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

Wind Hedge Wind Hedge OverviewOverview

Roy Morrison & Associates, LLCRoy Morrison & Associates, LLC

www.RMAenergy.netwww.RMAenergy.net

© RMA, 2005© RMA, 2005

Today’s Energy Purchase ProblemsToday’s Energy Purchase Problems

• Rapidly increasing cost driven by a global oil Rapidly increasing cost driven by a global oil crisis and natural disastercrisis and natural disaster

• Users choose between timing energy markets, Users choose between timing energy markets, being passive price takers being passive price takers

• Future prices appear radically unstableFuture prices appear radically unstable

• Market prices likely to continue to climb but Market prices likely to continue to climb but subject to sudden collapse and spikessubject to sudden collapse and spikes

• Long-term company and institution budget Long-term company and institution budget instabilityinstability

1.5 Megawatt GE Wind Turbine in NY State

Contract for Differences HedgeContract 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 Contract for Differences (CFD) hedge is a

tried and true way for producers and users tried and true way for producers and users to control energy coststo control energy costs

• Hedges are used all over the world by Hedges are used all over the world by farmers and food processors, energy farmers and food processors, energy producers and usersproducers and users

• CFD is based on a win-win negotiation CFD is based on a win-win negotiation between producers and usersbetween producers and users

Wind Hedge Advantages 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 Keeps net electricity and natural gas costs level over the 5 to 20 year life of the hedgelevel over the 5 to 20 year life of the hedge

• Represents a simple financial transaction Represents a simple financial transaction that doesn’t interfere with energy purchase that doesn’t interfere with energy purchase decisionsdecisions

CFD Helps Build New CFD Helps Build New RenewablesRenewables

• Direct relationships between energy users Direct relationships between energy users and renewable developersand 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 Users can take initiative in helping develop new renewablesnew renewables

• A Win-Win-Win solution for users, A Win-Win-Win solution for users, developers, communities, the environmentdevelopers, communities, the environment

Wind Turbine BladeWind Turbine Blade

A Classic CFD in ActionA 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 The farmer can pay her mortgage if she can

sell wheat at $1.00 a bushel.sell wheat at $1.00 a bushel.• The baker can pay his workers and his rent if The baker can pay his workers and his rent if

he can buy wheat at $1.00 a bushel.he can buy wheat at $1.00 a bushel.• They agree on a $1.00/bushel strike price for They agree on a $1.00/bushel strike price for

1,000 bushels. The farmer sells her wheat in 1,000 bushels. The farmer sells her wheat in the Iowa market. The baker buys wheat from the Iowa market. The baker buys wheat from a Boston merchant.a Boston merchant.

A Classic CFD in Action - 2A Classic CFD in Action - 2

• In the first year, there’s a frost in Iowa. Price of In the first year, there’s a frost in Iowa. Price of wheat is $1.50. The farmer earns $1500 for 1000 wheat is $1.50. The farmer earns $1500 for 1000 bushels. The farmer sends $500 to the baker. bushels. The farmer sends $500 to the baker. The farmer’s net income is $1.00/bushel.The farmer’s net income is $1.00/bushel.

• In the first year, the baker has to buy wheat at In the first year, the baker has to buy wheat at $1.50. He spends $1500, but he receives $500 $1.50. He spends $1500, but he receives $500 from the farmer. The baker’s net cost is from the farmer. The baker’s net cost is $1.00/bushel.$1.00/bushel.

• Both the farmer and the baker control their first Both the farmer and the baker control their first year costs and incomes. Both are winners.year costs and incomes. Both are winners.

Classic CFD in Action - 3Classic CFD in Action - 3

• In the second year, there’s a bumper crop in Iowa. In the second year, there’s a bumper crop in Iowa. Price of wheat is $.50. The farmer earns $500 for Price of wheat is $.50. The farmer earns $500 for 1000 bushels. 1000 bushels.

• In the second year, the baker buys wheat at $.50. In the second year, the baker buys wheat at $.50. He spends $500. The baker sends $500 to the He spends $500. The baker sends $500 to the farmer. The baker’s net cost is $1.00/bushel.farmer. The baker’s net cost is $1.00/bushel.

• Thus, over two years under the hedge the farmer Thus, over two years under the hedge the farmer earns an average of $1.00/bushel, while the baker earns an average of $1.00/bushel, while the baker pays $1.00/bushel for wheat.pays $1.00/bushel for wheat.

• The CFD allows both parties to meet their goals.The CFD allows both parties to meet their goals.

How A Wind CFD Hedge WorksHow A Wind CFD Hedge Works

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

• For example, 20% of the output of a wind farm (20% is For example, 20% of the output of a wind farm (20% is expected to be an average of 10 million kWh/yr), at a expected to be an average of 10 million kWh/yr), at a $.06/kWh strike price, for a term of ten years. $.06/kWh strike price, for a term of ten years.

• The wind farm owner sells power into the local spot The wind farm owner sells power into the local spot market. The user continues to buy power from their local market. The user continues to buy power from their local market supplier.market supplier.

• If income received by the wind farm is greater than the If income received by the wind farm is greater than the strike price (e.g. $.06/kWh), the wind farm will pay 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 user. If income is less than the strike price, the user will pay the wind farm.pay the wind farm.

How Are Hedge Payments Made ?How Are Hedge Payments Made ?

• If there is no sale of power, there is no payment to If there is no sale of power, there is no payment to or by either party. or by either party.

• Generally settlements are monthly, using actual Generally settlements are monthly, using actual hourly spot market price and machine output data hourly spot market price and machine output data for the previous month to determine whether or not for the previous month to determine whether or not payments need to be made by either party.payments need to be made by either party.

• If the wind farm power generated is below the If the wind farm power generated is below the anticipated amount, the hedged quantity is equal anticipated amount, the hedged quantity is equal to the percentage of the projected wind farm to the percentage of the projected wind farm output originally contracted for in the hedge. output originally contracted for in the hedge.

The Buyer’s Agent Model The Buyer’s Agent Model

• The hedge is based on the energy buyer’s agent The hedge is based on the energy buyer’s agent model where the seller (wind farm) pays all fees model where the seller (wind farm) pays all fees while the buyer’s agent represents the buyer (user). while the buyer’s agent represents the buyer (user). These fees are included in the strike price. These fees are included in the strike price.

• The buyer’s agent, Roy Morrison & Associates LLC, The buyer’s agent, Roy Morrison & Associates LLC, will track and monitor hourly output, sales, and price will track and monitor hourly output, sales, and price data from the wind farm, and indicate any hedge data from the wind farm, and indicate any hedge payments to be made. payments to be made.

• There is a complete audit trail based on ISO price There is a complete audit trail based on ISO price data for the wind farm and the wind farm’s output data for the wind farm and the wind farm’s output data filed with local distribution company. data filed with local distribution company.

Where Are The Wind Farms?Where Are The Wind Farms?

• We currently have CFDs available from We currently have CFDs available from wind farms in New York, New England, and wind farms in New York, New England, and New Jersey.New Jersey.

• Some of these wind farms are up and Some of these wind farms are up and running and others are under development.running and others are under development.

• We are identifying and negotiating with We are identifying and negotiating with interested developers on an ongoing basis interested developers on an ongoing basis for wind and other renewable sources.for wind and other renewable sources.

These are large machines. One blade by the roadside.

Who’s Doing Wind Hedges?Who’s Doing Wind Hedges?

• Major wind developers such as PPM in New Major wind developers such as PPM in New York have used wind hedges to help support York have used wind hedges to help support their projects.their projects.

• They have negotiated CFD wind hedges with They have negotiated CFD wind hedges with companies such as Constellation New Energy, companies such as Constellation New Energy, Goldman Sachs, and Morgan Stanley.Goldman Sachs, and Morgan Stanley.

• Wind developers realize they can now make Wind developers realize they can now make CFD agreements with end users for the CFD agreements with end users for the benefit of both parties. benefit of both parties.

How Do We Know the Hedge Works?How Do We Know the Hedge Works?

• RMA has developed a detailed spreadsheet RMA has developed a detailed spreadsheet analysis that provides an exhaustive analysis that provides an exhaustive examination of present and likely future examination of present and likely future costs and benefits of the wind hedge under costs and benefits of the wind hedge under a variety of future price scenarios.a variety of future price scenarios.

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

Our Wind Hedge Analysis IncludesOur Wind Hedge Analysis Includes

• Hour by hour data on wind generation and Hour by hour data on wind generation and sale.sale.

• Hour by hour data on user electric Hour by hour data on user electric consumption and monthly natural gas or oil consumption and monthly natural gas or oil use.use.

• Examination of the correlation between Examination of the correlation between wind farm local market and user local wind farm local market and user local market. market.

• Demonstration of the validity of hedge Demonstration of the validity of hedge based on historic data and future behavior based on historic data and future behavior under a variety of price scenarios.under a variety of price scenarios.

NH-NY Electric Spot Market PricesLight Lines=Prices / Heavy Lines=12 Month Moving Averages

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NH Elec NY Elec 12 per. Mov. Avg. (NY Elec) 12 per. Mov. Avg. (NH Elec)

Our Analysis ProvidesOur Analysis Provides

• An interactive means to examine the effect of An interactive means to examine the effect of different hedge quantities and differing strike different hedge quantities and differing strike prices over the life the the hedge.prices over the life the the hedge.

• Dynamic summary data sheets that change Dynamic summary data sheets that change by varying hedge quantities and strike prices.by varying hedge quantities and strike prices.

• Yearly and cumulative summary of electricity Yearly and cumulative summary of electricity and fuel expenses with and without the and fuel expenses with and without the hedge.hedge.

The CFD OpportunityThe CFD Opportunity

• The wind hedge is a clear and present The wind hedge is a clear and present opportunity for end users to regain opportunity for end users to regain control of their energy budget and control of their energy budget and help build the renewable energy help build the renewable energy future.future.

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

Escape From Escape From Energy Price Energy Price Volatility & Support Renewable Volatility & Support Renewable DevelopmentDevelopment

Contact:Contact:

Roy Morrison & Associates, LLCRoy Morrison & Associates, LLC

603-496-4260 / 603-456-2871 (Fax)603-496-4260 / 603-456-2871 (Fax)

[email protected]@iamnow.net

www.rmaenergy.netwww.rmaenergy.net

P.O. Box 201 Warner, NH 03278P.O. Box 201 Warner, NH 03278