Negotiation Strategies for Hedge Contracts Discussed by Lynch and Temeng, With Article Contribution From Both
In the realm of energy projects, negotiating a hedge agreement is a critical step towards securing a predictable revenue stream from a creditworthy offtaker. Published by Project Finance International, the article "Ten Commandments for Energy Hedge Agreements" offers valuable insights for project companies and contracting parties, such as utility companies, energy producers, and financial institutions.
Written by Gump partners Daniel Lynch and counsel Yaw Temeng, the article delves into ten key factors to consider when negotiating a hedge agreement.
- Choosing Between Physical versus Financial Settlement: The choice between physical and financial settlement is a significant consideration in hedge agreements. Physical settlement involves the actual delivery of energy, while financial settlement is based on the financial value of the energy.
- Term and Termination: The term of the agreement and the conditions for termination are crucial factors to negotiate. A clear understanding of these terms ensures that both parties are protected and the project's viability is maintained.
- Pricing Real-Time versus Day-Ahead Settlement: The timing of the pricing mechanism is another important aspect. Real-time pricing offers flexibility, while day-ahead settlement provides predictability.
- Construction Milestones: The agreement should clearly define the construction milestones and their impact on the hedge agreement.
- Availability Requirements: The availability requirements of the offtaker should be clearly stated, ensuring that the project company can meet these demands.
- Ownership of Future Capacity: The ownership of future capacity, if applicable, should be addressed in the agreement to avoid future disputes.
- Security/Collateral Requirements: The security and collateral requirements, if any, should be negotiated to ensure fairness and protect the interests of both parties.
- Permitted Additional Transactions: The agreement should specify the permitted additional transactions that the project company can undertake without breaching the terms of the hedge agreement.
- Risk of Change of Law: The risk of change of law and how it will be addressed should be considered to mitigate potential disputes.
- Basis Risk: Basis risk, which arises from differences in the prices of related assets, should be managed to ensure the hedge agreement remains effective.
The article serves as a valuable resource for project companies and contracting parties, offering a comprehensive guide to navigating the complexities of energy hedge agreements. By considering these ten factors, parties can ensure a fair and effective agreement, providing a stable revenue stream and securing the project's success.
Read also:
- Railway line in Bavaria threatened by unstable slope - extensive construction site at risk
- Wind Farm Controversy on the Boundary of Laois and Kilkenny
- Puerto Rico's Climate Lawfare Campaign experiences another setback with the dismissal of its deals.
- Delaware's contentious offshore wind project faces uncertainty as the Trump administration reverses course on clean energy initiatives.
