Call options can be used as a financing tool for fixed-cost renewable energy technologies.
Daniel Simon holds an MBA (finance concentration) from Northwestern University in Evanston, Ill. Contact him at firstname.lastname@example.org. The author would like to acknowledge Shimon Awerbuch for his editing and advice improving the charts and figures.
An unexploited benefit of renewable energy is the predictability of operating costs over the long term. A renewables operator knows today how much it will cost to produce energy decades in the future. This future price certainty has a value that can be transferred to electricity buyers or other market participants.
Long-term call options, akin to electricity price insurance, can capture some of this value. Short-term call options—options that expire in three years or less—are traded commonly on numerous markets. These include options on energy inputs commodities like coal, oil, and natural gas, as well as energy products, like electricity.
How much value can a renewable-plant operator capture from selling long-term call options, given several future price and volatility scenarios? What will be the cost and benefit to an individual buyer or seller?