What is a renewable energy hedge?

A renewable energy hedge is a financial contract between a renewable power generator and a power customer that is intended to protect both against price volatility. It can be compared to a locked-in, fixed-rate mortgage in which parties agree on a fixed, or “strike,” price for power. When the strike price is higher than the market price for power, the generator pays the power customer the difference; when the strike price is lower than the market price for power, the power customer pays the wind generator the difference.

Such a hedge is not intended to simply provide monetary savings, but does enable the power customer to do long-term energy budget planning. It also supports green energy development, as it provides a renewable energy generation company such as PPM Energy with a stable income stream that facilitates long-term financing for future renewable energy projects.

Example: The farmer and the baker
A farmer in Iowa and a baker in Boston determine that $1 a bushel is a good price for wheat. They agree on a strike price of $1 a bushel for 1,000 bushels of wheat. The farmer continues to sell wheat in her market in Iowa, while the baker continues to buy wheat from his supplier in Boston. During the first year, a frost drives the price up to $1.50 a bushel. Because the farmer made $500 more and the baker paid $500 more than the strike price, the farmer sensd the baker $500. The second year, there is a bumper crop of wheat, which drives the price down to $.50 a bushel. The farmer made $500 less and the baker paid $500 less, so the baker sends the farmer $500. It works out over the two years so that the farmer and the baker have earned/paid $1 a bushel for wheat, so they both met their goals and controlled their costs. A wind hedge works the same way.

What are RECs?
RECs are renewable energy credits, sometimes also called green tags or tradable renewable certificates or green energy certificates. According to the U.S. Department of Energy, they represent the technology and environmental attributes of one megawatt hour of electricity generated from a renewable, or “green,” source, such as a wind farm.

Customers do not have to switch providers or use green power to purchase RECs.