Purchase-As-Produced Contracts – Whether Derivative or Not?

Kleen Co. enters into a power purchase agreement (PPA) with a windmill operator to purchase electricity. Both Kleen and the operator are connected through a common national grid. The PPA obliges Kleen to acquire a 45 per cent fixed share of the wind energy produced by the operator. The price per unit for the energy is fixed in advance and remains stable throughout the contract duration of 25 years. The operator does not guarantee a specific amount of output (energy) but estimates with 80 per cent probability an expected amount. The energy produced is transferred to Kleen through the national grid. The total energy demand of Kleen by far exceeds both the contracted share of the estimated output and the contracted share of the peak output of the wind park. However, Kleen does not operate its production facilities 24/7 but pauses production during the night times, on weekends and holiday season. There is thus a mismatch between the demand profile of Kleen and the supply profile of the wind park. Kleen is obliged to acquire the energy of the wind park in the amount (45 per cent of the current production volume) and at the time it is produced. Since Kleen has no feasible option to store the energy, it sells energy that cannot be consumed immediately (e.g., on weekends or overnight) to the spot market and repurchases (at least) the same amount from that market at times when the production facilities a