Reducing Risk in Merchant Wind and Solar Projects through Financial Hedges

There are five general designs for hedging risk for merchant wind projects, all of which swap potentially volatile revenue from the project in return for more stable revenue from the hedging counterparty.For wind, the primary revenue risks concern regional electricity prices, the time and intensity of wind speeds, transmission congestion and the project’s operational inefficiencies.Solar has lagged wind in wholesale trading and the use of financial hedges, but there have been recent indications that merchant solar may accelerate.Although wind historically has had lower costs and higher subsidies than has solar, the most significant lasting difference may be the midday-concentrated profile of solar energy.Decreasing federal subsidies present a near-term challenge, but price erosion due to increasing penetrations of wind and solar is the greater long-term threat.