Independent Power Producer Financing

On the face of it, obtaining independent power producer financing shouldn’t be all that difficult. Becoming an independent power producer is actually encouraged by law, and today it is an integral part of the Green Movement.

A Short History of Independent Power

It all started during the 1970s when the Arab oil embargo caught the US by surprise. The prices of gasoline and other energy sources increased dramatically because of the short supply, and as a response the US Congress enacted the federal Public Utilities Regulatory Policy Act (PURPA) in 1978.

The new law aimed to diversify the sources of energy and to boost efficiency, and the electrical utility monopoly on power generation came to an end.

The Energy Policy Act of 1992 (EPAct) boosted matters further, as it lowered the cost of electric utility services throughout the US. Because of the EPAct, the independent energy industry grew significantly, and by 2002 about a third of all the power plants in the US were operated by independent energy producers. Even today 7% of the power in the US is provided by non-utility power producers.

Benefits of Independent Power

Because of these enacted laws, a lot of interest was focused on renewable energy, and this interest has not totally disappeared. Developments in solar and wind energy technology came about, and now people are more aware of these alternative sources of energy.

The benefits of these sources of energy include:

  • Less global warming, which affects the weather, the crops, and the health of people all over the world
  • Reduced pollution, which obviously makes the country a healthier place to live in
  • Domestic economic development, which strengthens the economy and provides jobs
  • Less dependence on foreign energy sources, which may hold the country hostage to the demands of other countries

Nowadays, independent power producers operate all over the world. Asia is an obvious example, but nations in Central and South America, Africa, and Eastern Europe have also followed suit. Because of independent power producers, commercial wind energy is now the leading new source of power generation in the world.

Financing Independent Power Production

Yet despite all the benefits and “glamour”, financing can still be somewhat iffy for these companies. That’s because government permits must be obtained before such a project can be constructed and operated. Financing usually comes from banks and private investors. Millions of dollars maybe poured into such a project. But there’s no way the costs can be recovered if the permits are not acquired or if the project runs out of money midway.

There’s also another requirement before financing can be acquired, and that’s the power purchase agreement. This agreement states that the electrical utility must buy all the energy that the independent power plant produces. The independent power producer must get this agreement before banks would commit funds to a project like this.

In other words, the local government (which usually owns the electrical utility) must provide assurances that the investment in the independent power production will be worthwhile. This is the only way that funds can be raised for the project.