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 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 niches in the market; some provide steady supplies to a power grid, while others fire up only when demand is highest and meet peak loads.” Merchant power plants operating competitively help assure that power is produces with efficiency and supplied to locations where it is needed most”.
The government has set the plant size between 500 MW and 1,000mw. This is not merely because the national tariff policy mandates all new private sector projects to come through the competitive bidding process. There are transmission constraints as well. The transmission system will not be able to support evacuation of power from large sized merchant plants.
To ensure that large volumes of power can be evacuated, dedicated transmission systems would be required. This would mean that customers for power produced by these plants have been tied up. Such projects would require transmission systems that are planned and executed in tandem with the generating plant. So that when the plant begins producing power, the transmission lines are in place to evacuate power from the plant to the consumer.
Merchant plants, by definition, do not have pre-identified customers. This would mean that these plants would have to depend on redundancies in the existing transmission system to evacuate power. The ministry is working on a via media where the merchant plant of capacity 500 mw to 1000 mw can be accommodated in the national grid, which would have redundancies.
The ministry of power, believes that a limited number of merchant plants will enable the development of an electricity market. “A few merchant plants of 500 mw to 1000 mw could be easily handled through the transmission system and it is an option for creating a market as it would promote power trading on short-term, medium –term and spot market basis.

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