Trading in Electricity Derivatives (The Georgian Paradigm of the Reception of the European Framework)

Abstract

The article examines the legal mechanisms of wholesale trading in electricity derivatives and the relevant trading products on the basis of European experience. Within the framework of the research, the main types of electricity derivatives – futures, forwards, options and swaps – are discussed, including their legal nature, purposes of use and specific features of trading both on electricity exchanges and on over-the-counter and bilateral contract markets.

The article analyses European models for organising trading in electricity derivatives, including the role of exchanges, central counterparties, clearing and settlement mechanisms. Particular attention is paid to the use of derivatives in the context of managing risks associated with fluctuations in market prices and contractual relationships relating to future delivery.

A separate part of the research is devoted to the legal prerequisites for the functioning of the electricity derivatives market in Georgia. To this end, the relevant provisions of the Law of Georgia on Energy and Water Supply and the Law of Georgia on Financial Collateral Arrangements, Netting and Derivatives are examined. The paper raises the issue of the legal classification of electricity as an underlying asset of a derivative and assesses the possible role of the electricity exchange operator in the functioning of the derivatives market.

The research concludes that, for the development of the electricity derivatives market in Georgia, it is advisable to introduce appropriate legislative amendments and to share European experience with participants in the energy sector.