As South-East Europe (SEE) transitions into 2025, the region showcases a façade of market maturity highlighted by record trading volumes in day-ahead and intraday markets, alongside an expansion of price coupling and the availability of forward products across national markets. However, beneath this surface progress lies a significant challenge: the inability to internalize electricity price risk. Instead, SEE continues to export its volatility primarily towards Hungary and into the core European futures markets.
The demand for hedging within SEE is not lacking; industrial buyers, utilities, and trading desks are increasingly seeking forward price certainty amid a landscape marked by large, concentrated, and volatile electricity exposure. Factors such as dependency on hydro resources, ageing thermal fleets, and grid congestion contribute to this volatility. The crux of the issue resides within the market architecture, which fails to provide adequate solutions for risk management.
Central to this dilemma is the issue of open-interest concentration. The liquidity in SEE’s forward markets diminishes swiftly outside a limited range of instruments. Dominance by annual baseload contracts leaves quarterly and monthly products trading intermittently or remaining shallow. Consequently, while hedging can occur, active management becomes cumbersome due to significant slippage costs associated with adjusting positions.
This situation starkly contrasts with more developed markets where open interest is more evenly distributed among various tenors, enabling dynamic portfolio adjustments. In SEE, once an annual hedge is established, it tends to remain static. Attempts to roll over or reshape these positions often introduce risks that participants are reluctant to undertake.
A further complication arises from participant concentration. The forward liquidity in SEE is largely generated by a small group of dominant utilities and a few trading houses. While industrial end-users participate in the market, they typically act as price takers rather than providing liquidity. This limited competitive landscape increases the likelihood that substantial orders can disrupt market stability.
Additionally, regulatory and clearing fragmentation presents another barrier. Variations in margining rules, collateral requirements, and access to clearing services across different exchanges hinder arbitrage opportunities that could alleviate price discrepancies and enhance liquidity depth. For many market makers, maintaining multiple collateral pools across SEE exchanges incurs costs that outweigh potential trading benefits.
The absence of effective long-term cross-border risk instruments further exacerbates these challenges. Current structures do not allow for hedging physical congestion risks beyond short time frames. As a result, forward prices often carry implicit congestion premiums that can fluctuate unpredictably. Without tools such as financial transmission rights or similar long-term mechanisms, price convergence remains tenuous, leaving forward hedges vulnerable to geographic risks.
By 2025, these structural characteristics have led to an unmistakable outcome: while SEE power markets can efficiently price electricity in the short term, they lack the capacity to manage risk over longer periods effectively. This responsibility has shifted toward HUPX and ultimately EEX, where larger capital pools and broader participation help absorb volatility that SEE markets cannot handle independently.
This scenario presents a paradox: despite appearing increasingly liquid on the surface, SEE markets remain fundamentally dependent on external systems. For the region to evolve into a self-sustaining market entity rather than a price-taking appendage of Europe’s core markets, it must broaden its open interest across various tenors, diversify its participant base, and develop robust cross-border risk instruments.
