Hedging Energy Prices With Renewable Power

WRI and a group of corporate green power purchasers explore whether long-term green power contracts can be a win-win for providers and consumers.

A key advantage of renewable power is that it is generally free of fuel costs. That makes it attractive to buyers looking for a “hedge” against energy price volatility pegged to fossil fuels. But while this “hedge” can clearly be provided at the wholesale level, there is little experience in using it for retail customers, especially in competitive power markets.

A group of businesses—working with WRI’s Green Power Market Development Group, the Green Power group California Affiliates, and the U.S. Climate Business Group—is looking into ways to change that. The group recently distributed a first-of-its-kind Request for Information (RFI) to a select group of green power suppliers. The RFI is intended to solicit information to assess the feasibility of long-term (say, 10-year) renewable power transactions as a hedge against energy prices in competitive U.S. power markets around the country. The results of the RFI could lead to either formal solicitations or long-term contract negotiations.

The background summary document (PDF, 4 pages, 36 Kb) envisions two long-term contract options. The first option is a fixed-price contract, where the buyer agrees to buy a portion of their total load from a green power provider for a fixed price (say, 6 cents/KWh) or series of annual fixed prices. The second option is a “contract for differences,” in which the provider and consumer agree to a “strike price” (say, $60/MWh) for the duration of the contract. If the market clearing price is less than the strike price at the time of production, the consumer pays the power generator the difference between the two. If the market price is greater, the power generator pays the difference to the customer. Either way, both parties enjoy the benefit of a predictable price.

A long-term “hedge contract” could provide big benefits for both consumers and producers. Consumers get the aforementioned hedge against volatile fossil fuel energy prices. For green power producers, a long-term contract is an attractive value proposition and could help the developer lock-in debt financing. As the crisis in the financial markets has reduced the amount of capital for project financing, these long-term contracts could provide an additional source of support to project developers.

The RFI was originally submitted to a group of pre-screened suppliers; additional suppliers, merchants and generators should contact Alex Perera or Robert Heilmayr if interested.

For more details, read the background summary document (PDF, 4 pages, 36 Kb).