AEE CEP cheat sheet

Merit-order dispatch ranks generating units by ascending marginal cost; the most expensive unit required to meet demand sets the clearing price, so all infra-marginal units earn a margin.

Heat rate (Btu/kWh) = 3,412 / thermal efficiency; a 50%-efficient combined-cycle plant has a heat rate of about 6,824 Btu/kWh.

Spark spread ($/MWh) = power price - (gas price $/MMBtu x heat rate / 1,000); a positive spread signals profitable gas-fired generation.

Electricity cannot be stored at scale, so supply must equal demand instantaneously; inelastic demand plus must-run or subsidized generation produces sharp volatility and negative prices.

North American gas benchmarks at Henry Hub (NYMEX futures); European gas at TTF; Asian LNG commonly indexed to JKM or oil-linked formulas.

Crude benchmarks are WTI (delivered Cushing) and Brent (North Sea); refined products trade at the crude price plus a crack spread.

Forward curves are in contango when forward prices exceed spot (carry, storage cost) and in backwardation when forward prices sit below spot (prompt scarcity, convenience yield).

Power forward curves are shaped rather than flat: on-peak blocks price above off-peak, and the peak/off-peak ratio widens as renewable penetration grows and reserve margins tighten.

Resource adequacy is priced either through a capacity market (for example PJM) or through scarcity and ancillary pricing (ERCOT); a shrinking reserve margin raises that price.

The sourcing spectrum runs from full fixed price (budget certainty, risk premium included) through block-and-index to pure index purchase (no premium, full market exposure).

Block-and-index practice commonly fixes 60-80% of forecast load with shaped blocks and leaves the remainder floating to retain participation in price declines.

A full-requirements contract transfers volume and shape risk to the supplier and is priced at a premium over the equivalent block purchase.

Build the load baseline first: interval meter data, weather normalization, and 12-36 months of history establish the volume and hourly shape to be procured.

Layered (tranche) procurement spreads execution over successive periods, averaging the achieved price and removing single-entry timing risk.

RFP design must fix volume, term, shape, index, credit terms, and the evaluation formula so that bids are comparable on total delivered cost.

Counterparty screening covers credit rating, collateral demanded, delivery track record, and a maximum concentration limit per supplier.

Total delivered cost = commodity + capacity or demand charges + transmission and distribution + ancillary services + taxes + supplier margin; commodity price alone misleads.

Demand-side measures (efficiency, load shifting, on-site generation) shrink the volume that must be hedged and are usually cheaper per MWh than additional supply.

Contract families: fixed price and fixed volume, full requirements, index-plus-adder, block-and-index, collar, and physical or virtual PPA.

Volume clauses normally set a tolerance band (often plus or minus 10-20%) around nominations; delivery outside the band triggers imbalance charges or penalties.

The price formula should name the index, the publication, a fallback for missing or corrupted data, rounding conventions, and the settlement calendar.

Credit terms to negotiate: unsecured thresholds, mark-to-market collateral, letters of credit, parent guarantees, and rating-based triggers.

Change-in-law and tax pass-through clauses allocate regulatory cost risk; force majeure should be defined narrowly so it cannot become a market-price escape.

Longer fixed-price terms carry a larger supplier risk premium; the price-versus-term trade-off is the central lever alongside volume flexibility and credit.

Negotiate multiple issues at once, trading term, volume tolerance, and credit terms against price, rather than haggling on price alone.

Termination provisions should address default, insolvency, and extended force majeure, and must specify how the close-out amount is calculated.

Governing law, dispute forum, and collateral valuation methodology are frequent sources of dispute and should be specified explicitly.

Instrument map: forwards and futures (linear), fixed-for-floating swaps, options (caps, floors, collars), basis swaps, and financial or physical PPAs.

Cleared futures require initial margin and daily variation margin, so a hedge that will later be physically offset can still create significant liquidity demands.

A cap is a call on the index, a floor is a put, and a collar is a bought cap plus a sold floor: premium is reduced but the benefit of falling prices is capped.

Option premium = intrinsic value + time value; time value decays toward expiry, so short-dated protection costs less but covers a shorter window.

Hedge ratio = hedged volume / forecast exposure; set it from budget tolerance, competitive position, and the risk appetite approved by the board.

Basis risk arises when the hedge hub differs from the delivery point; mitigate with basis swaps or by explicitly accepting the locational spread.

Heating-degree-day and cooling-degree-day derivatives hedge volumetric risk where consumption or revenue depends on temperature rather than on price.

Effectiveness testing (dollar-offset or regression under IFRS 9 / ASC 815) determines whether hedge gains and losses may be deferred in other comprehensive income.

Governance requires a written risk policy with position limits, segregation of execution from approval, and regular mark-to-market and stress reporting.

Market architecture: FERC regulates wholesale transmission and ISO/RTO markets, state commissions set retail tariffs and default service, and ERCOT is an intrastate market outside FERC rate jurisdiction.

A commercial electricity bill contains commodity, capacity or demand charges, transmission, distribution, ancillary services, riders, and taxes; only some components can be hedged.

Carbon pricing (EU ETS, RGGI, California cap-and-trade) raises the marginal cost of emitting generation, shifting the merit order and lifting clearing prices.

Renewable portfolio standards and voluntary markets create certificate obligations; the REC or guarantee of origin must be retired to substantiate the claim.

GHG Protocol Scope 2 reporting has location-based and market-based methods; contractual instruments determine the market-based figure.

Contract classification matters: derivative treatment under ASC 815 / IFRS 9, lease treatment under ASC 842 / IFRS 16, or own-use executory treatment each produce different balance-sheet outcomes.

Credit exposure = current mark-to-market + potential future exposure; collateral calls can absorb large amounts of liquidity during price spikes.

Corporate clean-energy targets increasingly require hourly (24/7 carbon-free energy) matching rather than annual volumetric matching.

Disclosure regimes such as CSRD and climate-related SEC rules increase audit scrutiny of emissions claims that rest on procurement choices.