Cfd Power Purchase Agreement

Typically, your organization buys electricity generated from renewable sources at a fixed price of 7, 10 or 15 years. Even if you have a direct agreement with a renewable energy project, you must always let a distributor pass the terms of the agreement. The main problem is the setting of the future level of prices. The long-term nature of contracts often makes it difficult to find robust prices that are still valid for electricity at the long end of a forward curve. This part of the market, known as illiquid, must be determined by internal models; Alternatively, a company can purchase price forecasts from external lenders. The resulting price risks to the buyer, inherent in the instrument and model used, must be carefully monitored and covered. It turns out that standard EEX power contracts are ideal hedging instruments. They cover price risks for up to six years in a liquid and standardised market. Different strategies can be used depending on the amount of electricity expected. In general, companies choose a dynamic sequential strategy to manage large exposures.

Over time, an increasing share of the volume to be produced is covered for an approaching delivery time. Depending on the possibility of an AEA, more or less varied security strategies must be taken into account. In principle, two main types of AAE appear on the market. In a physical AAE, the producer sources in the same price area as the counterparty. This means that there is a direct and physical delivery that is also relevant to the accounting grid. In this case, it is not mandatory for the producer to be in the same area as the supplying part. But if there is such proximity — for example, because there is a power plant in the industrial park — that form of contract is called local AAE. In the case of an external AAE, the manufacturer provides electricity to the user via a public grid. For this reason, the amounts must be paid through the relevant accounting grid.

While the manufacturer also acts as an intermediary in an off-site AAE (because it handles certain processes), it is also a sleeveless AAE.

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