Annuity Swap

An Annuity Swap is a structured derivative in which one party pays or receives a stream of fixed periodic payments resembling an annuity, while the opposing leg references a floating or market-linked cash flow. Although more commonly associated with interest-rate markets, annuity-style payment structures appear in long-term energy transactions that involve infrastructure financing, production-linked revenue streams, or regulated tariff mechanisms. In energy markets, an Annuity Swap may be used to convert variable commodity-linked cash flows—such as those tied to power prices, capacity payments, or hydrocarbon production—into predictable annuity-like payments to support project financing or hedging objectives. For example, renewable developers may use such structures to stabilise cash receipts during early project years, while investors may prefer fixed annuity-style inflows that improve creditability and reduce revenue volatility. Because energy projects often involve long asset lifespans, varying load factors, and exposure to market cycles, annuity structures can smooth income and improve debt-service coverage. Traders may also encounter Annuity Swaps when hedging structured products embedded in tolling agreements or supply contracts. The valuation of an Annuity Swap requires discounting future cash flows under appropriate interest-rate curves, assessing commodity correlation, and accounting for long-dated project risk factors.