(1)

During the energy price crisis of 2021–2022, significant instability within the electricity sector resulted in supplier bankruptcies, with considerable effects for consumers. When suppliers fail to adequately hedge their electricity portfolios, fluctuations in wholesale prices can expose them to financial distress, potentially resulting in bankruptcy and the transfer of risks and costs to consumers and other market participants. To protect consumers from such consequences, it is essential that suppliers offering fixed-price contracts have appropriate hedging strategies proportionate to their generation access, capitalisation, exposure to wholesale volatility, size and market position.

(2)

The concept of ‘hedging’ refers to a purchasing strategy or financial strategy designed to mitigate the risk of adverse price fluctuations in energy markets. Through effective hedging, suppliers can stabilise procurement costs, shield themselves from wholesale-market volatility, and offer consumers stable and predictable retail prices. For suppliers with substantial fixed-price contract portfolios, it is essential to hedge against price changes throughout the contract duration, while accounting for consumption pattern variations.

(3)

While hedging may lead to increased costs, the security it provides is significantly more valuable, as failures within the sector can increase costs for consumers by jeopardising consumer advance payments and potentially leading to more costly alternatives. Suppliers should therefore demonstrate that their strategies align with their business models and do not pose undue risks to consumers, particularly through inadequate hedging practices. Competition within the market is expected to incentivise cost optimization, driving costs down for consumers. Therefore, sustaining robust competition amongst retail suppliers is vital for mitigating potential rises in supplier costs.

(4)

While the fundamental responsibility lies with the supplier to set up and demonstrate the suitability of their hedging strategy, national regulatory authorities have the competence and obligation to enforce this responsibility onto suppliers pursuant to Article 18a of Directive (EU) 2019/944 of the European Parliament and of the Council (1) as amended by Directive (EU) 2024/1711 of the European Parliament and of the Council (2).

(5)

An effective measure to enhance the resilience and liquidity management of energy suppliers is stress testing, which in this context is a simulation evaluating the impact of predetermined risk factors. Conducting stress tests can help gauge a supplier’s financial resilience. It is at the discretion of national regulatory authorities to determine the inclusion and structure of such stress tests.

(6)

Financial risks faced by energy suppliers can be closely linked to the complex dynamics between physical and financial markets, notably derivatives markets. Strengthened cooperation between energy regulators, prudential supervisors, and financial market authorities can help identify cross-sectoral vulnerabilities, particularly related to margining requirements, collateral requirements, and liquidity requirements in energy derivatives trading.

(7)

It remains difficult for energy communities to engage with hedging products on centralised markets. This situation amplifies their exposure to market fluctuations and is compounded by discussions at the national level about imposing hedging requirements on suppliers, potentially exacerbating market risks for community suppliers without recognising their specific circumstances.

(8)

While Member States have certain discretion in implementing Article 18a of Directive (EU) 2019/944, this Recommendation should provide guidance on the enforcement of supplier risk management to protect consumers from supplier risks and energy price shocks.