How Does the Hedge Work?
The CFD is based on a negotiated price point, called the strike price, for the power generated by the renewable facility. The strike price may logically be based on the year’s average spot market power pool price where the facility is located. For example, let’s say 5 cents per kwh was the agreed upon strike price. (An example follows below.)
The power from the project will be sold into the daily spot market of the local power pool.
The CFD operation is straightforward.
The negotiated strike price is 5 cents for a fifteen or twenty year contract.
If the average price received by the generator is above 5 cents during a month, the generator sends all income received above 5 cents to the user. If the average price received by the generator is below 5 cents, the user sends the difference below five to the generator. If the average price is equal to the strike price, no money changes hands.
If for any reason the energy facility doesn’t operate, then no money changes hands. This is a pure hedge. There is no capital investment and no requirement to purchase anything.
A typical CFD term for renewable projects would be 15-20 years. Each month there would be a cash settlement (if any) determined with a detailed audit trail by the buyer’s agent, Roy Morrison & Associates LLC, with information sent to generator and user.
The negotiated strike price may be adjusted to account for changing underlying generator costs and to share in a win-win fashion changing economic conditions over time.
Click below (A CFD Example) for more details.
