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Revisiting the Long-Term Hedge Value of Wind Power in an Era of Low Natural Gas Prices

Research or Whitepaper
Valuation, Analysis, BCA   
This article proceeds as follows. Section 2 makes the case for valuing wind power as a long-term natural gas price hedge by contrasting the characteristics of a large sample of wind power purchase agreements (“PPAs”) to the shortcomings of conventional gas price hedging instruments like futures and options contracts. Although these conventional hedging instruments can be used effectively to hedge gas price risk in the near-term, they come up short when one tries to use them to lock in prices over longer terms – e.g., over the average 20-year duration of a wind PPA. Section 3 sets up an empirical comparison between wind power prices from this PPA sample and long-term natural gas price projections, in order to explore whether wind power can provide this long-term hedge in a cost-effective manner. Section 4 presents the comparison graphically and discusses results, and Section 5 draws conclusions.