Today, Acer releases a new tool to simulate price correlations for electricity forward trading with potential virtual hub prices. This simulator shows correlations between prices in any EU electricity bidding zone and various configurations of a virtual hub price.
A virtual hub price is already used in the Nordic market and could be introduced in Continental Europe under the upcoming Forward Capacity Allocation (FCA) Regulation revision. ACER’s simulator helps inform the debate on this topic.
Why did ACER develop this simulator?
ACER’s 2023 policy paper to further develop the EU electricity forward market identified the need for better allocation of long-term cross-zonal capacities to support forward electricity trading. It proposed shifting from long-term transmission rights (LTTRs) for individual bidding zone border towards LTTRs between bidding zones and a virtual regional hub. A revised FCA Regulation would need to define virtual hub prices for this approach.
What is proxy hedging and why could a virtual hub price be relevant?
Market participants who lack sufficiently liquid forward electricity products for their bidding zone may want to hedge via similar, more liquid products. The efficiency of using such ‘proxy hedge’ depends on:
Liquidity: the proxy product must be actively traded.
Price correlation: the proxy’s price must closely reflect the bidding zone’s price movement.
Currently, many market participants use the German forward market as a proxy. A virtual hub forward electricity product could offer a better alternative for proxy hedging.
ACER’s simulator uses real day-ahead prices to explore potential virtual hub configurations for hedging electricity prices and compares correlations with current EU bidding zones and proxy products (like the German bidding zone price).
Can any initial findings be drawn from the data?
The simulator suggests that a well-designed virtual hub price would have stronger correlations with most bidding zone prices than current proxy products, supporting ACER’s 2023 policy recommendations.