.
A merchant power plant is funded by investors and sells electricity in the competitive wholesale power market. Since a merchant plant is not required to serve any specific retail consumers, consumers are not obligated to pay for the construction, operations or maintenance of the plant. A traditional rate-based power plant, on the other hand, is built and operated by a regulated electric utility specifically to serve that utility’s retail customers. In return, the customers are obligated to pay for the plant’s construction, operations and maintenance.
The merchant power plants are not tied up with long-term power purchase agreements (PPA). Independent power producers (IPPs) who opt for this route will have to do so at their own risk. Setting up a merchant plant would necessarily mean balance sheet financing by he developer, as financial institutions/lenders may as a rule, may not be comfortable with projects that don’t have long-term PPAs. Though this would appear to be a gamble, experts say the risk could be fully taken care of IPPs develop projects that deliver power at competitive rates. Given considerable demand-supply mismatch, sale of competitively – priced power should pose a problem. Consider that in between April and May’06, against a demand of 95,583 MW, only 83,094 mw power was available – a peak shortage of 13.1%. This situation is likely to persist. Projections by the Central Electricity Authority show even if Xth Plan capacity addition together target of 32,084 mw is met, the all India peak shortages would be at an average of 16.3% or 18,913 mw. The ministry of power intends to add 10,000 MW capacity addition through MPPs in 11th Plan. In its guidelines for the allocation of coal blocks and coal linkages for the power sector, the ministry of power said, “merchant power plants fill different...
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