Renewable Energy World has published the article "Why corporate renewable energy buyers should consider hedge agreements over PPAs," written by Dan Lynch and Yaw Temeng, counsel and associate, respectively, in the global project finance practice at Akin Gump. The article offers a basic overview of what a hedge agreement is, focusing on renewable energy hedge agreements.
Lynch and Temeng begin by discussing the purpose of a hedge, which they note is "a contractual device used to lock in a predictable, per unit price against commodity price fluctuations." The predictable revenue stream, they write, provides assurance to project lenders "that the project will be able to satisfy the project company's debt service obligations and financial return targets."
The article then describes different types of hedge agreements, observing that they all require "a level of market liquidity (and a regulatory structure) that permits the project company to sell its power directly into the grid for the prevailing wholesale market price." Lastly, the authors write that the use of a hedge agreement can have some significant advantages over a traditional power purchase agreement.