Reuters photo

What is the covariance risk?

The following graphic illustrates the spot price distribution as a function of wind power generation in ERCOT West. We have juxtaposed a hypothetical hedge consisting of P80 (i.e., 80% chance on average that our wind power generation exceeds that volume) baseload sold at $35/MWh in the ERCOT West hub. It is possible to sell into other hubs that are more liquid (e.g., North or South) but at the expense of a basis risk that further exacerbates the overall risk exposure.

What has been the financial impact of the Arctic blast on the assumed hedge?

Our hypothetical hedge combined with the Arctic blast has led to massive losses bringing the average margin down to $-8.37/MWh for the 12-month horizon ended by the blast. The average margin was $21.73/MWh just before the blast. The following graphic summarizes the impact of the Arctic blast on our supposed hedge.

How should we hedge then?

The very first step is to determine the discount associated with the covariance risk and what will drive this discount in the future. Unfortunately, a task that requires heavy analytics as the intricacies related to intermittent renewable energy are complex to assess, even more in a nodal market approach.

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CEO, Pyxidr

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Robin Duquette

Robin Duquette

CEO, Pyxidr

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