LCC OBSERVATIONS 1

1st QUARTER 2016LCC ObservationsWind & Solar Sector Update

14 June 2016

Using ASX Electricity Futures to Hedge a

Merchant Wind Farm

Summary

• LCC has used the actual generation data of a 30MW operating

wind farm in NSW and ½ hrly pool prices for Q1 2015 & 2016

to demonstrate the effectiveness of futures hedging strategies

compared to a generation following fixed price PPA.

• Hedge should be sized based on expected ENERGY

PRODUCTION over the contract window NOT rated POWER

• A combination of ½ hrly Futures & At or Close To The Money

Average Rate Puts (DEPENDING ON COST) is the preferred

hedge

• The effectiveness of the preferred hedge exceeds 85% of a

‘generation following fixed price’ PPA (measured by R2)

• High priced ½ hrly Caps (k = $300) are not effective as a

hedge even as protection for a larger short ½ hrly futures

position

• The effectiveness of the preferred hedge can support higher

leverage than a pure merchant profile

• Further insights available on request

LCC OBSERVATIONS 2

Real Data for Q1 2015 & 2016 for a NSW Wind Farm

Results using randomly selected daily Generation

& Price Profiles

• Daily ½ hrly generation and price profiles for Cullerin Range Wind Farm & NSW were sourced for Q1

2015 & 2016

• There was no observable correlation between ½ hrly generation & prices

• Analysis was undertaken using 100 combinations of randomly selected daily generation and daily

price profiles and results plotted for a synthetic 28 day (20 working days and 8 non-working days)

contract window

• Hedge effectiveness was assessed assuming hedges had been locked in at $50 & $35 and

compared to actual outcomes

• The preferred hedge may support an additional 5+% leverage over a merchant profile

Comments

Interpretation of the

graphics to the left:

• Objective of the

analysis is to closely

replicate the PPA

profiles in both cases

(upper & lower)

• In the low price case

(upper) the Monthly

Average Rate Puts are

mostly out of the

money and therefore

result in revenues

tracking the Merchant

profile (+ve variance to

the PPA profile)

• In the high prices case

(lower) the Monthly

Average Rate Puts are

mostly in the money

and therefore act like a

short futures position

• A trading strategy that

involves a short futures

position that is traded

out over time into

Average Rate Puts to

reduce costs

associated with time

decay may be an

attractive

implementation of the

strategy

14 June 2016

LCC OBSERVATIONS 314 June 2016

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