Why does currency value keep fluctuating in the stock market? – Quora

Why does currency value keep fluctuating in the stock market? - Quora Вклады для семьи

Sourcing

In order to receive buying offers, the renewable project owner usually goes through a request for proposal or quotation (RFP/RFQ). Interested energy buyers can then make an offer of purchase.

Pro tip:

For large established buyers such as Google, the process can be different. In this case, Google tends to launch private tenders, or auctions, where they invite pre-selected parties to bid against each other in several rounds.

Compare PPA offers

Initial offers do not feature details. They contain only core commercial conditions. We call them Term Sheets.

They include, at a minimum, a price, a tenor and a PPA structure. The offers received can vary a lot from one offtaker to another due to different underlying structures, the inclusion of costs (which are not included in others) or different price area basis, among others. Comparing one offer against another can be quite complicated.

At Pexapark, we compare these offers by running thousands of price scenarios based on our proprietary model. This enables us to advise our clients on the optimum structure for their PPA, to maximise their expected revenue and reduce their risk.

Negotiation

While sellers and buyers can agree on an approximate price in advance, the details of the contract negotiation can take between 6 to 12 months. There are many important points to agree on.

-> Later in this article, you’ll find our PPA checklist containing 10 commercial points you shouldn’t miss when negotiating your PPA.

Comparing and negotiating are critical parts of the PPA process. Upon signing, a project or an existing project can have better chances for receiving finance or re-finance and construction can start for a specific Commercial Operation Date (COD).

Accounting:

A financial PPA is considered a financial derivative and falls under specific accounting requirements set by the IFRS (International Financial Reporting Standards). This is relatively complex accounting which requires mark-to-market valuing.

Physical PPAs, on the other hand, only account for the realised sale, which means a relatively simpler accounting structure.

Capital flows

Foreign capital tends to flow into countries that have strong governments, dynamic economies, and stable currencies. A nation needs a relatively stable currency to attract capital from foreign investors. Otherwise, the prospect of exchange-rate losses inflicted by currency depreciation may deter overseas investors.

There are two types of capital flows: foreign direct investment (FDI), in which foreign investors take stakes in existing companies or build new facilities in the recipient market; and foreign portfolio investment, in which foreign investors buy, sell and trade securities in the recipient market. FDI is a critical funding source for growing economies such as China and India.

Governments generally prefer FDI to foreign portfolio investments, because the latter is hot money that can leave the country quickly when conditions grow tough. This capital flight can be sparked by any negative event, such as a devaluation of the currency.

China’s undervalued yuan

Between 1995 and 2005, China held the renminbi steady at about 8.2 per dollar, enabling its export juggernaut to gather steam from what trade partners said was an artificially suppressed and undervalued currency. In 2005, China responded to the growing chorus of complaints from the U.S. and other nations.

Cod project finance

COD or Commercial Operation Date refers to the date at which the renewable asset 1) becomes fully operational 2) has a grid connection and 3) starts producing energy. Under a PPA contract, COD also indicates a point, from which the obligation of an offtaker to buy the energy begins.

In the US, for example, this date typically aligns with the release of a portion of project funding – such as remaining construction costs, potential additional fees, and tax equity. We call this release of final project capitalisation COD Finance or takeout finance.

Economic growth

The basic formula for an economy’s GDP is:


G

D

P

=

C

I

G

(

X

M

)

where:

C

=

 Consumption or consumer spending, the biggest

I

=

Capital investment by businesses and households

G

=

Government spending

(

X

M

)

=

Exports

Imports, or net exports

begin{aligned} &

GDP= C I G (X-M)\ &textbf{where:}\ &begin{aligned} C = &text{ Consumption or consumer spending, the biggest}\ &text{ component of an economy}end{aligned}\ &I = text{Capital investment by businesses and households}\ &

G = text{Government spending}\ &(X-M) = text{Exports}- text{Imports, or net exports}\ end{aligned}
​GDP=C I G (X−M)where:C=​ Consumption or consumer spending, the biggest​I=Capital investment by businesses and householdsG=Government spending(X−M)=Exports−Imports, or net exports​


From this equation, it is clear that the higher the value of net exports, the higher a nation’s GDP. As discussed earlier, net exports have an inverse correlation with the strength of the domestic currency.

Efet template:

The EFET (European Federation of Energy Traders) published a standard Corporate Power Purchase Agreement in cooperation with RE-Source Platform. In view of standardisation, industry stakeholders have widely circulated and reviewed this CPPA.

Pro tip:

The European Federation of Energy Traders is an association advocating policies and regulations in electricity and gas trading in Europe. It was established in 1999 to support the liberalisation of electricity and gas markets in Europe. 

Euro fears (2022-12)

Concerns that the deeply indebted nations of Greece, Portugal, Spain and Italy would be forced out of the European Union led the euro to plunge 20% from 1.51 to the dollar in December 2009 to about 1.19 in June 2022. The euro recovered its strength over the next year, but that only proved temporary.

Far-reaching currency impacts

Many people do not pay attention to exchange rates because rarely do they need to. The typical person’s daily life is conducted in their domestic currency. Exchange rates only come into focus for occasional transactions, such as foreign travel, import payments or overseas remittances.

An international traveler might harbor for a strong domestic currency because that would make travel to Europe inexpensive. But the downside is a strong currency can exert significant drag on the economy over the long term, as entire industries are rendered noncompetitive and thousands of jobs are lost. While some might prefer a strong currency, a weak currency can result in more economic benefits.

The value of the domestic currency in the foreign exchange market is a key consideration for central banks when they set monetary policy. Directly or indirectly, currency levels may play a role in the interest rate you pay on your mortgage, the returns on your investment portfolio, the price of groceries at your local supermarket, and even your job prospects.

For a renewable asset owner/developer:

A PPA allows renewables projects to increase their level of revenue certainty. Normally, this would not be possible in fluctuating energy markets in absence of a government incentive.

A PPA:

  • Enables the financing of their renewable project by lenders
  • Reduces risks by efficiently allocating them among the contractual parties

For long-term price predictability:

Electricity prices can fluctuate greatly and frequently. The main characteristic of a power purchase agreement is the agreement to sell X amount of MWh from a renewables project to a buyer of energy at a fixed price.

While this allows a secure future stream of revenue on the seller’s side, the buyer also secures a certain amount of energy at a fixed cost.

For project financing:

Renewables often need a third-party funding source, such as a bank. It is, however, unlikely that a third party will lend without a security.

In the absence of a government subsidy, a wind or solar PPA provides that assurance.

Vocabulary tip:

Third-party lenders can be banks, lenders, credit providers or finance providers.

A typical European 100-megawatt (MW) wind farm can cost between EUR 1-2 million per MW to build. Hence the need for a credit provider – such as a bank – to continually finance a renewable project.

When finance providers require a certain level of confidence in a renewable project, a PPA can provide such confidence. This means a buyer’s commitment to paying a fixed price per megawatt hour (MWh) for a long-term tenor (10-20 years) for the electricity that will be generated by the renewable asset.

From a lender’s perspective, one must also consider counterparty risk. Is this energy seller’s credit profile strong enough to ensure ongoing operation in the next 10-20 years? Lenders call counterparties whom they consider strong enough to finance the cash flows as “bankable”.

Global impact of currencies: examples

The forex market is the most actively traded market in the world, with an excess of more than $5 trillion traded daily, far exceeding global equities. Despite such enormous trading volumes, currencies usually stay off the front pages.

Hedge currency risk

Adverse currency moves can significantly impact your finances, especially if you have substantial forex exposure. But there are plenty of choices to hedge currency risk, such as currency futures, currency forwards, currency options and exchange-traded funds such as the Invesco Euro CurrencyShares Euro Trust (FXE)

How does a power purchase agreement work?

  1. Implement, develop or re-finance a project with a PPA
  2. Determine the structure of the contract
  3. Create an RFQ and reach out for buyers
  4. Compare the offers received
  5. Negotiate the terms
  6. Sign the PPA contract
  7. Manage your energy sales and risk throughout the life of your asset

Inflation

A devalued currency can result in “imported” inflation for countries that are substantial importers. A sudden 20% decline in the domestic currency could result in imports costing 25% more, as a 20% decline means a 25% increase is needed to get back to the original price point.

Interest rates

As mentioned earlier, exchange rates are a key consideration for most central banks when setting monetary policy. In September 2022, Bank of Canada governor Mark Carney said the bank took the persistent strength of the Canadian dollar into account when setting monetary policy.

A strong domestic currency exerts drag on the economy, achieving the same result as a tighter monetary policy (i.e. higher interest rates). In addition, further tightening of monetary policy at a time when the domestic currency is already strong may exacerbate the problem by attracting hot money from foreign investors seeking higher yielding investments (which would further strengthen the domestic currency).

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Invest in u.s. multinationals

The U.S. has many large multinational companies that derive a substantial part of revenues and earnings from foreign countries. Earnings of U.S. multinationals are boosted by the weaker dollar, which should translate into higher stock prices when the greenback is weak.

Invest overseas

US-based investors who believe the greenback is weakening should invest in strong overseas markets, because your returns will be boosted by foreign currency gains. Consider the Canadian S&P/TSX Composite Index between 2000 and 2022.

The S&P 500 Index was virtually flat over this period, yet the TSX generated about 72% returns in Canadian dollar terms. For U.S. investors buying Canadian equities with greenbacks, U.S. dollar returns were about 137%, or 9% per annum, due to the steep appreciation of the Canadian dollar.

Japanese yen’s gyrations from 2008 to mid-2022

The Japanese yen was one of the most volatile currencies between 2008 and 2022. Because of Japan’s policy of near zero-bound interest rates, traders favored the yen for carry trades, in which they borrowed yen for next to nothing and invested in higher yielding overseas assets.

As a result, the yen appreciated by more than 25% against the U.S. dollar in the five months to January 2009. Then in 2022, Prime Minister Shinzo Abe unveiled monetary stimulus and fiscal stimulus plans (nicknamed “Abenomics”) that led to a 16% plunge in the yen within the first five months of the year.

Lesson #10 quiz

1. Which of the following is FALSE of Direct Participation Programs (DPPs)?

  • They may skip corporate profits tax.
  • A major example of a DPP is a real estate partnerships.
  • They must operate for at least some minimum amount of time.
  • They are for accredited investors only

2. If Sabine is “under water”, what can we say about her situation?

  • She has sent her keys to the bank and abandoned her house.
  • The value of her home is less than the value of her mortgage.
  • She has no choice but to declare bankruptcy.
  • She does not have enough money to make payments on her home.

3. Why does the 30 year mortgage rate so closely match the 10 year treasury bond YTM?

4. Who pays for private mortgage insurance on a mortgage?

  • The US government
  • The homeowner
  • Thank banks
  • Fannie Mae and Freddie Mac

5. Before the recession in 2007, why were banks giving out mortgages to people who could not afford them?

  • Banks would resell to mortgages to CMOs, and thus they were not incentivized to make sure their mortgages were unlikely to default.
  • CMOs were incentivized to buy mortgages which were likely to default, since these would only affect their lowest tranche.
  • Many people faked documents in order to get a mortgage, known as a “liar loan”
  • Banks had no way to verify whether people would be able to pay.

6. Select TWO key causes of the housing bubble which crashed in 2007:

  • Fraudulent mortgage lending
  • Over-optimistic mortgage lending
  • Hyper-inflation
  • Corruption within the government

7. During the housing bubble of 2007, which of the following tended to fluctuate with home price index?

  • The percentage of new homeowners who regretted their decision.
  • The percentage of new homeowners who think that investing in real estate is a good long term investment.
  • The percentage of new homeowners who have been evicted from their home.
  • The percentage of new homeowners who think investing in real estate is a bad long term investment.

8. What in 2005 indicated the housing market might be a bubble?

  • The expected 10 year home price appreciation dropped below the 30 year mortgage rate.
  • Media was discussing a home-buying mania in the American public.
  • Media was discussing how people were no longer purchasing houses.
  • Time magazine predicted that the housing market was a bubble.

Lesson #12 quiz

1. What is the effect of traders storing grain to wait for higher prices?

  • It is essential in preventing grain shortages.
  • Most shortages could have been prevented if traders had not speculated on grain prices.
  • Most grain ends up getting moldy in storage.
  • Traders are able to monopolize the market.

2. In commodities trading, what is the role of forwards and futures?

3. When an investor uses margin to buy or sell securities, how are the securities paid for?

  • A combination of an investor’s own funds and futures
  • On money borrowed from a broker only
  • On money borrowed from a broker whereby the broker may tell the investor at any time to sell securities or contribute money.
  • A combination of an investor’s own funds and money borrowed from a broker.

4. What is the primary purpose of purchasing futures if they are rarely delivered?

5. What often happens to futures at the time of the crop for commodities with a specific well-defined harvest window?

  • They tend to be traded above the expected spot price at the contract’s maturity.
  • Due to defaults, investors could lose a lot of money.
  • They tend to be traded below the expected spot price at the contract’s maturity.
  • They tend to be traded exactly at the expected spot price at the contract’s maturity, making it difficult to profit as an investor.

6. How is it possible to have a future based on the S&P500?

  • On the last day, there is a final settlement of a combination of the other commodities on the futures market.
  • There is a large fine on anyone who still holds the security on the final day.
  • Anyone still holding the security on the final day will receive a proportionate number of shares in an S&P500 index fund.
  • On the last day there is a final settlement of the difference between the futures price and the actual index.

7. What is the fair value of a futures contract with a storage cost of 3%, an interest rate of 5%, and a spot price of $1000 over a 1 year time period?

  • $1800.00
  • $1080.00
  • $1081.50
  • $1000.00

8. How can you determine whether a future is in backwardation or contango?

  • If the price is rising at an increasingly fast rate (has a positive second derivative), it is backwardation, but if it is falling at an increasingly fast rate (has a negative second derivative), it is contango.
  • If the price is falling at an increasingly fast rate (has a negative second derivative), it is backwardation, but if it is rising at an increasingly fast rate (has a positive second derivative), it is contango.
  • If the price rises over time (has a positive derivative), it is backwardation, but if it falls (a negative derivative), it is contango.
  • If the price falls over time (has a negative derivative), it is backwardation, but if it rises (a positive derivative), it is contango.

9. What is the Federal Funds Futures Market?

  • Futures contracts created by the government which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.
  • Futures contracts created by an exchange board which are settled at the end of each month for 100 minus the federal funds rate averaged over the month.
  • Futures contracts created by an exchange board which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.
  • Futures contracts created by the government which are settled at the end of each month for 100 minus the federal funds rate averaged over the month.

Lesson #13 quiz

1. What are the two types of options?

  • A “call” option is the right to buy and a “put” option is the right to sell.
  • A “put” option is the right to buy and a “call” option is the right to sell.
  • A “get” option is the right to buy and a “push” option is the right to sell.
  • A “push” option is the right to buy and a “get” option is the right to sell.

2. Why do some stock options have an exercise price which is more than the cost of the stock?

  • New investors often mistake “put” and “call” options, leading to an easy profit for the dealer.
  • For “call” options, this provides the option to buy at this price if the stock goes up before the exercise date.
  • These options are “put” options, giving you the option to sell at a higher price.
  • The stock options sell for negative prices, because the investor will lose money if the stock price does not fluctuate.

3. Which of the following is NOT a behavioral reason why people buy options?

  • Portfolio managers will usually buy options for clients without them knowing so that if the stock price goes down, the manager will come across as thinking ahead and watching out for their clients.
  • People will feel better about themselves if their stocks go down if they have purchased a put option on them, regardless of whether or not they gained or lost overall.
  • They are fooled by salespeople.
  • People will pay attention to specific aspects of their portfolio more so than others, so they will buy options when they hear about volatility in the market to protect certain components of their portfolio.

4. Are mortgages in the US similar to options from the perspective of the homeowner?

  • No, because defaulting does not eliminate liability.
  • Yes, because people always have the option to default.
  • Yes, because they can be sold by banks to Fannie Mae and Freddie Mac.
  • No in recourse states, yes in non-recourse states.

5. What is the put-call parity relationship?

  • A relationship between the put price, the call price, and the stock price for European-style stock options.
  • A method of arbitrage for options exchanges.
  • Another name for the Black-Scholes model.
  • A mathematical formula specifying that the put price of an option minus the call price of an option equals the price of the stock

6. What is a stop-loss order?

  • An instruction to your broker indicating that they should sell your shares once it drops below some price.
  • A type of stock that will protect you against losses.
  • The same thing as a put option, except you do not have to pay for it.
  • An instruction to your broker indicating that they should sell your shares once they get above a certain price.

Lesson #14 quiz

1. Which of the following two options are deals that underwriters make with corporations?

  • Best efforts: the underwriters tries to sell shares at some price, and the deal collapses if they don’t.
  • Short cut: the underwriters will cut the price of the shares if some of them remain unsold.
  • Loss safe: the underwriter will pay a penalty to the company if not all of the shares sell.
  • Bought deal: the underwriter will purchase all unsold shares.
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2. Why do underwriters usually underprice IPOs?

3. Which of the following was NOT a feature that Charles Ellis believed made Goldman Sachs successful?

  • Becoming prestigious
  • Making money
  • Absolute loyalty to the firm
  • Personal anonymity

4. What is a rating agency?

5. Why was the Glass-Steagall Act of 1933 repealed in 1999?

6. What were the two biggest assets of the average (not median) US household in 2022?

  • Real estate and mutual funds
  • Real estate and corporate equities
  • Mutual funds and corporate equities
  • Real estate and pension funds

7. Which best describes the “prudent person” rule?

  • A new rule for fund managers which is starting to apply to newer regulations.
  • A law which mandates that investment managers must do what another educated, experienced investment manager might do in a similar circumstance.
  • A law which limits the amount of risk with which funds managers may invest money
  • A guideline that individuals should look for funds managers who show prudence.

8. Which of the following is NOT true of mutual funds?

  • Mutual funds are closed end funds.
  • They are defined and regulated by the SEC.
  • You join the fund at 4:00 PM on the day you decide to invest.
  • Massachusetts Investment Trust was an early model for mutual funds in the US.

Lesson #16 quiz

1. Some of Carmen Reinhart’s historical findings on sovereign defaults include: (check all that apply)

  • Governments who cannot repay their creditors often tend to repudiate their sovereign debt contracts.
  • Sovereign defaults historically tend to occur in waves.
  • It is common for governments to solve their debt problems by inflating their currencies.
  • Governments have rarely repudiated their sovereign debt contracts

2. Which of the following are justifications given for the existence of a corporate profits tax? (check all that apply)

3. How do local governments typically make use of the money generated by municipal bond issues?

  • Municipalities use the money to finance public works projects.
  • Municipalities use the money to finance purchase of equipment such as fire trucks.
  • Municipalities use the money to finance the salaries of public works employees.
  • Municipalities use the money to finance local events.

4. The social insurance system in the U.S. is commonly referred to as the OASDI. What kinds of insurance does this abbreviation encompass? (check all that apply)

  • Asset Insurance.
  • Survivors insurance.
  • Disability Insurance.
  • Old age insurance.

Lesson #17 quiz

1. The percentage of the workforce in nonprofit organizations is:

2. Which of the following are examples for nonprofit organizations? (check all that apply)

  • Robert Shiller’s Case Shiller Weiss Incorporated
  • Peter Tufano’s Doorways to Dreams.
  • Dean Karlan’s Innovations for Poverty Action.
  • Wendy Kopp’s Teach for America.

3. The main differences between cooperatives and nonprofit organizations are: (check all that apply)

  • Cooperatives have a specific voting system for its members.
  • Cooperatives may distribute profits.
  • Cooperatives do not have the maximization of profits as the very first objective.
  • There are no fundamental differences between cooperatives and nonprofit organizations, the unique difference is their different legal treatment.

4. Which of the following tend to be true for cooperatives? (check all that apply)

  • Cooperatives are rarely successful.
  • Cooperatives tend to charge higher prices or lower wages to their employees.
  • Cooperatives aim to maximize the welfare of the group.
  • Cooperatives aim to maximize the profits for the group.

5. A benefit corporation is halfway between:

  • For-profit and not-for-profit organizations.
  • For-profit organizations and cooperatives.
  • None of the above.
  • Not-or-profit organizations and cooperatives.

1. What does the term “democratization of finance” mean?

  • It should benefit real people; everyone, not just the rich.
  • It should benefit the youngest people; not the old.
  • It should benefit the oldest people; not the young.
  • It should benefit rich people; not the poor.

2. What is ‘odious’ debt?

3. Malthus contended that:

  • Poverty causes resource depletion rather than the reverse.
  • All of the above.
  • By providing additional workers human population growth enhanced economic development.
  • Human population can grow faster than humans can produce commensurate amounts of food.

4. Malthus contented that population, when unchecked, increased in a ______ ratio; and subsistence for man in an _______ ratio.

  • linear; geometrical
  • geometrical; arithmetical
  • arithmetical; linear
  • arithmetical; geometrical

5. What are some reasons that inequality exists? (check all that apply)

  • Unmanaged risks
  • Political power
  • failure to democratize finance.

Liquidity risk:

A market is called liquid – if buyer and seller can conclude large volume transactions quickly, without impacting the market price. Depending on the structure of the PPA, its cost or risk can be reduced.

One can achieve this, for example, by getting a validity period (which comes at a cost) or agreeing on a price formula indexed on closing prices. The buyer and seller could agree to fix the PPA price closure referenced on publicly available prices such as forward prices observed on an exchange.

Merchandise trade

This refers to a nation’s imports and exports. In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy. A weak or strong currency can contribute to a nation’s trade deficit or trade surplus over time.


For example, assume you are a U.S. exporter who sells widgets at $10 each to a buyer in Europe. The exchange rate is €1=$1.25. Therefore, the cost to your European buyer is €8 per widget.

Now let’s say the dollar weakens and the exchange rate is €1=$1.35. Your buyer wants to negotiate a better price, and you can afford to give them a break while still clearing at least $10 per widget. Even if you set the new price at €7.50 per widget, which is a 6.

Conversely, a stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism. But before this happens, export-dependent industries can be damaged by an unduly strong currency.

Peer-graded assignment: financialization of housing

Project Title *Give your project a descriptive title

Financialization of Housing

How did the learner perform on this assignment?

Financialization of housing, the incident happens when housing is treated as a ware a vehicle for riches and investment rather than a social decent. Inhabitants are regularly delivered destitute, supplanted by extravagance lodging that frequently stands empty

Ppa negotiation

You are in the midst of a PPA negotiation….but have you thought of everything?

We got your back and created a PPA checklist to ensure you are covered!

Here are the 10 commercial key points you shouldn’t miss if you want to successfully close your next PPA.

(You’ll find a downloadable checklist at the end of the article.)

  1. Commercial structure

The type of PPA structure you choose (pay-as-produced, annual baseload, etc.) will impact how the energy risks are distributed among the parties. For example, for the volume risk, in a pay-as-produced structure (a fixed price is paid for any volume produced), the buyer will carry a portion of the volume risk, but the seller is responsible for over – or underperformance.

Whereas in a monthly baseload structure, (a contract that buys a constant volume of energy every hour of each month), the volume risk will be carried by the seller as the volumes are to be guaranteed on a monthly basis.

  1. Understand Energy Risks

Knowing how much each energy risks you are carrying is essential for negotiating a PPA. This is key to successful contract negotiation.

We recommend you to go over the following 5 key energy risks:

Ppa prices:

Due to a general lack of transparency in the PPA market, PPA prices in Europe are not readily available. In fact, the process to get them is cumbersome. You would normally need to contact potential buyers, outline your project, sign NDAs (Non-Disclosure Agreements) and maybe get a price range.

To contribute to a more transparent PPA market, Pexapark provides PPA Prices across Europe for free. Drawing from over 15 years of origination experience, we understand energy buyers and how to calculate fair values of PPAs.  We urge you to check it out.

Vocabulary tip: NDAs (Non-Disclosure Agreements) are necessary legal documents to ensure that the information shared between the parties stays confidential.

Origination: The process of originating deals into the trading desk of the company. Providing services and products to solve clients’ energy needs or problems.

Ppas’ underlying structure

In addition to various contractual forms, PPAs come with different underlying structures and with different forms of hedging that will distribute the diverse energy risks between the buyer and seller. Some of the most common forms include pay-as-produced, annual, or monthly baseload.

In mature PPA markets, availability of Pay-as-Produced (PAP) is decreasing due to cannibalization concerns, and demand for Baseload PPAs is on the rise. Read more on the drivers behind volume preferences in our Baseload PPAs: Essential tips for developers and lenders guide.

Profile risk:

Profile risk arises from the fluctuating nature of renewable energy (for example, there is no solar energy produced at night). In markets with high renewable energy penetration, times of high production can mean a significant decrease in power price, that is, revenue.

This will depend of course on the location of the plant and type (solar or wind). You can mitigate this risk by choosing certain PPA structures.

Refrain from borrowing in low-interest foreign currencies

This has admittedly not been a pressing issue since 2000, as U.S. interest rates have been at record lows for years. However, at some point they will rise again. When that happens, investors who are tempted to borrow in foreign currencies at lower interest rates should remember those who had to scramble to repay borrowed yen in 2008.

Sample ppa contract

The buyer is usually the one to create basic offers based on the RFP/RFQ from the energy seller.

Should there be interest on the seller side, the buyer will then provide a more detailed contract. Some more sophisticated buyers such as Google would usually have their own contracts.

In an attempt to standardise PPA contracts across Europe and to reduce transaction costs, the EFET (European Federation of Energy Traders) in collaboration with the RE-Source Platform, have issued a standard Corporate Purchase Agreement (CPPA).

Check out the Sample PPA contract from EFET.

The asian crisis of 1997-98

A prime example of the havoc caused by adverse currency moves is the Asian Financial Crisis, which began with the devaluation of the Thai baht in summer of 1997. The devaluation occurred after the baht came under intense speculative attack, forcing Thailand’s central bank to abandon its peg to the U.S. dollar and float the currency.

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The energy buyers

Energy buyers can use PPAs to get their energy from renewable sources. This also enables them to reach their green energy goals.

  • Utilities are energy providers such as Axpo (Switzerland), Vattenfall (Sweden) and Holaluz (Spain). They have their own generating assets but also buy additional power to supply their customers. This also enables them to meet potential regulatory obligations set by governments (minimum green energy requirements or targets).
  • Corporates are companies with relatively large energy consumption needs across several locations such as: Google, Amazon, and Nike. They buy energy from renewable assets to achieve their ambition of reducing their carbon footprint.
  • Industrials are companies that require large amounts of energy for manufacturing, such as a mining company (Alcoa for aluminum production). They would enter into power purchase agreements in order to get certainty on their long-term energy costs.

The energy sellers

Energy sellers are the renewable asset owner or developer of renewable assets. We usually call them sellers, although they can fall into the following categories:

  • Investment companies that focus on infrastructure
  • Independent producers of electricity
  • Renewable energy asset managers
  • Utilities and energy companies that wish to build their own renewables assets
  • Infrastructure funds investing in renewables

Volume risk:

The annual energy production of a renewable asset is an estimate. Its likelihood is typically calculated and assessed on the basis of long-term meteorological data.

If a renewable asset is hedging a fixed volume at a fixed price, there is a risk that certain amounts of volume are not produced and need to be procured. If this is the case, the producer may have to purchase the missing volume at market prices that may be worse than the original fixed price. Optimising the volume risk is crucial.

You can make use of insurance guarantees or use certain PPA structures to reduce this risk.

Pro tip: It is important to note, however, that there is always a portion of the volume risk carried by the project owner. What if the plant is not producing any energy?  Even under a pay-as-produced structure (when a fixed price is paid for the energy produced), there is a form of volume risk due to potential non-production.

Week-3

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What is a financial power purchase agreement (financial ppa)?

A financial PPA, (also called virtual PPA and synthetic PPA) allows a company to buy renewable energy virtually. There is no need to own the title of physical energy. This enables companies to focus on their “green impact”, such as corporates, to receive renewable attributes without owning the asset.

These “green” additionalities allow a credit link between the purchaser and the renewable asset owner. A virtual PPA will not impact the source of energy consumed by the purchasing company.

Read more on the drivers of the increasing popularity of Financial PPAs and frequently asked questions around the structure in our Virtual PPAs: the shift from hassle to bustle blog.

There is a direct correlation between VPPA options becoming more popular and corporates wanting to aggregate demand in multiple countries, or source renewables in locations that it may prove more competitive to do so. Learn more about the concept by reading our Understanding the value of a Cross-border PPA: A guide for corporates guide.

Vocabulary tip:

Renewable attributes are energy credits, renewable energy certificates, etc.

What is a ppa?

A power purchase agreement (PPA) is a contractual agreement between energy buyers and sellers. They come together and agree to buy and sell an amount of energy which is or will be generated by a renewable asset. PPAs are usually signed for a long-term period between 10-20 years.

Vocabulary tip:

Offtaker is another name for energy buyer. You will also hear an energy seller by other names – such as a generator, an asset owner or an investor.

If you come across any unknown terms, we have you covered. Pexapark’s Glossary of Terms will help you quickly get up to speed at any point while reading our guide.

Pro tip:

A PPA can cover an existing asset previously under a feed-in tariff (a government subsidy). A PPA can also replace an expired contract.

Note: In a feed-in tariff world, renewable energy investors do not ask how you manage price risk.

What is a solar ppa?

Thanks to the low cost of solar technology, solar is now one of the cheapest renewables available. That is what makes solar PPAs popular. Generally speaking, a template of a solar PPA is comparable to that of a wind PPA, except for their profile risk.

Why do we use ppas in renewable energy projects?

To promote renewable energy, governments initially provide financial incentives for investment such as subsidies (feed-in-tariffs, feed-in-premiums).

With improved technology, renewable assets have become cheaper to build. This leads to a surge in their development.

Consequently, governments begin to move away from subsidy schemes. Either they cannot keep up with the financing or they no longer see the need to provide incentives.

Because the market shift from subsidised projects to open markets has drastically affected renewable investors, they now need to find alternative securities to replace government subsidies.

Feed-in tariff is ending:

Vocabulary tip:

When talking about ‘open markets’, we mean the absence of government involvement, i.e. the absence of subsidies. 

Why does currency value keep fluctuating in the stock market?

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12. Introduction to Philosophy

Final exam

1. Why was the Yale portfolio primarily in bonds and other “safe” investments?

  • Yale was following the best practice advice of Joe McNay
  • Yale did not want the strong variation that are common in investment
  • Yale had too much money for other investments
  • Yale did not have a portfolio manager

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2. Which of the following is NOT an example of moral hazard?

  • Lying about farming yields to collect insurance money.
  • Neglecting to replace smoke detector batteries when insured against fire.
  • Knowingly building a house in an area susceptible to floods
  • Not farming efficiently because farming insurance will cover the cost of a bad crop.

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3. All rational investors, seeking to manage risk by optimally diversifying across a common set of different assets:

  • Only focus on the mean of the overall portfolio.
  • Can ultimately hold different, fully diversified portfolios.
  • Are concerned about by the performance of the riskier assets once they have created the diversifying portfolio.
  • Ultimately earn the same return if they share the same level of risk-aversion.

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4. If you want to protect the risk consisting in the fluctuations of the value of your home, you would ideally:

  • Want to be long (buyer) in the market for homes in your city.
  • Want to stay market-neutral (neither long nor short) in the market for homes in your city.
  • Avoid investing in the housing market in your city.
  • Want to short the market for homes in your city.

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5. Regarding the Efficient Market Hypothesis:

  • The strong form states that stock prices reflect all the information that can be observed on the trading floor.
  • The weak form states that current market prices reflect all information that can be relevant to the valuation of the firm.
  • The semi-strong form states all publicly available information about a firm’s prospects are reflected within the firm’s stock price.
  • The hypothesis does not hold if asset prices reflect all -including inside- relevant information.

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6. Nastya’s makes risky investments with 25% of her portfolio and invests the rest of the portfolio in low-variance investments. This is an example of

  • Attention anomalies
  • Disjunction effect
  • Representativeness heuristic
  • Mental compartmentalization

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7. Today, the nominal rate of interest is 6% and the inflation rate is 2%. The real rate of interest is therefore:

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8. The potential upside of share dilution is that:

  • The capital received by the company after the dilution can improve the company’s profitability and its stock price.
  • The ownership of the company becomes more concentrated.
  • The company will increase its dividend payments over the short to medium-term.
  • There is no potential upside of share dilution.

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Conclusion

A PPA is a contractual agreement to purchase an amount of energy at an agreed price, for a certain time, in advance of producing the energy.

PPAs are now common in renewable energy businesses due to the decline of government subsidies. Without subsidies, there is a lack of financial security for lending institutions, such as banks, to invest in a renewables project. As a result, lenders require a new way to secure their investment. A PPA can prove that the concerned renewable asset has already found a long-term buyer at a fixed price.

PPA contracts thus enable renewable investment by providing revenue certainty to investors and lenders in unsubsidised markets.

However, PPAs are complex in their structure and pricing. Overlooking or inadequately negotiating a contractual clause can impact the overall revenue of a PPA project. This necessitates a thorough understanding of energy risks, valuation, and negotiation issues.

Our Pexapark Team takes the weight off renewable investors’ shoulders by guiding them through their renewable projects. We make sure they maximise their revenues.

Get in touch with us today and see how we could help you make the best of your PPA.

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