Energy derivatives

Energy derivatives

An electricity consumer wants to buy 1,000 MWh for 3 months.

In order to have a predictable disbursement for this purchase, the company decides to contract, through the derivative instrument, the purchase of 1,000 MWh at a price of R$100/MWh the average PLD  (Brazilian "spot") for 3 months.

At the expiration of the contract (3 months later), the adjustment value for the buyer of the Electricity Term will be calculated according to the expression below

  Adjustment (R$) = (PLD at Maturity – PLD contracted) x Quantity of MWh

There are 3 possibilities for the PLD: above, below or exactly at the value. The table shows an example simulating each of them.

1st) PLD at maturity of R$ 120/MWh

Adjustment (R$) = (120 - 100) x 1,000 = R$ 20 thousand that the buyer will receive

2nd) PLD at maturity of R$ 100/MWh

Adjustment (R$) = (100 - 100) x 1,000 = 0 that the buyer will receive

3rd) PLD at maturity of R$80/MWh

Adjustment (R$) = (80 - 100) x 1,000 = R$20 thousand that the buyer will pay

In all three cases, the buyer will end up having the same final cost of R$100,000.

This is a very interesting way of risk management. This “tool” will certainly be worth considering.

In Brazil we already have platforms that enable these transactions.