A CFD Example
This is to show hedge dynamics, not a prediction of market behavior. Hedges operate to keep both sides whole. Generator gets income needed. User controls costs. Hedge terms can be adjusted to account for plunging or peaking markets to share benefits and maintain win-win nature of the agreement.
3 years of a 20 year hedge
(Hedge Cash Flows followed by User Utility Costs)
I. Hedge Cash Flows
CFD size 10,000,000 kwh/year
Strike Price: 5 cents ($500,000 income/yr. @$.05/kwh)
Year one
Kwh income year one: $550,000 ($.055/kwh)
Generator sends $50,000 to user
Year two
KWH income year two $500,000
No net exchange of funds
Year three
Kwh income year three: $450,000 ($.045/kwh)
User sends $50,000 to generator
II. User utility power costs
Base costs 10,000,000kwh/yr *.07/kwh = $700,000 (est. electric rates for this example)
Year one
Utility costs increase est. 8% = .0756/kwh = $756,000 utility bill
$756,000-50,000 hedge from payment generator = $706,000 net utility expense year one
Year two
Utility Costs decrease est. 8% = .07/kwh = $700,000 net utility expenses year two
Year three
Utility costs decrease est. 8% = $.0644/kwh = $644,000 utility bill
$644,000 + $50,000 cost to generator = $694,000 net utility expenses year three
Year one user utility costs +approximately 10% off set by hedge and remains flat
Year two utility costs flat no hedge payment
Year three user utility costs - approximately 10% off set by hedge and remain flat
(The market forces that lead average spot market costs to rise or fall will lead average utility costs which are based on underlying wholesale market to similarly rise or fall)
The user has substantially maintained level power costs equal to amount hedged.
