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Merchant Power: Making the Grade
01 January 2000
Peter N. Rigby, Director at Standard & Poor's, details the risk-reward equation on merchant power plants.
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Over the last 30 months Standard & Poor's has analyzed merchant power plant (MPP) financings in the UK, the United States, Latin America and Australia. In that time Standard & Poor's has issued investment grade ratings on eight merchant power projects and several merchant generating companies. Each transaction has demonstrated a new facet of merchant power complexity and illustrates just how quickly this form of independent power is evolving.
As developers structure transactions to address the market specific risks, the realities of project financed merchant power are becoming apparent. Projects seeking investment-grade ratings for highly leveraged transactions without binding long term contracts face tremendous challenges. Unhedged, MPPs exposed to the uncertainty of commodity electricity markets and regulatory reform are more likely to have speculative-grade debt ratings than not. Projects that do not incorporate strict controls on cash flows and project operations also face speculative grade debt ratings.
Unfortunately, the costs...
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