Merchant plants are built with the understanding that they do not have specifically identified buyers to purchase their output at fixed prices over a long term (15-20 years). Instead, they sell into the market and receive whatever price it dictates for the particular day or hour. The incentives facing merchant plant developers choosing between capital or fuel-cost-intensive generation technology are different than for plant developers with long-term sales contracts. Financing usually involves a greater percentage of sponsor equity (50% or more). This raises the cost of capital because equity capital is more expensive than debt capital.^*

Because of the uncertainty over market prices and thus investment returns, merchant plant developers are likely to opt for less capital-intensive capacity than developers of dedicated capacity. Still, the merchant plant developer wants operating costs to be sufficiently low to assure a favorable (baseload) position in the dispatch order. The tension between the developer's incentives for minimizing capital cost and operating cost may be resolved by choosing natural gas generation where gas supplies are cheap.

* J. Paul Forrester, "Wanted: A New Financing Model for Merchant Power Plants," Power Economics, Vol. 1, No. 1, February 1997, pp. 23-25.