Revenue design beats asset quality
Keeping the lights on isn't free
Demand is set to double and prices are already feeling it Projected 79%
That creates volatile and unpredictable cash flows. In contrast, markets such as PJM (serving 13 states, including Pennsylvania, New Jersey and Maryland) are ‘capacity markets’ that provide a more stable revenue base by paying plants for being available, not just for generating power.⁸ Identical plants can deliver very different financial outcomes depending on their revenue model. Modelling shows two identical projects generating gross margins of around 19 percent in PJM compared with roughly 5 percent in ERCOT.⁹
Texas is an “energy-only market” where generators are paid only for the electricity they produce. That leads to unpredictable cash flows and revenues that are highly dependent on rare price spikes. Without stable revenue, investors are finding it hard to finance new projects even when the system clearly needs them. As a result, developers are turning to contract-driven models. Behind-the-meter generation, where a plant is tied to a single large customer, is perhaps the clearest way to make the numbers work.⁵ Texas’s grid operator, the Electric Reliability Council of Texas (ERCOT), expects the state’s overall grid demand to nearly double before the decade is out.⁶ That pace of growth should, in theory, support major investment in new power capacity. Global trends point in the same direction, with natural gas investment climbing to a decade high.⁷ But in Texas, those signals do not automatically translate into viable projects. The challenge isn't asset quality but securing the predictable cash flows lenders and investors require.
price raise in 2027 driven by data centre demand.
Same plant, four times the margin Gross margin for two identical gas projects
2030 The state grid demand will nearly double before the decade is over.
PJM ("Capacity market - paid for being available") ERCOT ("Energy-only market - paid only for power produced)
19%
2020
5%
Nor can developers simply build bigger and bank on economies of scale. In practice, scale amplifies the challenge. A gigawatt plant carries disproportionately higher risks and costs across transmission, water, fuel and permitting, with grid connection alone potentially adding hundreds of millions of dollars and several years to the development timeline. For most of the year, Texas power is cheap and abundant, with higher prices confined to rare windows when prices spike. Meanwhile, PJM provides a stable capacity payment alongside energy revenues, creating a more predictable income stream. For investors, that’s the difference between a project that gets built and one that does not. The contract, not scale, makes the economics work In practice, ERCOT projects tend to require long-term contracts with large, creditworthy buyers, such as data centres, before lenders are willing to commit. 10 Texas lawmakers have taken note. While Senate Bill 6 (SB 6), which became law last year, does not fix the market's overall structure, it strengthens the business case for contract-backed gas-to-power projects. 11 By assigning more of the grid upgrade costs to large new loads, such as data centres, the legislation encourages direct partnerships between power generators and large customers through behind-the-meter and long-term contracted arrangements.
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