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Although the risk of high fuel prices can be
mitigated with RE, there would be a new risk of Hedging is one strategy commonly
low or intermittent resource availability. This can, used to address this uncertainty
however, be managed by informed placement of
the RE systems or by using energy storage, which and gain greater control over fuel
has already been implemented in islands such as costs. However, due to its complex
Barbados, Jamaica, and Bermuda. Battery energy nature, some utilities choose not
storage not only mitigates the intermittency of to hedge, leaving their customers
RE, but also supports more efficient dispatch of exposed to the volatility of the fuel
generators by replacing some amount of spinning market through the fuel surcharge
reserves, resulting in even more fuel and cost
savings. The predictable and minimal operation & mechanism.
maintenance costs over the lifetime of an RE project
means that some additional cost stability is also
achieved. With the utility’s increased control over will be helpful in ensuring that this type of distributed
their costs, customers are able to benefit from more generation is effective in reducing fuel costs and
stable electricity pricing. providing resilience, however this topic requires a
deeper analysis than is presented here.
In addition to the possible benefit of reduced risk
complexity, RE has the advantage of reducing CONCLUSION
emissions associated with power generation. TO RECAP:
These emissions are known contributors to • Hedging is a complex strategy used by some
negative externalities such as climate change and utilities as a means of avoiding high market fuel
environmental pollution, the costly effects of which prices.
include damage from severe weather events and • Renewable energy can be an alternative method of
degraded population health. The main question avoiding high fuel costs and can result in significant
now is whether the trade-offs between traditional savings for a utility.
hedging and RE are significant enough to make the • There is a trade-off between the risks of hedging
latter a better form of protection from high market and the risks associated with RE projects, however
prices of fuel. the latter also provides sustainability and
resilience benefits.
An important variable in the discussion of RE’s use • In terms of risk management, IPP-owned projects
as a hedge for fuel price volatility is the ownership of are analogous to outsourced hedging, while utility-
the power system – mainly whether it is owned by an owned projects can be viewed in a similar light as
independent power producer (IPP) or the utility. If an in-house hedging.
IPP owns the system and an agreement is made with
the utility for electricity provision, then the IPP takes For utilities, hedging brings the benefits of high fuel
on the risks associated with the RE project while the cost avoidance and increased price stability. Investing
utility simply pays them. This is akin to outsourcing in RE can also reap these benefits along with the
the hedging to an external organization. On the other advantages of cleaner power generation, increased
hand, if the utility owns the system, then it must resilience, and greater energy independence. The
assume and mitigate the risks, similar to carrying costs may just be worth it.
out traditional hedging themselves.
SOURCES:
Customer-owned distributed generation can also be “Decision: The Barbados Light & Power Company Limited Application for Approval
helpful in lowering fuel costs, as well as strengthening to Implement a Fuel Hedging Programme and to Apply the Results and Costs of
the operation of the grid. However, this type of Hedging to the Calculation of the Fuel Clause Adjustment.” 2021. Barbados Fair
scheme has many factors to consider, including Trading Commission.
whether systems are grid-tied or standalone, and
the costs associated with the installation of more Louisy, Trevor. 2011. “Energised: LUCELEC Monthly Newsletter.” LUCELEC, August
robust infrastructure at several points throughout 2011. https://www.lucelec.com/sites/default/files/documents/Energised 1 - 11 -
the grid. The implementation of informed policies Hedging and Renewable Policy V2.2.pdf.

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