Power price hedging with financial derivatives

Market Insight

Financial hedges offer a key solution for managing ongoing energy price volatility arising from geopolitical and environmental risks; certainty of energy-related costs or revenues has become paramount for many of our clients, including both large energy users and generators.

Market volatility stems from conflicts in Eastern Europe and the Middle East, shifting weather patterns, station disruptions, technological advancements, and global politics amid a net-zero transition. Quick and decisive actions to secure energy cost or revenue certainty have proven vital in navigating this environment.

Source: Nord Pool Group, 2024

Centrus has been particularly active in advising clients around getting set up to trade financial hedges (derivatives) with financial institutions and energy trading companies. We see four key benefits to being in a position to trade financial hedges:

  1. Price advantage: Financial hedges often offer superior pricing compared to traditional Power Purchase Agreements (PPAs), resulting in significant cost savings per MW over a 7-10 year period.
  2. Agility in execution: Doing the heavy lifting of agreeing security, structure and ISDA documentation upfront allows for an expedited execution should markets turn quickly (even same day) – this can be in the form of a market order at a pre-determined fixed price that “works”.
  3. Tenor / product flexibility: Particularly when looking to transact quickly, financial hedges can give more flexibility over how far out the curve you can hedge, or for specific seasons to target. PPAs have become more customizable but there is generally a large suite of features available from financial hedge providers.
  4. Accounting benefits: Proven track record for being eligible for hedge accounting treatment, deferring changes in fair value through other comprehensive income (OCI).

We continue to support clients through adding value along the full spectrum of accessing energy security, from sourcing and advising on acquisitions of generation assets to arranging power purchase agreements and financial power hedges with financial institutions and energy trading entities.

Want to learn more? Reach out to the Centrus team for a complimentary initial assessment to discover how we can help you save on your energy generation costs.

Please contact Myrto Charamis, Adam MacDonald or Ivan McKinlay for more information.