A commodity-linked swap in which an electricity consumer (the swap buyer) has its electric bill paid by a counterparty (the swap seller), against the payment of a fixed fee. The electricity consumer will enter into such a swap in circumstances where the generating utility’s cost-based product does not meet its risk management needs. For example, an electricity-consuming firm which is served by a utility with rates based on a large fuel adjustment mechanism may find it attractive to hedge its electricity costs (its exposure to fuel price fluctuations) by exchanging its fluctuating (or floating) rate for a more stable rate (fixed rate).
November 19, 2023
