This is especially true for the provisions on hedging suppliers whose implementation is due by 17 January 2025.
To aid in that endeavour, Eurelectric has developed guidance for member states with its new paper on supplier hedging that protects against volatility and enables financial planning.
Hedging is a crucial strategy for stabilising energy costs and revenues. It involves locking in prices in advance through the market via a handful of forward instruments (for example, forward or future contracts, options and/or swaps). The locked in price provides stability to both parties that enables better financial planning. In extreme cases, as during the energy crisis of 2022-23, good hedging can prevent insolvency due to volatile energy prices and even bankruptcy.
When a supplier goes bankrupt, the customers that depended on the insolvent party are forced to contract with suppliers of last resort (SoLR) which often drives up electricity prices, exacerbating crisis scenarios. Given the number of bankruptcies experienced during the crisis, legislators decided to include a specific article in the electricity market design (EMD) reform to manage suppliers risk: Article 18a of Directive 2024/1711. This article grants national regulatory authorities (NRAs) the power to ensure that electricity suppliers adopt and implement effective hedging strategies, possibly mandating some percentages or tools to hedge.
Mandating hedging, however, is not the right solution. If all suppliers were to hedge the same percentage of their energy supply under a power purchase agreement (PPA), for example, consumers would all start paying a similar price, resulting in less competition in the market, limiting the number of suppliers in the market and ultimately resulting in higher energy prices for consumers. For those hedging strategies to work, suppliers need the flexibility to choose their own hedging tools to diversify their offers, maintain competition, optimise sourcing and ultimately benefit consumers.
Member states should therefore avoid making hedging mandatory and have instead a solid licensing system or equivalent process to ensure that suppliers are financially robust and adequately hedged when entering the market.
In addition, EU countries can opt for less distortive tools to ensure the suppliers’ preparedness and resilience such as enhanced regulatory oversight, eased access to necessary financial instruments and innovation. These approaches can strengthen the market without restraining suppliers’ flexibility or competitiveness.
For more information, take a look at our full paper or reach out to us!