Contracted vs Merchant Revenue
Definition
Contracted revenue is income set in advance by a long-term agreement with a buyer, such as a power purchase agreement, tolling agreement or capacity contract with a utility or company. Merchant revenue is income from selling electricity, capacity or grid services into a wholesale market at whatever prices prevail. Most energy projects combine the two, and many move from contracted to merchant when their first contracts expire, which is why investors look at how many years of contracts remain and with whom.
Why it matters
Two projects with the same yield can carry very different risks. A long contract with a highly rated utility makes cash flow depend mainly on output and on the buyer paying; a merchant project's cash flow also moves with power prices, congestion and market rules. Investors in energy funds and project notes should know what share of income is contracted, for how long, with whom, and what the project is assumed to earn after the contracts end.
Common misconceptions
- •Contracted does not mean fixed volume. Most PPAs pay per megawatt-hour delivered.
- •Contracted does not remove credit risk. The buyer can default, as PG&E's 2019 bankruptcy showed.
- •A headline remaining contract life depends on the weighting (capacity, revenue or cash flow) and can hide short contracts.
- •Merchant does not mean unhedged; it means the price is not set by a long-term offtake contract.
Technical details
Revenue streams a project can sell
Energy: megawatt-hours delivered, under contract or into the market.
Capacity or resource adequacy: payment for being available at peak times.
Ancillary services: frequency and reserve services to the grid operator.
Environmental attributes: renewable energy certificates, sold with or apart from the power.
Worked example: Clearway Energy, 2025 10-K
Portfolio of about 12.9 GW: about 10.1 GW of wind, solar and battery storage and 2.8 GW of gas-fired Flexible Generation.
Renewables and Storage: offtake agreements with about 12 years remaining on average (CAFD-weighted) and a Baa1 average rating where rated.
Flexible Generation: most facilities went merchant in 2023 when their PPAs expired, then re-contracted part of their capacity value under shorter resource adequacy agreements.
Questions to ask
What share of projected cash flow is contracted in each year, and with which buyers?
Does the contract pay for energy delivered, for capacity, or both?
What price is assumed after the contract ends, and who set it?
Can the buyer terminate or curtail without paying?
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Is contracted revenue guaranteed?
- No. A contract fixes the price or payment basis, but most power contracts pay only for energy actually delivered, so output still varies with weather and equipment. Payment also depends on the buyer: when PG&E filed for bankruptcy on January 29, 2019, Clearway disclosed that the filing 'triggered defaults under the PPAs with PG&E and such related financing agreements.'
- What happens when a contract expires?
- The project sells into the market or signs a new, usually shorter contract. Clearway's gas-fired Flexible Generation facilities 'commenced merchant operations during 2023 following the expiration of the PPAs' and now sell electricity and resource adequacy into California's market; in early 2025 it contracted 75 MW and 197 MW of El Segundo's resource adequacy from August 2026 to December 2029.
- How do investors measure how contracted a portfolio is?
- By the weighted average remaining contract life, the credit quality of buyers and the concentration of revenue. Clearway reported a weighted average remaining contract duration of about 12 years for its Renewables and Storage segment at December 31, 2025 (weighted by cash available for distribution), a weighted-average Moody's rating of Baa1 for rated offtakers, and its two largest customers, SCE and PG&E, at 22% and 16% of revenue.
- Is merchant revenue always riskier?
- It carries market price risk that a fixed contract removes, but owners often hedge part of it. Clearway says it manages merchant price risk 'by entering into derivative or non-derivative instruments to hedge the variability in future cash flows from forecasted power sales.'