DANSKE COMMODITIES. Hedging techniques for Long Term renewables PPA. Dario Gallanti, Origination General Manager Southern Europe

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1 DANSKE COMMODITIES Hedging techniques for Long Term renewables PPA Dario Gallanti, Origination General Manager Southern Europe 1

2 2 Our business model Trading in 35 markets, Danske Commodities is well-positioned to seize opportunities

3 Danske Commodities are committed to being part of the renewables future Experience with structuring long term PPAs 15Y PPA with 294MW of off-shore wind in UK. 10Y Fixed price for wind assets in Denmark. Evaluating market parity assets across Europe. Significant European footprint on renewables +5GW across 8 different markets. Negative price risk management and certificates trading. Portfolio effect implies strong product offering on both price and creativity. Flexible assets Deep understanding of the value of flexibility 24/7/365 optimisation of production Gas trading > cross commodity and longer curve 3

4 THE TRADER S ROLE 5

5 Energy markets Main energy price drivers for different time horizons Market parity SEN 2017 Storage Primarily influences Commodity Defaults Wheather Holidays LT Trends 6 Clouds Temperature Sun/Wind Rainfall Capacity market EU Policy HVAC CO2 Price Wind/Solar PP Hydro PP Gas Price Energy Price Bids thermal plants Time of day Illumination Oil Price PP/Grid Coal Price Holidays Demand and consumption behaviours Revisions Technical outages Cross-border capacity National grid development Nuclear decommissioning DSR/Prosumer Distributed Generation Consumption electrification Economic growth pace Electric mobility

6 7 There is only one certainty regarding long term energy price expectations: they are certainly wrong.

7 Agenda Hypothesis 1 Hypothesis 2 Hypothesis 3 Physical vs. Financial Fixed price structures Credit 7

8 8 Hypothesis 1: More and more asset owners will choose to split the physical and financial part of the PPA

9 Example of contractual set-up Balance Responsible Party Wind/Solar farm Physical power flow Reasoning Spot price Financial contract Fixed price off-taker Lower the credit risk by increasing counterparty diversification (MtM vs. Settlement risk). Simple from a contractual and operational point of view. Big spread in balancing off-taker quotes so dividing the products is likely to yield a better pricing (e.g. Italy). Fixed price Spot price We are currently evaluating a deal like this in UK, where DC will handle the physical power for a 15Y horison, and the financial fixed price will be directly between a Corporate and the production asset. 9

10 10 Hypothesis 2: Banks are slowly getting more comfortable with commodity risk

11 MWh MWh Volume risk Pay-as-Produced or Fixed Volume Pay-as-produced Buyer purchases [100]% of the actual production from the PV/wind farm and carries the volume and price risk. Fixed volume Seller is obligated to deliver a pre-agreed volume of electricity. Any risk associated with surplus/scarcity volumes is carried by the Seller. Seller sells the excess at the spot price Seller buys the missing volume in the spot market and deliver to Buyer Production Production Fixed volume Buyer buys [100]% of this production at the agreed price Buyer buys [100]% of this production at the agreed price Buyer buys [100]% of this production at the agreed price Buyer buys [100]% of this production at the agreed price Time Time The Pay-as-produced is the standard product, but we are evaluating projects in UK and Finland where we are discussing the Fixed volume product on a P90 basis converted to a hourly profile. 11

12 Price Price Price risk Fixed price Fixed, agreed price on the production for the term of the contract (can be flat, stepped, etc.) Fixed price on liquid products The SYS / PUN accounts for majority of the value and has better liquidity The EPAD / CCT has limited liquidity, and can be hedged through a rolling structure instead. Market (spot) price Fixed price EPAD / CCT SYS / PUN Buyer buys the agreed volume at the fixed price Buyer Buyer buys buys the agreed [100]% of this volume production at the fixed at the price agreed price Time Time The Fixed price is the standard product, but we are currently evaluating projects in DK and Italy where we are discussing the Fixed price on liquid products. 12

13 Hedging tools 1 - Forward market hedge opportunities STACK AND ROLL MECHANISM MW MW Y Y RISKS AND COSTS ON TRADER Volume and profile risk CCT risk High cost of collateral Mark to market risk Balancing risk PRO AND CONS FOR PRODUCER High share of risk delivered to market Works well only up to 5Y Producer needs to provide bank guarantee 4

14 14 Hypothesis 3: Credit coverage is needed from SPVs, but the requirements will differ a lot across the different off-takers

15 Credit reserve Solving the credit issue Credit sinking fund Reasoning The SPV is able to pose some kind of credit coverage either in the form of a guarantee, or a cash deposit. The structure of the SPV and the details of the underlying assets can significantly reduce the need for credit coverage (eliminated volume, price and imbalance risk, insurance in place, top tier hardware, direct agreement, good O&M contract, good fund track record, production distributed across multiple sites, etc.). 0 3m 2.5Y 5Y Time We are currently discussing these credit structures with several of the major developers, and it seems that similar structures have already been executed. 15

16 Challenge. Compete. Repeat. LEGAL NOTICE The contents of this publication are for general information and illustrative purposes only and are used at the reader s own risk. Danske Commodities uses all reasonable endeavours to ensure the accuracy of the information. However, Danske Commodities does not guarantee or warrant the accuracy, completeness, factual correctness, or reliability of any information in this publication and does not accept liability for errors, omissions, inaccuracies, or typographical flaws. The views and opinions expressed in this publication are not necessarily those of Danske Commodities Danske Commodities A/S. All rights reserved. Without limiting rights under copyright, no part of this document may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form, by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose without the express written permission of Danske Commodities A/S. Danske Commodities, Danske Commodities A/S and the Danske Commodities logo are either registered trademarks or trademarks of Danske Commodities A/S in Denmark and/or other countries. Refer to Other trademarks referred to in this document are the property of their respective owners.