Bradford Nordholm
CEO of Tyr Energy, Inc. Tyr is part of ITOCHU Corporation

The massive dislocation in the merchant energy sector is changing the way merchant power plants are owned and managed. Over a five year period between 1998 and 2003, non-load serving entities - IPPs and merchant energy companies - quintupled their ownership of power generation assets in the U.S. from 70 GW to over 390 G W, corresponding to an increase from 9% to almost 40% of the domestic generation fleet.


The significance of this shift was only realized in the last eighteen months when massive amounts of new generation were put in service at the precise moment that the merchant energy companies that were to provide newly-needed intermediation services between energy generation (supply) and load (demand) began to fail. The current wave of corporate and project company financial problems resulting in the announced sale or foreclosure of over 100 GW is documented daily, and our favorite speculation at industry gatherings has become “who will buy these gas-fired merchant assets?”

With the exception of some utilities targeting discounted investments in distressed generation as part of their resource plans supported by their regulators, virtually all prospective owners of merchant plants are banks or financial investors motivated by prospects of capital gains linked to a recovery of spark spreads and volatility.


Unlike merchants, such as Dynegy, Reliant, Mirant, Allegheny, PG&E NEG, Duke and Aquila, that had comprehensive management and intermediation capabilities, the new classes of owners are looking to third parties to provide the various complex services necessary to extract value from a merchant power plant. Asset management, operations and maintenance management, energy management, risk management and customized intermediation services such bilateral contracting are all critical and complex services needed by these owners. These services will be provided by a new class of emerging firms with highly specialized skill sets. The shift in ownership and the emergence of these new firms providing services is resulting in an industry unbundled.


This unbundling is a natural and permanent evolution of capital intensive industries that experience a bust following some external event such as deregulation. The commercial real estate, airline, gas transportation and many segments of the financial services industries provide relevant precedents where financial owners - always active participants in capital markets - have been the catalyst for the creation of specialized service pro v i d e r s .


Ultimately the flow of capital into distressed merchant assets will depend on the availability of management services, and especially a full complement of risk management services that provide some assurance that the considerable commodity price, volumetric and credit risks of a merchant generation plant can be managed within the risk tolerance of the owners. Load serving entities are most capable of mitigating the risks of a merchant plant. Therefore realignment of the merchant generator with those load serving entities, through effective term intermediation services, is key to capturing full value in an industry unbundled.