8551 Why Use Energy Swaps

An energy producer that is constantly selling energy into the open market is exposing its revenue stream to the volatility of the market. The company's risk can be neutralized by converting the variable market price that it receives on its sales to a fixed price. A swap is then set up in which the company receives fixed payments from the buyer, based on the fixed price, and pays a variable amount to the buyer, based on the index. An energy consumer, who is concerned about rising prices, takes the other side of the swap in order to pay a fixed price and receive a variable price.

For the producer, the swap agreement provides income stability by eliminating the effects of market price fluctuations on its income stream. Risk is reduced through the swap. While it can be argued that the producer is giving up the opportunity to benefit from rising prices, the producer is protected from losses due to falling prices. Likewise, the energy consumer, by taking the opposite side of the swap transaction, insulates himself from rising prices while giving up the opportunity to benefit from declining prices.

Figure 8.8 illustrates a commodity swap. This example shows the relationship between the two sides of a swap transaction and the role of the intermediary, in this case a bank. Of course, the natural match between the producer and consumer's hedging needs could mean that the two parties could simply enter into a series of forward transactions without the services of an intermediary. However, the risk exposures of the producer and consumer usually do not match precisely, and intermediaries can add value by standing in between and assuming the risk.

Solar Stirling Engine Basics Explained

Solar Stirling Engine Basics Explained

The solar Stirling engine is progressively becoming a viable alternative to solar panels for its higher efficiency. Stirling engines might be the best way to harvest the power provided by the sun. This is an easy-to-understand explanation of how Stirling engines work, the different types, and why they are more efficient than steam engines.

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