How Can the Financial Hedge Work in Different Markets?
The financial hedge is concerned with market prices paid for electricity in power pools. Each regional power pool constitutes a separate electricity market. The financial hedge may be based on transactions that may take place in the same market (power pool) or in different markets (power pool). What matters is that when prices rise or fall in one market (power pool), they also rise or fall in the other market.
Electricity markets tend to respond to large scale, often global, price signals and typically move in tandem. For example, when the price of natural gas and oil soars in the U.S., the price of electricity rises in most power markets. We carefully examine and document several years of data on price movements and the correlation between fuel costs and electricity in different markets to make sure the hedge is solid.
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