Reducing Risk in Merchant Wind and Solar Projects through Financial Hedges

Wind and, increasingly, solar projects are expanding beyond long-term power contracts to sell directly into wholesale markets. These “merchant” projects use financial hedges to reduce the risk of lower-than-expected prices in order to secure financing, but hedges entail costs and additional risks.



Feb. 22, 2019


Jay Bartlett


Working Paper

Reading time

1 minute

Key Findings

  • There are five general designs for hedging risk for merchant wind projects, all of which swap potentially volatile revenue from the project in return for more stable revenue from the hedging counterparty.
  • For wind, the primary revenue risks concern regional electricity prices, the time and intensity of wind speeds, transmission congestion and the project’s operational inefficiencies.
  • Solar has lagged wind in wholesale trading and the use of financial hedges, but there have been recent indications that merchant solar may accelerate.
  • Although wind historically has had lower costs and higher subsidies than has solar, the most significant lasting difference may be the midday-concentrated profile of solar energy.
  • Decreasing federal subsidies present a near-term challenge, but price erosion due to increasing penetrations of wind and solar is the greater long-term threat.


US wind energy projects have increasingly opted to sell directly into wholesale electricity markets rather than under long-term power purchase agreements (PPAs). Although PPAs offer low risk to projects’ revenue, a limited pool of potential customers and strong competition among project developers have depressed prices. Selling into wholesale markets may increase returns, but such “merchant” projects generally need financial hedges so that future revenues will predictably cover financing costs. In this paper, I provide an overview of the five general designs for hedging risk in merchant wind projects, with a focus on the specific risks that are, and are not, hedged under each design. From project data, I find that merchant wind has both increased, accounting for almost half of new capacity in 2017 and 2018, and diversified, with at least three hedging designs used in each of the past three years. I then assess the more restrained growth of merchant solar energy and propose that differences in costs, subsidies, project sizes, and generation profiles may explain the disparities between merchant wind and merchant solar. Evaluating the revenue risks to wind and solar projects yields insights to future financing challenges, including the near-term declines in federal subsidies and, more significantly, the long-term erosion in prices due to increasing penetrations of wind and solar.


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