Saturday, April 29, 2006

Call options would benefit renewable producers

Wind and Solar farm operators should sell call options (today) on their electricity production for the years 2016-2035. Since both types of renewables have no fuel cost, they know (approximately) how much it will cost to produce electricity in that period. They can select a future electric price that will be profitable. Because of the long time horizon, the theoretical value of the options would be tens of thousands of $/MW/yr. Even if they could only capture 10% of this theoretical value, they would generate (right now) millions of $ by selling the options. This call premium could be used to pay off debt early, further boosting the profitability of the venture.
Meanwhile the call purchasers (utility or end consumer) would be in effect buying "electricity price insurance". The buyers would effectively cap future electricity prices for several decades. At the same time the buyer will not be "locked-in" to some arbitrary high future rate because if the market rate were lower than the option rate, the buyer could simply buy at the market rate.

I have written a journal ready article explaining this concept in more detail. Please contact me if you'd like a copy.

In the past 20 years electricity rates have not been very volatile, but as fossil fuel prices rise they will cause ripple effects that will lead to higher electric rates. For example, sustained or increasing high oil prices will raise the cost of mining and transporting coal. This will in turn raise the cost of electricity about 50% of is coal generated in the US.


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