06.05.2025
Guaranteeing the fulfillment of obligations under electricity supply contracts in the forward market became the topic of discussion at an online meeting organized by Energy Club on May 2.
On April 18, the Auction Committee for the sale of electricity under bilateral agreements approved the introduction of a mechanism for forming and depositing guarantee collateral for fulfilling obligations under bilateral agreements in accordance with Cabinet of Ministers of Ukraine Resolution No. 99 of June 5, 2019. This was preceded by the problem of non-fulfillment of electricity purchase and sale contracts by buyers, which periodically occurs in the Ukrainian electricity market and causes significant losses to generating companies. At the same time, some market participants (buyers) are concerned about the introduction of a guarantee deposit for the fulfillment of agreements. Therefore, this online meeting was aimed at analyzing potential risks, identifying strategic priorities, and considering international experience in risk management for electricity supply contracts in the forward market, using Poland as an example.
During the discussion with speakers: Krzysztof Rogulski, energy expert, director of a consulting company (Poland); Irakli Baramia, member of the National Securities and Stock Market Commission (NKTSPFR); Oleksandr Hrechko, Head of the Regulatory Policy Department at PJSC “Ukrhydroenergo”; and Yuriy Pidlisnyi, Head of LLC “ENERGY 365”, approaches to risk management mechanisms and ensuring the fulfillment of obligations under concluded bilateral agreements in the electricity market were evaluated, and key vectors for the development of the Ukrainian exchange-traded day-ahead market were identified.
As noted by the meeting’s moderator, Energy Club Vice President, former Deputy Minister of Energy of Ukraine, Maksym Nemchynov, this is the first step towards building normal clearing in Ukraine with further integration with the EU: “Normal market coupling is impossible without clearing, and guaranteeing the fulfillment of obligations under forward contracts is the first stage in building a normal clearing system.”
Ukraine has almost no experience in this area, so Krzysztof Rogulski, director of the Polish consulting company and energy expert, spoke about how the system works in Europe:
“A similar situation occurred in the Polish market, and it nearly led to the collapse of the exchange twice. We were looking for a solution for how to secure the execution of contracts in the forward market. This is not payment for electricity; it is purchasing insurance that neither party will terminate the agreement. The problem was that the mechanisms in place at the time were insufficient to compensate for the difference between the price in the contract and the current market price. Many market participants, primarily sellers, intended to terminate the agreements. Buyers – suppliers who purchase electricity on the market – entered into contracts a year in advance. But it was more profitable for sellers to terminate the contracts and sell electricity on the market at a significantly higher price. Many supplier companies, both small and large, went bankrupt. The model was recalculated again, and the rates for securing contract execution increased.”
“This does not only apply to the purchase and sale of electricity in the forward market, because subsequently, if a contract is terminated and it is impossible to secure the contract, the consumer ends up with the supplier of last resort, and you yourselves know what the tariff is there,” emphasized Mr. Krzysztof. “Some suppliers went bankrupt, being unable to secure the execution of contracts with consumers. Subsequently, consumers began to pay significant amounts to secure contract execution due to the sharp increase in exchange prices. Therefore, the insurance contribution must be sufficient so that sellers do not incur losses and can sell electricity on the market at a normal price. The same thing is happening in Ukraine. At the time of contract termination, the consumer was ‘thrown’ onto the day-ahead market, and subsequently, the price changed.”
“So, very small and incorrect collateral affects not only market liquidity but also bilateral contracts. Some traders bought electricity under an annual contract and started selling it on the day-ahead market. Thus, in most cases, the problem was created not by generation but by sellers. Buyers do not always buy electricity solely to ensure supply to consumers. Often, they use this mechanism to sell electricity on the market. According to some estimates, before a consumer receives electricity, it is sold at least four times. Different legal entities participate in the purchase and sale process, and how can you trust a trader who bought electricity for speculation? Ukrenergo turned to Poland to initiate not only hourly auctions but also weekly, monthly, and quarterly ones. This means that electricity is unlikely to be bought only for own needs but also for sale on the exchange.”
“The market price depends on risks, and this leads to buyers seeking contract termination when the price falls. The peculiarity of forward contracts is that they come into effect after some time, during which the price has already changed. The risk of price change is calculated as follows: you need to pay an insurance contribution for the difference between the contract price and the current market price. You need to determine who pays for it – the supplier or generation. And this is not payment for the commodity. These are funds that the buyer deposits as a guarantee of contract execution – one day before the contract comes into force and two days before delivery. This is insurance that prevents contract termination. The seller or generation does the same if the price changes in the other direction.”
“The guarantor of contract execution for the consumer is a fixed price. Conclusion: the mechanism prevents both parties from terminating the bilateral contract. This stabilizes market operation and removes risks. Deposits securing the contract are calculated daily. Otherwise, the exchange closes the position, and the price difference is covered by the insurance. And no one pays for others’ manipulations. The electricity purchase and sale agreement is standard, where all conditions are stipulated, developed by the exchange and agreed upon with its participants. Funds can reach 60% of the contract value. Today, the cost of purchasing the guarantee is 38%.”
“The electricity market is for the rich,” summarized Rogulski. “Many companies wanted to obtain electricity supply licenses in Poland and were surprised why it was so difficult and the regulator required high financial guarantees. But this is done to avoid the problem that existed in 2020 – the risk of the exchange collapsing.”
Continuing the conversation, Irakli Baramia, a member of the National Securities and Stock Market Commission (NKTSPFR), emphasized: the securities and stock market commission welcomes the changes in the trading regulations concerning the strengthening of requirements for guaranteeing the fulfillment of obligations under energy market contracts, and is guided by objective legislative requirements – from EU directives and practices of developed countries to regulatory legal acts – regarding clearing activities. “In our opinion, the changes to the regulation, proposed a long time ago, should work, as they are an integral part of transparent exchange trading. Without an effective mechanism for fulfilling obligations, transparent pricing is impossible. Transparent pricing is what the commission, the NCREGL, the Ministry of Energy, and market participants are building this market for. This technology works in developed countries. Therefore, instead of inventing know-how, it is better to gradually adopt their developments. Furthermore, we have our own experience in other types of commodity markets where the number of defaults is tenfold lower. Obviously, this experience needs to be replicated and scaled to other markets.”
“As for guarantee collateral – the terms and mechanism, market participants’ approaches to trading must be unified for everyone, then both the rules and pricing will be transparent. In fact, the system of advance payments does not comply with exchange trading standards, and different margin levels do not provide equal conditions for participants, which affects market transparency, pricing, and ultimately leads to a loss of benefit for the state. We have martial law in the country, and the commission understands all possible risks and specificities of the energy market, which is why it did not rush with the regulation on clearing activities and did not insist on bringing it into compliance with the legislation. Thus, although the changes have been introduced late, we support the fact that these steps have finally been taken. Even a small local reform can affect the comfort zone of trading participants. But considering that this concerns the professional community, being an antagonist to such changes essentially means being against the development of exchange technologies and pursuing one’s own short-term benefits. I hope that these are just the first steps towards optimizing clearing activities and mechanisms in the exchange-traded commodity market, which will be followed by the implementation of a risk-oriented model, guarantee collateral for variation margin, and the principle of delivery versus payment. Requirements for guarantee collateral when fulfilling obligations are actually not a wish of the commission but direct legislative requirements and a path towards a healthy commodity exchange market,” said Irakli Baramia.
Oleksandr Hrechko, Head of the Regulatory Policy Department at PJSC “Ukrhydroenergo,” agreed with this: “We understand that the increase in the number of unfulfilled contracts occurs when price volatility is observed. The practice of applying an additional guaranteeing mechanism is common in Europe and should be implemented in Ukraine. We support such changes. So, we move forward and hope that the time will come when the exchange becomes a central counterparty that can provide clearing services.”
“In fact, behind the good slogans about clearing, the implementation turned out to be of poor quality. They couldn’t invent anything better than simply collecting funds from buyers and accumulating them in the exchange’s account. The product is raw, nothing works,” shared Yuriy Pidlisnyi, Head of LLC “ENERGY 365,” his experience. “It would be possible to take an analogy with ProZorro contracts, contract performance guarantees – a ready product that all banks know about. If sellers are so worried about non-fulfillment of contract terms – systemic banks provide guarantees stipulated in the agreement. The problem is solved. Previously, the difference was covered by advance payments, which were considered as penalties. There is NCREGL Resolution No. 332, which prohibited charging and collecting penalties, but this is temporary, for the period of martial law. Changes can be made to this resolution, and sellers will have the opportunity to hedge risks through advance payments.”
Yuriy Pidlisnyi proposed several options for solving the problem: introduce a payment as a guarantee to the seller’s account, obtain a bank guarantee, or a contract performance guarantee from ProZorro.
Conditions and guarantees must be the same for everyone; all market participants must be confident in the fulfillment of contractual obligations and in the reliability of banks and the exchange.
Krzysztof Rogulski added: in Poland, payment is calculated daily and depends on price fluctuations. If the price is positive, the supplier pays; if negative, the seller pays. Contributions to the guarantee fund are paid immediately from the first day when players enter the exchange. This is a barrier for serious and stable participants. As for guarantees, there is a scheme based on international ratings for regular players: 50% cash, 50% bank guarantees. These funds are immediately liquid.
Large companies have electricity sellers. The forward market should fully cover electricity volumes – which is 80% of the electricity sold in Poland, Ukraine, and other countries. The remaining 20% is spot. But the operation must be stable. Mostly, the base load is purchased – for a year. On bilateral contracts, the price is predictable. The problem with contract defaults arises due to incorrect price formation. If the approach to the indicative price were correct, there would be fewer default contracts.
According to Yuriy Pidlisnyi, there are other instruments for guaranteeing the terms of the agreement between sellers and buyers – funds in the seller’s account. It is more advisable to allow sellers who sell electricity under bilateral contracts to apply penalties to buyers. Or vice versa, allow penalties to be applied to both parties. As practice shows, the court supports the idea of not charging penalties. In parallel, mechanisms need to be developed that will allow market participants to hedge their risks, which will suit all parties and genuinely work in the market.
Advance payments are not guarantee provisions, summarized Irakli Baramia, noting that the exchange is regulated and constantly supervised by the NKTSPFR.
