Building power plants without a guaranteed buyer.
A QF had something precious: a guaranteed purchase contract with the local utility. The utility had to buy the power, at a price set by regulation. It was almost impossible to lose money — which is why so many people rushed to build QF projects.
But some developers began to ask a different question: what if you built a power plant without a utility contract? What if you sold power on the open market, at whatever price the market would bear? This was the "merchant" model — named by analogy to merchants who bought goods at one price and sold them at another, taking risk in between.
In the late 1980s and early 1990s, a handful of pioneering companies began building merchant plants in states that had begun opening their wholesale markets. These were not QFs. They were Independent Power Producers that chose to compete directly rather than shelter behind regulatory guarantees.
To make a merchant plant work, you needed several things that didn't fully exist yet. You needed a wholesale market where buyers and sellers could transact — not just bilateral contracts, but something resembling an exchange. You needed transparent price signals that told generators when to run and when to stand down. You needed open access to transmission so you could move power to wherever it was most valuable.
FERC began providing the regulatory foundations: Order 436 had opened natural gas pipelines; now pressure grew for similar open access to electric transmission. The logic was the same — a vertically integrated utility that owned both the transmission lines and the generators had every incentive to discriminate against competitors trying to use those lines.
By the early 1990s, FERC was receiving proposals for something genuinely new: power pools and spot markets where multiple buyers and sellers could trade electricity at prices set by supply and demand. New England already had a rudimentary power pool. PJM (the Pennsylvania-New Jersey-Maryland interconnection) had operated a coordination agreement since 1927. The technology was primitive — phone calls and fax machines — but the concept was established.
The merchant pioneers were betting that these markets would mature. Most of them were right. But it would take a sweeping federal order to create the open access infrastructure that made merchant generation truly viable.
Late 1980s — AES and the invention of merchant power finance. Applied Energy Services, incorporated in 1981 by two former Federal Energy Regulatory Commission staffers, became the first company to demonstrate that large power plants could be owned, financed, and operated entirely outside the regulated utility structure. AES held no utility franchise and relied on no PURPA avoided-cost contracts. Instead, it sold electricity through long-term power purchase agreements and financed construction through project finance — debt secured by projected plant revenues rather than a utility's credit rating or rate base. When AES completed its first plants in Texas and Pennsylvania in the mid-1980s, lenders learned to analyze a power plant as a standalone investment. That template — credit analysis based on contracted revenues and plant performance — became the standard structure for the hundreds of merchant plants built after Order 888.