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Green Options On the Future

Call options can be used as a financing tool for fixed-cost renewable energy technologies.

Fortnightly Magazine - August 2006

utilities to buy call options from renewable energy plants and resell them to their customers, capturing a generous margin. The value is considerable and real: What consumer or business wouldn’t want to cap future energy costs?

 

Endnotes:

1. From the 2004 Annual Energy Review of electricity prices http://www.eia.doe.gov/emeu/ aer/elect.html .

2. Other markets have developed successful mechanisms for reducing many types of uncertainty. Renewable producers could pool their electricity output and sell participation in the pool, thereby reducing variable output risk—the risk that an unusually low amount of wind at one farm in a given month might reduce the total value of the electricity to a buyer. Similarly, an exchange clearing mechanism such as utilized by many stock and commodity futures markets would reduce the risk of default.

3. American Wind Energy Association’s “Economics of Wind Energy” fact sheet 2002, presentation of costs and revenues for a wind farm.

4. Capacity factor measures what fraction of time the turbine generates power. One- hundred percent capacity factor means the turbine generates the theoretical maximum year round.

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