CEP Financial Analysis & Energy Budgeting Flashcards
6 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CEP Financial Analysis & Energy Budgeting flashcards as text
What is the primary purpose of a 'hedge ratio' in energy portfolio management?
Answer: To determine the proportion of energy needs covered by fixed-price contracts vs. spot market exposure
A hedge ratio defines what share of projected energy consumption is covered under fixed or forward contracts, balancing price certainty against potential savings from spot market movements.
Which accounting approach capitalizes the cost of an energy efficiency upgrade over its useful life rather than expensing it immediately?
Answer: Capital expense (CapEx) treatment
CapEx treatment records energy equipment as an asset on the balance sheet and depreciates it over its useful life, spreading the cost across multiple accounting periods.
Under an Energy Savings Performance Contract (ESPC), who typically finances the upfront cost of energy efficiency improvements?
Answer: An Energy Service Company (ESCO) finances improvements and is repaid from guaranteed savings
In an ESPC, the ESCO finances and installs improvements, then recovers its investment through the energy cost savings it guarantees over the contract term.
Which financial ratio is most useful for comparing the cost-effectiveness of energy projects with different scales and lifetimes?
Answer: Levelized Cost of Energy (LCOE)
LCOE normalizes total lifecycle costs (capital + operating) by total lifetime energy output, enabling consistent comparison across projects of varying sizes and durations.
What is 'basis risk' in the context of energy commodity hedging?
Answer: The risk that the price of a hedging instrument diverges from the actual price at the delivery location
Basis risk arises when the reference price of a hedge (e.g., a futures contract at a hub) differs from the actual local delivered price, leaving residual price exposure.
When evaluating a renewable energy Power Purchase Agreement (PPA), which factor most directly affects the 'savings' calculation compared to grid electricity costs?
Answer: The PPA strike price relative to projected retail electricity rates
PPA savings are determined by whether the contracted PPA price is lower than the buyer's alternative retail electricity cost over the contract term.