Develop Risk-hedging Products

The balancing responsibility exposes market participants to new financial risks. Therefore, the market will need to provide corresponding risk-hedging products like the intraday cap futures recently introduced by power exchanges. Hedging products should develop naturally as an outcome of a market in which all generators and suppliers are subject to balance responsibility; in which imbalance prices are reflective of full system costs; and in which finally market parties, including consumers, are incentivised to balance their position as early as possible.

Such hedging products value flexibility and translate it into a more predictable and ‘bankable’ revenue stream, compared to the underlying commodity. At the same time, these products will allow market participants to mitigate their financial risks and provide more stable investment incentives. As long as the risk-hedging products are not developed by the market, they may need to be centrally developed (e. g., regulators could place obligations on balancing responsible parties or suppliers to purchase a certain amount of such products; TSOs would need to be closely involved in the design and certification of such products).

Recommendations

  1. ACER and NRAs should put full financial balance responsibility on all market participants to expose market parties to system adequacy price signals.
  2. To improve the investment signal while mitigating the risks for market participants, new risk hedging products should be developed by the market, or if that doesn’t occur, be introduced through an appropriate regulatory framework.