The P99 Hedge that Wasn't: Empirical Analysis of Bank Hedge Performance in ERCOT
11 Sep 18
10:15 AM
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11:30 AM
Tracks:
Liquid Power Markets 201
A fixed quantity energy price swap, also known as a “P99 Hedge”, is a useful risk management tool for wind power projects but one that results in dramatically less valuable revenues than many project developers and owners expect in their financial forecasts. Much of the overestimation of value stems from the name itself. The “P99 Hedge” name implies, incorrectly, that (1) a wind project’s minimum, or “P99” quantity of energy generation has been hedged, and (2) any excess generation above P99 provides financial upside through the sale of unhedged energy at the spot market price. This interpretation of a P99 Hedge’s performance is fundamentally flawed as it ignores the reality of hourly settlements, where projects with a P99 Hedge are constantly buying expensive spot market power during periods of low generation and selling cheap spot market power during periods of high generation.