Wind Hedges905 2 ppt

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Information about Wind Hedges905 2 ppt

Published on October 4, 2007

Author: Kestrel


Wind Hedge Overview :  Wind Hedge Overview Roy Morrison & Associates, LLC © RMA, 2005 Today’s Energy Purchase Problems:  Today’s Energy Purchase Problems Rapidly increasing cost driven by a global oil crisis and natural disaster Users choose between timing energy markets, being passive price takers Future prices appear radically unstable Market prices likely to continue to climb but subject to sudden collapse and spikes Long-term company and institution budget instability Slide3:  1.5 Megawatt GE Wind Turbine in NY State Contract for Differences Hedge :  Contract for Differences Hedge A Hedge is a barrier or means of protection Contract for Differences (CFD) hedge is a tried and true way for producers and users to control energy costs Hedges are used all over the world by farmers and food processors, energy producers and users CFD is based on a win-win negotiation between producers and users Wind Hedge Advantages :  Wind Hedge Advantages Uses wind power to lower your energy cost Supports renewable energy development Achieves long-term energy budget stability Keeps net electricity and natural gas costs level over the 5 to 20 year life of the hedge Represents a simple financial transaction that doesn’t interfere with energy purchase decisions CFD Helps Build New Renewables:  CFD Helps Build New Renewables Direct relationships between energy users and renewable developers Lower capital costs for developers Caps energy prices for end users Users can take initiative in helping develop new renewables A Win-Win-Win solution for users, developers, communities, the environment Slide7:  Wind Turbine Blade A Classic CFD in Action:  A Classic CFD in Action A farmer in Iowa and a baker in Boston: The farmer can pay her mortgage if she can sell wheat at $1.00 a bushel. The baker can pay his workers and his rent if he can buy wheat at $1.00 a bushel. They agree on a $1.00/bushel strike price for 1,000 bushels. The farmer sells her wheat in the Iowa market. The baker buys wheat from a Boston merchant. A Classic CFD in Action - 2:  A Classic CFD in Action - 2 In the first year, there’s a frost in Iowa. Price of wheat is $1.50. The farmer earns $1500 for 1000 bushels. The farmer sends $500 to the baker. The farmer’s net income is $1.00/bushel. In the first year, the baker has to buy wheat at $1.50. He spends $1500, but he receives $500 from the farmer. The baker’s net cost is $1.00/bushel. Both the farmer and the baker control their first year costs and incomes. Both are winners. Classic CFD in Action - 3:  Classic CFD in Action - 3 In the second year, there’s a bumper crop in Iowa. Price of wheat is $.50. The farmer earns $500 for 1000 bushels. In the second year, the baker buys wheat at $.50. He spends $500. The baker sends $500 to the farmer. The baker’s net cost is $1.00/bushel. Thus, over two years under the hedge the farmer earns an average of $1.00/bushel, while the baker pays $1.00/bushel for wheat. The CFD allows both parties to meet their goals. How A Wind CFD Hedge Works:  How A Wind CFD Hedge Works The parties, the wind farm owner and the energy user, agree on a quantity to be hedged, a strike price that’s good for both parties, and a term. For example, 20% of the output of a wind farm (20% is expected to be an average of 10 million kWh/yr), at a $.06/kWh strike price, for a term of ten years. The wind farm owner sells power into the local spot market. The user continues to buy power from their local market supplier. If income received by the wind farm is greater than the strike price (e.g. $.06/kWh), the wind farm will pay the user. If income is less than the strike price, the user will pay the wind farm. How Are Hedge Payments Made ?:  How Are Hedge Payments Made ? If there is no sale of power, there is no payment to or by either party. Generally settlements are monthly, using actual hourly spot market price and machine output data for the previous month to determine whether or not payments need to be made by either party. If the wind farm power generated is below the anticipated amount, the hedged quantity is equal to the percentage of the projected wind farm output originally contracted for in the hedge. The Buyer’s Agent Model :  The Buyer’s Agent Model The hedge is based on the energy buyer’s agent model where the seller (wind farm) pays all fees while the buyer’s agent represents the buyer (user). These fees are included in the strike price. The buyer’s agent, Roy Morrison & Associates LLC, will track and monitor hourly output, sales, and price data from the wind farm, and indicate any hedge payments to be made. There is a complete audit trail based on ISO price data for the wind farm and the wind farm’s output data filed with local distribution company. Where Are The Wind Farms?:  Where Are The Wind Farms? We currently have CFDs available from wind farms in New York, New England, and New Jersey. Some of these wind farms are up and running and others are under development. We are identifying and negotiating with interested developers on an ongoing basis for wind and other renewable sources. Slide15:  These are large machines. One blade by the roadside. Who’s Doing Wind Hedges?:  Who’s Doing Wind Hedges? Major wind developers such as PPM in New York have used wind hedges to help support their projects. They have negotiated CFD wind hedges with companies such as Constellation New Energy, Goldman Sachs, and Morgan Stanley. Wind developers realize they can now make CFD agreements with end users for the benefit of both parties. How Do We Know the Hedge Works?:  How Do We Know the Hedge Works? RMA has developed a detailed spreadsheet analysis that provides an exhaustive examination of present and likely future costs and benefits of the wind hedge under a variety of future price scenarios. We provide comprehensive measures of historical, current, and future hedge behavior. Our Wind Hedge Analysis Includes:  Our Wind Hedge Analysis Includes Hour by hour data on wind generation and sale. Hour by hour data on user electric consumption and monthly natural gas or oil use. Examination of the correlation between wind farm local market and user local market. Demonstration of the validity of hedge based on historic data and future behavior under a variety of price scenarios. Our Analysis Provides:  Our Analysis Provides An interactive means to examine the effect of different hedge quantities and differing strike prices over the life the the hedge. Dynamic summary data sheets that change by varying hedge quantities and strike prices. Yearly and cumulative summary of electricity and fuel expenses with and without the hedge. The CFD Opportunity:  The CFD Opportunity The wind hedge is a clear and present opportunity for end users to regain control of their energy budget and help build the renewable energy future. End users can reduce risks from volatile market prices and plan for long term price stability based on renewable energy generation. Escape From Energy Price Volatility & Support Renewable Development:  Escape From Energy Price Volatility & Support Renewable Development Contact: Roy Morrison & Associates, LLC 603-496-4260 / 603-456-2871 (Fax) P.O. Box 201 Warner, NH 03278

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