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ABSTRACT
Deregulation of energy markets and the establishment of a transparent market such as the PJM Interconnection, LLC have allowed companies that have generation assets located in that market, a means to cost effectively manage market risks over a significantly longer period than typical supply contracts. The value of on-site generation lies in its ability to dispatch based on market conditions, therefore acting as a market hedge for the purchase of electricity. This provides a collar on the price of electricity for the life of the generator, unlike financial hedges, which are limited in their term.
An analysis of the benefits of on-site generation as a hedge for the market purchase of electrical power will be discussed for a project located in the PJM market. A pro forma analysis demonstrates the behavior of the generation project in various market conditions and is based on actual data. The electric procurement strategy for the site includes market based dispatch, which is simply a make/buy decision. When the cost of power on the spot market is below the price to generate, then the consumer buys. When the price exceeds the cost to generate, the equipment is operated to supply the needs of the consumer. In this way, a cap is placed on the price of power and corresponding futures (fixed price) power contract premiums are avoided.