Some renewable energy developers lacking a long-term PPA opting to build projects on a merchant basis without a PPA, financed with equity either from parent companies or private equity, such as from equipment vendors

LOS ANGELES , August 17, 2011 () – Developers of renewable energy projects that have not been able to secure a long-term power purchase agreement (PPA) are sometimes opting to build their projects on a merchant basis without a PPA, reported North American Windpower on Aug. 16.

The decision is seen as an opportunity to develop the project with the anticipation that energy demand will grow and enable the developers to eventually obtain supply contacts when long-term prices recover, while taking advantage of price spikes in the interim.

Such projects should be sited where there is grid access and markets for spots sales, but where the potential for power generation overcapacity is unlikely. Also, the location should have an outlook for energy demand growth and increasing energy prices, North American Windpower reported.

Risks of merchant projects without a PPA include a lack of correlation between energy prices and costs and between periods of high demand and supply availability, such as for wind energy; potential energy price volatility; and the possible threat from energy overcapacity in the area.

The merchant projects are typically funded by the parent companies’ equity or by private equity, although the rate of return on an unleveraged merchant project is not likely to meet investors’ expectations at first, reported North American Windpower.

Another source of financing for these projects is from equipment vendors. Turbine makers also have been keen to be supportive in order to establish a presence in the U.S., even accepting a lower rate of return on the projects than expected by private equity investors.

Hedge funds and private-equity firms provide some of the debt capital for merchant projects, but the interest rate is significantly higher than for projects with a PPA, North American Windpower reported.

Merchant-backed energy projects are not expected to dominate new wind energy generation in the year ahead, but do offer investors the ability to take advantage of price spikes in energy in the short term while eventually cashing in on long-term PPAs.

The primary source of this article is North American Windpower, Waterbury, Connecticut, on Aug. 16, 2011.

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