Negotiating Hedge Agreements: Insights from Lynch and Temeng, as Outlined in their PFI Article on Crucial Factors to Consider
In a comprehensive article published by Project Finance International, Gump partner Daniel Lynch and counsel Yaw Temeng delve into the intricacies of energy hedge agreements. The article, titled 'Ten Commandments for Energy Hedge Agreements,' offers valuable insights for parties involved in such agreements.
The authors begin by emphasising the importance of a clear and comprehensive definition of the hedge product. This definition is crucial to ensure that both parties have a mutual understanding of what is being agreed upon.
The second factor highlighted is the significance of understanding the creditworthiness of the offtaker. The creditworthiness of the offtaker is essential as hedge agreements aim to provide a predictable revenue stream for the project company from a creditworthy offtaker.
The third factor listed is the necessity of ensuring that the hedge agreement does not conflict with any other agreements. This is to prevent any potential disputes or complications arising from conflicting terms and conditions.
The fourth factor considered is the need to consider the tax implications of the hedge agreement. Understanding the tax implications is vital to ensure that both parties are aware of the financial implications of the agreement.
The fifth factor listed is the importance of specifying the term of the hedge agreement clearly. This includes the term and termination conditions, which should be clearly defined to avoid any confusion or disputes.
The sixth factor listed is the need to determine the method for setting the price of the hedge product. Pricing can be based on real-time or day-ahead settlement, depending on the agreement.
The seventh factor listed is the necessity of considering the liquidity of the hedge product. The liquidity of the hedge product is essential to ensure that it can be easily bought or sold if necessary.
The eighth factor listed is the importance of specifying the rights and obligations of the parties involved. This includes security or collateral requirements for the hedge agreement, as well as permitted additional transactions.
The ninth factor listed is the need to consider the impact of any changes in market conditions on the hedge agreement. This includes evaluating change of law risk and its potential impact on the hedge agreement.
The tenth factor listed is the importance of ensuring that the hedge agreement can be terminated or amended under certain circumstances. This is to provide flexibility in case of unforeseen circumstances or changes in the project's requirements.
The article also mentions that hedge agreements can go by many different names. However, they all serve the same purpose: to manage the financial risks associated with the project. The authors cite examples of hedge agreements between companies such as Xcel Energy and Oglethorpe Power Corporation.
The authors also stress the importance of considering the ownership of future capacity derived from the project. This is to ensure that the project company retains control over its future capacity.
Lastly, the article addresses basis risk, the difference in price between the hedge product and the underlying asset. This risk should be considered to ensure that the hedge agreement provides effective risk management.
In conclusion, the article provides an overview of key considerations for negotiating a hedge agreement. By following these commandments, parties can ensure that their hedge agreement is fair, effective, and free of potential disputes.
Read also:
- Deepwater Horizon Oil Spill: BP Faces Record-Breaking Settlement - Dubbed 'Largest Environmental Fine Ever Imposed'
- Cars' Environmental Impact Explained
- Lawsuit of Phenomenal Magnitude: FIFA under threat due to Diarra's verdict, accused of player injustice
- Union IG Metall advocates for a swifter expansion of electrical mobility in the Eastern region.
