According to Fitch Investors Service, the absence of long-term power purchase agreements, coupled with the increased price volatility associated with short-term energy sales, likely will result in noninvestment grade ratings for most merchant projects.
In its new report, Power Projects in a Less Regulated World, Fitch examines power plants and how to evaluate this riskier class of projects. Now, the company would rate a good merchant power project in the 'BB' category. Investment-grade ratings are possible, but only for projects with exceptionally low operating costs, a diverse pool of generating resources, some contractual support or an advantaged position in the power market.
Credit qualities associated with better projects will include: a well-defined sales strategy and energy marketing program; low variable costs compared with other producers; a regional service area that provides favorable opportunities for merchant-related functions; strong financial and legal protection; and the use of structural or credit enhancements.
A well-structured project with power costs substantially below the expected marginal price of electricity in its defined region is likely to achieve the best rating.