Navigating through stormy waters of the power market

In recent years, the energy markets have experienced exceptional volatility in electricity prices, marking a new era of electricity price uncertainty. Paired with soaring interest rates, the cost of collateral has reached exceptional heights, casting a shadow over daily operations and transforming them into a perpetual nightmare.

In the middle of this turmoil, electricity market participants must adapt and recalibrate their hedging strategies to thrive in these challenging conditions. In this landscape, the significance of physical trade as a vital component of the toolkit cannot be overstated. Here are three compelling reasons why to trust in physical settled power trade is paramount in turbulent waters:

• Market Risk Mitigation: In times of heightened electricity price volatility, the transparency and price discovery mechanisms inherent in physical trade become invaluable. Long-lasting delivery contracts, tailored to specific delivery times and profiles, offer a means of mitigating market risk. Unlike standard power products, these contracts are not bound by limitations, providing greater flexibility and stability in uncertain markets.
• Counterparty Risk Management: Physical trade offers a tangible means of mitigating risks inherent in volatile and speculative markets. Operating in non-cleared marketplaces exposes participants to counterparty risk, which can be effectively managed through diversification. By engaging in relatively small transactions with multiple parties, market participants can mitigate the impact of counterparty risk and safeguard their operations.
• Liquidity Risk Reduction: Typically, physical trade involves minimal or reasonable collateral requirements. By focusing on fixed-price power delivery rather than volatile market values of derivatives, liquidity risk can be significantly reduced. This approach ensures that resources are allocated efficiently, minimizing the impact of liquidity constraints on operations.

In conclusion, in the turbulence of today’s energy markets and electricity prices, the role of physical trade is indispensable. By embracing physical settled power trade, market participants can fortify their hedging strategies, enhance risk management, and navigate the complexities of volatile markets with confidence.

Jan Landén, CEO, EnCoHub Oy