Business & Money

Some independent power producers failed to contain capital and O&M costs, adding to financial pressures.

Merchant generators can substantially increase cash flow by revamping their capital allocation processes. Based on several recent client engagements, a PA Consulting study found that merchant generators often follow a flawed allocation process that misappropriates cash toward wasteful maintenance and capital expenditures, resulting in reduced asset values and erosion of precious cash reserves.

Our study of recently acquired generation assets representing 36 plants and 32,410 MW found a lack of control in the level and growth of non-fuel maintenance expenses and of capital allocated to projects related to operations and maintenance (O&M). Even more troubling is that this lack of investing discipline occurred at a time when merchant producers were under very serious financial pressures.

This situation is the result of a poor capital allocation process that often fails to: