As South-East Europe (SEE) steps into 2025, it presents a facade of market maturity characterized by record trading volumes in day-ahead and intraday markets, alongside expanded price coupling and the availability of forward products across national exchanges. However, beneath this surface progress lies a critical structural weakness: the region’s ongoing inability to manage its own electricity price risk effectively. Instead of stabilizing internally, SEE continues to export its volatility primarily towards Hungary and deeper into established European futures markets.
The demand for hedging in SEE is robust, driven by industrial buyers, utilities, and trading desks eager for forward price certainty amid increasing volatility due to reliance on hydro resources, aging thermal fleets, and grid congestion. The underlying issue is not a lack of demand but rather a significant flaw in the market architecture.
A central problem is the open-interest concentration within SEE’s forward markets. Liquidity diminishes rapidly outside a limited range of instruments, with annual baseload contracts dominating trading activity. Quarterly contracts see sporadic trades, while monthly products remain underdeveloped. This results in a forward curve that exists theoretically but lacks practical usability for active management, leading to substantial slippage when participants attempt to hedge dynamically.
This situation starkly contrasts with more mature markets where open interest is spread across various tenors, enabling continuous portfolio adjustments. In SEE, once an annual hedge is established, it becomes static, making any attempts to roll or partially unwind positions fraught with risks that most participants prefer to avoid.
Another significant constraint is the participant concentration. The liquidity in SEE’s forward markets is predominantly generated by a small number of dominant utilities and trading houses. While industrial end-users are present, they typically act as price takers rather than liquidity providers. This limited competitive depth raises the likelihood that a single large order could significantly impact market prices.
The issue of regulatory and clearing fragmentation further complicates matters. Variations in margining rules, collateral requirements, and access to clearing across different exchanges discourage arbitrage opportunities that could help equalize price discrepancies and enhance liquidity. For many market makers, the costs associated with maintaining multiple collateral pools across SEE exchanges outweigh any potential trading advantages.
Most critically, SEE lacks effective long-term cross-border risk instruments. Physical congestion risks remain unhedged beyond short timeframes, leading to forward prices that incorporate unpredictable congestion premiums. Without financial transmission rights or similar long-term instruments, price convergence remains tenuous, leaving forward hedges vulnerable to geographic risks.
By 2025, these structural challenges have led to a clear outcome: while SEE power markets can efficiently price electricity in the short term, they lack the capacity to manage risk over extended periods. This function has been transferred to HUPX and ultimately EEX, where larger capital pools and broader participation can absorb the volatility that SEE markets are unable to handle independently.
This situation creates a paradox; despite appearing increasingly liquid, SEE markets remain structurally dependent on external systems. Until there is an expansion of open interest across various tenors, an increase in participant diversity, and the maturation of cross-border risk instruments, SEE will continue to operate not as an autonomous market but as a price-taking appendage of the European core.
