To meet the growing demand for electricity, additional capacity needs to be built and/or existing generation facilities must be updated. Public-private partnerships (PPPs) can be used to overhaul old facilities and construct new ones. The most frequently used forms of PPP transactions for power generation are Build-Operate-Transfer (BOT) agreements or on concession agreements. BOT agreements are often employed where the nature of the project causes the government to have a very long-term interest in the facilities, such as is commonly the case for hydroelectric and geothermal power plants.
PPP projects have been particularly successful in providing new generation capacity through independent power producers (IPPs). Some IPP plants, particularly large thermal or hydro stations, are very expensive facilities, and are well-suited to project finance arrangements, whereby security can be provided to the lenders though an identifiable revenue stream. IPPs, which typically sell energy to utilities (government-owned or private) under a power purchase agreement (PPA), are increasingly playing a role in providing needed generation capacity, as many countries are liberalizing their power sectors by eliminating the monopolies previously held by state-owned companies and authorities. Between 2002-2012, there was a total of $350 billion invested in greenfield IPP assets in developing countries.
As of 2013, of the total PPP investment in electricity generation, fossil fuels account for the major share—roughly 75 percent. Coal accounts for 35 percent, natural gas 24 percent, and fuel oil 15 percent. Total investment in renewables represents only four percent (if hydropower is excluded) but investment in renewables is growing rapidly.
- Baseload: baseload generators operate on a continuous basis.
- Peak: peak generators operate only where demand exceeds the output of the baseload generation facilities. Peak generators are commonly either hydropower, or either combined-cycle or open-cycle natural gas generators, due to the need for quick start-ups to meet intermittent peaks.
- Mid-merit: mid-merit generators fill requirements somewhere between those of the baseload and peak generators. A mid-merit generator will be used as a base generator during the day, or during periods of high demand, and will then be used as peak generator at night or in times of lesser demand. Mid-merit generators are often older and more expensive than baseload plants.