European electricity futures markets in crisis of fragmentation-Report
European electricity futures markets in crisis of fragmentation:
persistent liquidity shortages hamper risk management
A new report realized by the Balkan Energy School (BES) has highlighted the persistent challenges and fragmentation afflicting European electricity futures markets. These markets are essential tools for managing price risks, stabilising revenues and costs, and supporting long-term investment decisions. Although Europe has made significant progress in integrating day-ahead and intraday markets, forward segments remain fragmented and less effective in fulfilling their core functions.
The report, entitled “The evolution of electricity forward markets in Europe: a review of policy options”, emphasises that improving the efficiency and effectiveness of forward markets remains a key objective of European energy policy.
The analysis identifies several recurring issues that hinder the integration and proper functioning of European futures markets.ergy acquis, the project aims to strengthen regional competition, improve security of supply and anchor the Western Balkans more firmly in the European internal electricity market.
Fragmented liquidity and imperfect proxy hedges
Futures trading is heavily concentrated in specific supply areas, leaving smaller or peripheral markets with restricted range of products . This concentration results in unequal access to hedging opportunities. Participants in less liquid areas are often compelled to rely on “proxy hedges”, which do not fully cover their exposure. For example, a producer in Poland seeking to fix its long-term price may not be able to find a liquid domestic market. It may therefore resort to selling a future on the much more liquid German futures market. This proxy hedge protects against fluctuations in the German spot price, but exposes the producer to the volatility of the spot price differential between Poland and Germany, resulting in an “imperfect” hedge.
Ineffective cross-border hedging instruments (LTTR)
Long-term transmission rights (LTTR) are designed to link cross-border forward markets, but they are not used consistently. Even after applying proxy hedging, operators are still exposed to spot price spread volatility. In theory, this exposure could be hedged using FTR bonds (Financial Transmission Right-obligations, i.e. two-way contracts for difference) against the price differential, achieving a “perfect hedge” where the outcome is independent of spot prices. However, this ideal scenario is compromised by the fact that FTR bonds are not actually traded. Instead, traders predominantly trade FTR options (unidirectional CFDs). This inconsistency in structure – commodity futures are based on bonds while LTTRs are based on options – limits the ability to obtain effective proxy hedges. Furthermore, data suggests that FTR options are often undervalued, leading to inefficient market outcomes and a transfer of wealth from consumers to traders.
Structural and regulatory constraints
Access to electricity futures markets is limited by structural factors, especially in smaller markets, including high market concentration, uneven distribution of large producers and consumers and high collateral requirements. In addition, regulatory diversity among national regulatory authorities (NRAs) hinders the creation of a coherent European futures market. For example, while commodity futures are standardised, the structure of FTRs (options vs. bonds, financial rights vs. physical rights) varies from one jurisdiction to another. Finally, the possibility of reconfiguring supply zones introduces additional risk for market participants, reducing the predictability necessary for long-term hedging strategies.
Key stakeholder positions and policy options
The policy debate involves several key institutions, including the European Commission, the Agency for the Cooperation of Energy Regulators (ACER), ENTSO-E/TSO and energy exchanges.
ACER advocates more effective cross-border instruments, in particular Financial Transmission Rights (FTRs) with full firmness. It also supports zone-to-hub products to concentrate liquidity in larger, more liquid regional hubs. In addition, ACER is exploring mechanisms to enhance forward market coupling and the imposition of market-making obligations in illiquid zones.
ENTSO-E/TSO promotes a unified model based on FTR obligations issued zone-to-zone. Their rationale is to achieve “perfect” proxy hedging opportunities by combining zonal commodity futures with FTR obligations, which requires a significant change from the current FTR option structure.
However, Power exchanges and trading associations have expressed caution regarding ACER’s proposed virtual hubs. They worry that these hubs could divert liquidity from existing zonal markets and introduce new basis risks for market participants, who would remain exposed to the spot price differential between their national market and the hub.
Other policy options being considered to improve efficiency include enhancing the allocation and timing of auctions (e.g., more frequent auctions and maturities up to three years) and pursuing forward market coupling, which would implicitly manage transmission rights.
The report concludes that the ongoing revision of the Forward Capacity Allocation (FCA) regulation, coupled with the 2024–2025 Electricity market design reform, represents a vital opportunity to address these challenges. Strengthening electricity forward markets is considered essential for improving risk management, facilitating investment in generation and infrastructure, and better protecting consumers from volatility in wholesale electricity prices.