How it works
A merchant plant has no long-term buyer for some or all of its output. It sells into the day-ahead, intraday and real-time markets, or through short-term bilateral deals, at the prices those markets set. Its revenue in each block is its volume times the price at its location. The owner bears price risk and volume risk together, including imbalance costs when output misses the schedule.
Many projects are part merchant. A developer may contract 70% of capacity under a PPA and sell the rest at market. Storage is often fully merchant, earning from price spreads and ancillary services. Owners manage the risk with shorter hedges, such as forward contracts for the next season, or with structures that cap the downside, such as a floor price bought from a trader. Lenders and owners forecast merchant revenue with price curves built from fundamentals models or market forwards.
Why it matters
Merchant exposure raises expected revenue in many markets, and it widens the range around it. Lenders size debt on a downside price case, so a merchant project borrows less and needs more equity. Investors price the risk into a higher required return. For an IPP, the share of merchant capacity is a strategic choice. It decides how much upside the company keeps and how much its earnings move with wholesale prices.
A worked example
A 100 MW wind farm produces 300,000 MWh a year. A 15-year PPA offers $45/MWh, worth 300,000 × $45 = $13.5 million a year. The base-case merchant forecast is $52/MWh, worth $15.6 million. The lender's downside case is $35/MWh, worth $10.5 million. Going merchant adds $15.6 − $13.5 = $2.1 million in the base case. Debt, though, is sized on the $10.5 million case.
Illustrative figures.
Across markets
In Europe and parts of the US, Texas in particular, merchant and part-merchant renewables are financed regularly, with hedges against forward curves. In India, most utility-scale renewables sell under long-term PPAs with state or central offtakers. Merchant sales on IEX and the other exchanges are smaller but growing, mostly from capacity built for open access or left uncontracted.