Business & Money

Merchant plants now draw investors from three different worlds-each with its own agenda.

It's tempting to chalk up the recent bubble in merchant generation to just another industry cycle, but there's more to consider. Investment in the industry was far from even, leaving some regions teeming with unused peaking plants while other regions continue to struggle with a need for capital investment. Technology also has evolved, opening up a new suite of potential options like demand-side management, more efficient transmission and distribution, and localized generation.

The growing concern over energy security and the environmental impact of the current fleet of generation assets also has created further flux. Change is the only constant in today's world-and change brings opportunity.

How has this experience affected investment? Few if any who invested during the generation boom have escaped unscathed. Nonetheless, we see the ongoing potential of the power sector. New investors have moved quickly to raise or redeploy capital and invest in an industry that is far from dead. Current investment in the power market increasingly flows from three distinct sources: private equity, institutional debt, and venture capital.

Private Equity

At one end of the risk spectrum, many private-equity investors have sought to purchase and finance contracted power assets. Large equity funds, which have tended not to see power as a core investment focus, have been drawn into the market by the opportunity to fund significant amounts of capital into strong, cash-producing assets. This trend has progressed steadily from single-asset acquisitions to large generation-portfolio purchases.