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Wind Hedge Overview Roy Morrison & Associates, LLC www.RMAenergy.net © RMA, 2005.

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Presentation on theme: "Wind Hedge Overview Roy Morrison & Associates, LLC www.RMAenergy.net © RMA, 2005."— Presentation transcript:

1 Wind Hedge Overview Roy Morrison & Associates, LLC © RMA, 2005

2 Todays Energy Purchase Problems Rapidly increasing cost driven by a global oil crisis and natural disasterRapidly increasing cost driven by a global oil crisis and natural disaster Users choose between timing energy markets, being passive price takersUsers choose between timing energy markets, being passive price takers Future prices appear radically unstableFuture prices appear radically unstable Market prices likely to continue to climb but subject to sudden collapse and spikesMarket prices likely to continue to climb but subject to sudden collapse and spikes Long-term company and institution budget instabilityLong-term company and institution budget instability

3 1.5 Megawatt GE Wind Turbine in NY State

4 Contract for Differences Hedge Contract for Differences Hedge A Hedge is a barrier or means of protectionA 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 costsContract 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 usersHedges 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 usersCFD is based on a win-win negotiation between producers and users

5 Wind Hedge Advantages Uses wind power to lower your energy costUses wind power to lower your energy cost Supports renewable energy developmentSupports renewable energy development Achieves long-term energy budget stabilityAchieves long-term energy budget stability Keeps net electricity and natural gas costs level over the 5 to 20 year life of the hedgeKeeps net electricity and natural gas costs level over the 5 to 20 year life of the hedge Represents a simple financial transaction that doesnt interfere with energy purchase decisionsRepresents a simple financial transaction that doesnt interfere with energy purchase decisions

6 CFD Helps Build New Renewables Direct relationships between energy users and renewable developersDirect relationships between energy users and renewable developers Lower capital costs for developersLower capital costs for developers Caps energy prices for end usersCaps energy prices for end users Users can take initiative in helping develop new renewablesUsers can take initiative in helping develop new renewables A Win-Win-Win solution for users, developers, communities, the environmentA Win-Win-Win solution for users, developers, communities, the environment

7 Wind Turbine Blade

8 A Classic CFD in Action A farmer in Iowa and a baker in Boston: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 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.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.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.

9 A Classic CFD in Action - 2 In the first year, theres 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 farmers net income is $1.00/bushel.In the first year, theres 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 farmers 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 bakers net cost 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 bakers net cost is $1.00/bushel. Both the farmer and the baker control their first year costs and incomes. Both are winners.Both the farmer and the baker control their first year costs and incomes. Both are winners.

10 Classic CFD in Action - 3 In the second year, theres a bumper crop in Iowa. Price of wheat is $.50. The farmer earns $500 for 1000 bushels.In the second year, theres 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 bakers net cost is $1.00/bushel.In the second year, the baker buys wheat at $.50. He spends $500. The baker sends $500 to the farmer. The bakers 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.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.The CFD allows both parties to meet their goals.

11 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 thats good for both parties, and a term.The parties, the wind farm owner and the energy user, agree on a quantity to be hedged, a strike price thats 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. 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.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.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.

12 How Are Hedge Payments Made ? If there is no sale of power, there is no payment to or by either party.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.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.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.

13 The Buyers Agent Model The hedge is based on the energy buyers agent model where the seller (wind farm) pays all fees while the buyers agent represents the buyer (user). These fees are included in the strike price.The hedge is based on the energy buyers agent model where the seller (wind farm) pays all fees while the buyers agent represents the buyer (user). These fees are included in the strike price. The buyers 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.The buyers 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 farms output data filed with local distribution company.There is a complete audit trail based on ISO price data for the wind farm and the wind farms output data filed with local distribution company.

14 Where Are The Wind Farms? We currently have CFDs available from wind farms in New York, New England, and New Jersey.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.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.We are identifying and negotiating with interested developers on an ongoing basis for wind and other renewable sources.

15 These are large machines. One blade by the roadside.

16 Whos Doing Wind Hedges? Major wind developers such as PPM in New York have used wind hedges to help support their projects.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.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.Wind developers realize they can now make CFD agreements with end users for the benefit of both parties.

17 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.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.We provide comprehensive measures of historical, current, and future hedge behavior.

18 Our Wind Hedge Analysis Includes Hour by hour data on wind generation and sale.Hour by hour data on wind generation and sale. Hour by hour data on user electric consumption and monthly natural gas or oil use.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.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.Demonstration of the validity of hedge based on historic data and future behavior under a variety of price scenarios.

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20 Our Analysis Provides An interactive means to examine the effect of different hedge quantities and differing strike prices over the life the the hedge.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.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.Yearly and cumulative summary of electricity and fuel expenses with and without the hedge.

21 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. 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. End users can reduce risks from volatile market prices and plan for long term price stability based on renewable energy generation.

22 Escape From Energy Price Volatility & Support Renewable Development Contact: Roy Morrison & Associates, LLC / (Fax) P.O. Box 201 Warner, NH 03278


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