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Thursday, February 23, 2006

Energy swap in the Economist

Following up on my previous post, this is that Economist article:

The whole article is interesting and worth reading, but the paragraph that caught my eye was this one:
Sun Edison, an American start-up backed by Goldman Sachs and BP, has devised a clever new business model that overcomes a number of the real-world obstacles that have hitherto stymied renewable-energy projects. Simply put, it offers big retailers (such as Whole Foods and Staples) long-term, fixed-price electricity contracts in return for being able to set up solar panels on their rooftops. The retailers benefit from stable power prices, but do not have to buy or run the panels themselves; Goldman Sachs, which finances the panels, benefits from the associated tax credits and other offsets; BP sells more solar panels; and solar power has a better chance of taking off. Meanwhile, other ventures are looking to wind energy for a hedge. Several firms are putting together hybrid financial products that combine the output of wind farms in America's mid-west with that of natural gas-fired plants—thus hedging the volatility of both.
I've heard from other sources that energy derivatives are a hot field. Obviously there are the simple and well-known derivatives like oil futures. But then there are more complicated "engineered" ones like the swap described above.

I liked this reference because it shows how financial engineering can do good for the world.

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