Commodity and Commercial Forwards · Forwards Trading Guide

Electricity forwards and power purchase agreements connect financial prices with physical generation and consumption. The shape of delivery is as important as the average price.

Distinguish the agreement types

A physical power agreement provides electricity under specified delivery arrangements. A financial agreement can exchange a difference against a reference price while the customer continues purchasing electricity separately. A power purchase agreement may also include project development, environmental attributes and long contractual terms. Its economic and legal classification depends on its actual terms, not simply the PPA label.

Calculate a matched interval

Assume a simplified financial contract covers 100 megawatt hours at a fixed $60 per megawatt hour. The reference price for the matching interval is $75. The buyer of fixed price protection receives $1,500. If it separately buys the same 100 megawatt hours at that reference price, its combined energy cost is $6,000 before network charges and other items.

Allow generation and demand to differ

Solar output may occur when the buyer’s demand is low or when market prices are depressed. Wind output can vary substantially across hours. A contract based on actual generation can therefore hedge a different hourly profile than the customer consumes. Differences in location, transmission congestion, curtailment and reference prices add further residual exposure. An annual volume match does not guarantee an hourly match.

Read the commercial clauses

Check delivery point, volume obligation, escalation, environmental attribute ownership, negative price treatment and termination terms. Identify who bears construction delay and grid connection risk. Model stress periods with weak generation or higher consumption. Do not assume a fixed contract price caps the entire electricity bill, because unhedged volumes and network costs can still change.

Try it yourself

A buyer needs 120 megawatt hours but has financial protection for 80 at $50. The matching reference and purchase price is $70. What is the combined cost?

Show the worked answer

$6,800 before other charges: $8,400 for physical electricity minus a $1,600 hedge receipt. The remaining 40 megawatt hours are exposed.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

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