American power generators now operate in a markedly changed landscape. The switch to natural gas – the largest fuel switch in the industry’s history – weakening demand growth, along with the rise of both renewables and disruptive technologies have all contributed to such market dislocation. And given that such pressures have increased market volatility, generators are revisiting their hedging strategies – favouring medium-term contracts as enthusiasm for longer-term hedges dwindles.
Writing for Energy Voice, Aneesh Prabhu, director, S&P Global Ratings, believes that while these shorter-term hedges may help to weather the current market’s dislocation, they should not be lauded as a magic bullet. He writes: “These new hedges can incur negative implications for credit risk – especially when compared to long-term options.”
Warning against the perils of mishedging, or using an unsuitable hedge, Prabhu calls for independent power producers and diversified companies to listen to the markets for a more accurate indication of moving power prices.
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