Let's Connect
Contact us
Thank you for reaching out, we will be in touch shortly!
Oops! Something went wrong while submitting the form.
.png)
In power markets across the US, utilities, merchant developers, and electricity retailers continue to grapple with load growth, increasing electricity demand, and large additions of volatility-inducing renewables and storage. As weather increasingly becomes an underlying driver of project risk and revenue, the ability to evaluate and deploy financial and physical hedges to reduce cash flow uncertainty is becoming ever more essential.
As part of the 2025 Ascend Analytics Power Markets Workshop, Carley Dolch, Managing Director of Business Development, joined Dr. Carlos Blanco, Managing Director of Portfolio and Risk Management, to discuss how integrated hedging and diversification strategies can optimize merchant portfolio returns, stabilize cash flows, support favorable financing, and mitigate risks.
When thinking about hedging strategies for renewables and storage, weather becomes a primary consideration. Whether energy market stakeholders are producing or purchasing power, weather directly shapes price formation, revenue variability, cost exposure, and system reliability. For producers, weather patterns directly impact generation output, revenue volatility, and project bankability. For offtakers, those same dynamics influence risk shape, procurement costs, and hedging strategy effectiveness.
When navigating weather-related risks, effective portfolio management hinges on strategically blending financial and physical hedges. Financial hedges, such as swaps or block hedges, are ideal for locking in predictable prices, particularly in markets with lower volatility. They offer a stable revenue stream, acting as a safeguard against unforeseen dips.
In markets characterized by significant price spikes and wide day-ahead/real-time (DART) spreads, physical hedges play a crucial role. Tools like unit-contingent Power Purchase Agreements (PPAs) or solar-plus-storage assets directly align energy delivery with payment. This allows asset owners and developers to capture lucrative price spikes, optimizing returns within the context of market structure and volatility. The key is to assess the market's dynamics – its structure, volatility, and DART spreads – to pinpoint the optimal blend of financial and physical hedges for robust portfolio performance.
A critical aspect of developing hedging strategies involves understanding how to effectively align forecasted cash flows with the cash flows that are actually realized. One essential approach for doing so involves conducting a cash flow analysis with uncertainty bands as a way to benchmark hedge performance. Two different hedge types may provide average returns over time, but the uncertainty around those returns might be quite different. As shown in the example in Figure 1, a block hedge (top), in which production is not aligned to cost, produces larger levels of uncertainty, while a physical asset (bottom) provides narrower levels of uncertainty, and thus produces larger levels of future cash flow certainty.
Additionally, diversifying across geographies and asset types (such as solar, wind, and storage) can significantly reduce overall portfolio risk. This strategy mitigates tail risk because strong output from one asset can offset weaker performance elsewhere. The result is more stable portfolio performance, enhanced ability to hedge, and ultimately, better risk-adjusted returns. For example, a developer in ERCOT might position a wind asset in the Gulf Coast that generally produces more during evening hours, while simultaneously positioning another wind asset in the Texas panhandle that generates in the morning. The combination smooths out volatility and effectively unlocks better financing terms because developers can present a balanced portfolio to lenders and investors.
Another critical component to revenue maximization and risk mitigation involves PPA design. As more data centers come online, and as corporate offtakers commit to clean energy sourcing, these entities are buying PPAs. Consequently, the market is becoming increasingly sophisticated and competitive.
To hedge against a 'race to the bottom' price dynamic, developers may want to consider alternative structures such as integrating a merchant tail, being more flexible on contract length, deciding whether or not to integrate storage into the mix, or integrating asymmetric upside sharing. It is vital to think ahead, so as to best understand how a PPA might boost returns in the long run while also maintaining competitive pricing in a specific market.
In an era with large structural changes and increased market uncertainty, asset owners and merchant developers must develop hedging strategies that are a function of the type of market where the asset is operating, both in terms of supply stack and degree of market penetration.
To help develop optimal hedging strategies for renewable and storage assets, Ascend has identified four types of markets. The first type, exemplified by PJM or MISO, has low renewable penetration and low volatility, which means few opportunities for value creation. Here, the best option is to wait until renewable penetration increases before developing storage projects.
The second type, exemplified by SPP or CAISO, contains low uncertainty levels and moderate value opportunities to arbitrage between low and/or negative prices set by renewable curtailment and gas-driven power prices. In this type of market, OTC hedges on gas and power might be advisable.
The third market type, exemplified by ERCOT in 2024, possesses significant asymmetric opportunities that create large upside potential relative to the downside. Here, small changes in demand can produce significant potential revenue gains. In this market type, structures such as partial tolls, partial OTC hedges, or revenue insurance solutions such as Ascend's EnSurance™ allow upside to be retained while mitigating downside risk.
The final market type, exemplified by ERCOT in 2023, is driven by scarcity, leading to high uncertainty yet also a strong potential for upside. Here, optimal structures should allow retention of upside potential: examples might include delta hedging, which is effective at reducing variability in storage revenues and locking in returns, or insurance products.
The Ascend PowerSIMM™ suite is an energy analytics platform that captures the new and evolving dynamics of electricity markets. Utilities, public power entities, renewable developers, and community choice aggregators utilize PowerSIMM for optimal energy portfolio management, risk management, resource planning, and project optimization. Contact us to learn more.
In power markets across the US, utilities, merchant developers, and electricity retailers continue to grapple with load growth, increasing electricity demand, and large additions of volatility-inducing renewables and storage. As weather increasingly becomes an underlying driver of project risk and revenue, the ability to evaluate and deploy financial and physical hedges to reduce cash flow uncertainty is becoming ever more essential.
As part of the 2025 Ascend Analytics Power Markets Workshop, Carley Dolch, Managing Director of Business Development, joined Dr. Carlos Blanco, Managing Director of Portfolio and Risk Management, to discuss how integrated hedging and diversification strategies can optimize merchant portfolio returns, stabilize cash flows, support favorable financing, and mitigate risks.
When thinking about hedging strategies for renewables and storage, weather becomes a primary consideration. Whether energy market stakeholders are producing or purchasing power, weather directly shapes price formation, revenue variability, cost exposure, and system reliability. For producers, weather patterns directly impact generation output, revenue volatility, and project bankability. For offtakers, those same dynamics influence risk shape, procurement costs, and hedging strategy effectiveness.
When navigating weather-related risks, effective portfolio management hinges on strategically blending financial and physical hedges. Financial hedges, such as swaps or block hedges, are ideal for locking in predictable prices, particularly in markets with lower volatility. They offer a stable revenue stream, acting as a safeguard against unforeseen dips.
In markets characterized by significant price spikes and wide day-ahead/real-time (DART) spreads, physical hedges play a crucial role. Tools like unit-contingent Power Purchase Agreements (PPAs) or solar-plus-storage assets directly align energy delivery with payment. This allows asset owners and developers to capture lucrative price spikes, optimizing returns within the context of market structure and volatility. The key is to assess the market's dynamics – its structure, volatility, and DART spreads – to pinpoint the optimal blend of financial and physical hedges for robust portfolio performance.
A critical aspect of developing hedging strategies involves understanding how to effectively align forecasted cash flows with the cash flows that are actually realized. One essential approach for doing so involves conducting a cash flow analysis with uncertainty bands as a way to benchmark hedge performance. Two different hedge types may provide average returns over time, but the uncertainty around those returns might be quite different. As shown in the example in Figure 1, a block hedge (top), in which production is not aligned to cost, produces larger levels of uncertainty, while a physical asset (bottom) provides narrower levels of uncertainty, and thus produces larger levels of future cash flow certainty.
Additionally, diversifying across geographies and asset types (such as solar, wind, and storage) can significantly reduce overall portfolio risk. This strategy mitigates tail risk because strong output from one asset can offset weaker performance elsewhere. The result is more stable portfolio performance, enhanced ability to hedge, and ultimately, better risk-adjusted returns. For example, a developer in ERCOT might position a wind asset in the Gulf Coast that generally produces more during evening hours, while simultaneously positioning another wind asset in the Texas panhandle that generates in the morning. The combination smooths out volatility and effectively unlocks better financing terms because developers can present a balanced portfolio to lenders and investors.
Another critical component to revenue maximization and risk mitigation involves PPA design. As more data centers come online, and as corporate offtakers commit to clean energy sourcing, these entities are buying PPAs. Consequently, the market is becoming increasingly sophisticated and competitive.
To hedge against a 'race to the bottom' price dynamic, developers may want to consider alternative structures such as integrating a merchant tail, being more flexible on contract length, deciding whether or not to integrate storage into the mix, or integrating asymmetric upside sharing. It is vital to think ahead, so as to best understand how a PPA might boost returns in the long run while also maintaining competitive pricing in a specific market.
In an era with large structural changes and increased market uncertainty, asset owners and merchant developers must develop hedging strategies that are a function of the type of market where the asset is operating, both in terms of supply stack and degree of market penetration.
To help develop optimal hedging strategies for renewable and storage assets, Ascend has identified four types of markets. The first type, exemplified by PJM or MISO, has low renewable penetration and low volatility, which means few opportunities for value creation. Here, the best option is to wait until renewable penetration increases before developing storage projects.
The second type, exemplified by SPP or CAISO, contains low uncertainty levels and moderate value opportunities to arbitrage between low and/or negative prices set by renewable curtailment and gas-driven power prices. In this type of market, OTC hedges on gas and power might be advisable.
The third market type, exemplified by ERCOT in 2024, possesses significant asymmetric opportunities that create large upside potential relative to the downside. Here, small changes in demand can produce significant potential revenue gains. In this market type, structures such as partial tolls, partial OTC hedges, or revenue insurance solutions such as Ascend's EnSurance™ allow upside to be retained while mitigating downside risk.
The final market type, exemplified by ERCOT in 2023, is driven by scarcity, leading to high uncertainty yet also a strong potential for upside. Here, optimal structures should allow retention of upside potential: examples might include delta hedging, which is effective at reducing variability in storage revenues and locking in returns, or insurance products.
The Ascend PowerSIMM™ suite is an energy analytics platform that captures the new and evolving dynamics of electricity markets. Utilities, public power entities, renewable developers, and community choice aggregators utilize PowerSIMM for optimal energy portfolio management, risk management, resource planning, and project optimization. Contact us to learn more.
Ascend Analytics is the leading provider of market intelligence and analytics solutions for the power industry. The company’s offerings enable decision makers in power development and supply procurement to maximize the value of planning, operating, and managing risk for renewable, storage, and other assets. From real-time to 30-year horizons, their forecasts and insights are at the foundation of over $50 billion in project financing assessments. Ascend provides energy market stakeholders with the clarity and confidence to successfully navigate the rapidly shifting energy landscape.
Products
Consulting
©2024 Ascend Analytics. All rights reserved. Privacy Policy.
-1-Data%20Centers.webp)
.webp)
.svg){kind=small}
.webp){kind=small}