In the current period of intense energy uncertainty, the electricity market in Greece is at a critical turning point, where financial risk-hedging mechanisms are no longer a “tool for experts” but a key factor that directly affects costs for households and businesses.
The high volatility in natural gas and coal prices, geopolitical tensions, and the rapid penetration of Renewable Energy Sources (RES) have radically changed the way electricity prices are formed in the day-ahead market of the Hellenic Energy Exchange (EnEx). In this environment, futures contracts are evolving into a critical stabilizing mechanism.
Consumers
For consumers—indirectly through their electricity bills—but especially for businesses with high electricity consumption, futures act asa “safety net”against sudden and sharp price increases.
By utilizing these tools, electricity suppliers can offer fixed-rate plans (also known as “blue” plans), providing security, cost predictability, and protection against energy price fluctuations, particularly during periods of high volatility.
Recent scientific research by the Center for Financial Studies and Education at the National and Kapodistrian University of Athens, titled “Price Discovery and Asymmetric Dynamics in a Renewable Energy Sector-based Electricity Market” and authored by Dimitrios Kainourgos, Athanasios Katevatis, and Alexandros Tsioutsios, reveals something even more critical: the futures market is not merely a hedging tool, but the primary mechanism for shaping expectations about the future. In other words, the prices “locked in” today in futures essentially influence the prices the market ultimately pays tomorrow.
Futures
The study is based on daily data for the period from November 2020 to July 2024, incorporating significant events such as the Russia-Ukraine war . Using a wide range of econometric methods—symmetric and asymmetric VECM error correction models (TAR and MTAR), the fractional cointegration model (FCVAR), and the dynamic time warping (DTW)—the results of these methods are consistent with the international literature, clearly showing that the futures market dominates the price discovery process, with a share of approximately 94.5% for the symmetric models.
The asymmetric models yield similar results. Specifically, when prices are above the equilibrium level, the contribution of futures increases slightly to 94.6%, primarily reflecting the impact of rising fuel prices due to geopolitical developments and the heightened need for risk hedging.
Conversely, when prices fall below equilibrium, the dominance of futures decreases slightly to 92.3%, as oversupply conditions—particularly due to high renewable energy production and low demand—operate differently.
The reliability of the results is further enhanced through the application of the FCVAR model and the DTW method, which allow for the incorporation of long-memory characteristics of the time series and nonlinear approaches, respectively. The findings indicate that, despite the high degree of persistence characterizing the system, clear mechanisms for a return to long-run equilibrium are maintained.
For all participants in the energy market, this has practical significance: risk-hedging strategies can no longer be based on the current (spot) electricity price, but must “read” the derivatives market as a harbinger of developments.
Energy Hub
The choice of Greece for the study is of particular interest for a number of reasons:
- This is the first study to assess the existence of aprice discovery mechanism in the Greek electricity market following the establishment of EnEx.
- This is a market with high renewable energy penetration, as Greece has emerged as a global leader, ranking 7th worldwide in terms of RES penetration in electricity generation and becoming a net exporter of electricity since 2020.
- Its geostrategic position is strengthened, as the country is expected to evolve into a European electricity hub due to its high renewable energy penetration and the development of interconnections with countries in Africa and the Middle East, which are rich in wind and solar energy, helping to lower electricity prices in Europe.
- Greece is evolving into an international natural gas hub through the “Vertical Energy Corridor” , facilitating the supply of natural gas, including liquefied natural gas (LNG) from the U.S., to countries such as Bulgaria, Romania, Moldova, Ukraine, Slovakia, and Hungary.
- The study fills an important research gap, as it is the first to examine the asymmetric dynamic relationship between spot and futures markets in a context where the non-storability of electricity, sharp fluctuations in demand, and strong regulatory constraints make price behavior particularly complex.
Policy
The study’s findings lead to specific conclusions regarding energy policy:
Strengthening the derivatives market: The increased importance of futures underscores the need to further develop and enhance liquidity in the energy derivatives market, with the aim of improving efficiency and reliability in price formation. At the same time, expanding the range of available futures beyond baseload products to include specific time zones will significantly enhance risk hedging capabilities.
Support for businesses in risk management: It is necessary to adopt policies that will facilitate access to risk hedging tools for small and medium-sized enterprises, given that these are currently used primarily by large market participants. Furthermore, the development of new standardized contracts with an emphasis on Corporate Power Purchase Agreements (PPAs) can contribute in the long term to securing lower electricity prices for businesses.
Transparency in the integration of RES: The increasing penetration of RES intensifies market volatility. Consequently, mechanisms are needed to allow for the smoother integration of RES generation into the system, limiting sharp price fluctuations. In this regard, accelerating investments in energy storage, such as batteries, as well as in flexible grid infrastructure, is considered crucial.
End-user protection: Passing on the volatility of wholesale markets to retail costs requires the implementation of appropriate regulatory mechanisms that will limit extreme price fluctuations while ensuring that conditions of healthy competition are maintained in the market.
Financial System
The Greek electricity market no longer functions solely as a mechanism for balancing supply and demand but has evolved into a complex financial ecosystem, in which futures markets decisively influence the next day’s energy costs.
For consumers and businesses, this implies a new operating environment, where financial derivatives can serve as an essential tool for managing and mitigating price risk.
For the state, this development signals that energy policy can no longer be designed independently of financial markets, but must actively and systematically incorporate them into its strategic planning.
* Dimitrios Kainourgios (center) is a professor of Finance, a member of the Governing Council of the National and Kapodistrian University of Athens (NKUA), and director of the Center for Financial Studies and Education (KEMEX).
** Athanasios Katevatis is a Ph.D. candidate in the Department of Economics at the University of Athens and a researcher at KEMEX.
***Alexandros Tsioutsios (pictured right) is a postdoctoral researcher in the Department of Economics at the University of Athens and a researcher at KEMEX.