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Glossary · Energy industry & energy transition

Clearing

Clearing Glossary Energy power system electricity trading electricity market Exchange Balancing group counterparty risk

In electricity trading, clearing refers to everything that happens after a purchase or sale has been concluded to ensure that the transaction is reliably fulfilled: processing, netting and financial safeguarding. A traded transaction thus becomes a reliable claim to payment and, where applicable, to delivery. At its core, clearing answers three practical questions: Who owes whom what amount? What collateral must be posted? And how is the risk limited that a contracting party defaults?

Central counterparty and novation

In the electricity system, clearing is not a technical procedure of grid operation. It is an institutional and financial infrastructure of trading and forms part of the market organisation. On exchanges, this task is generally performed by a central counterparty (CCP). Under the EU Regulation on market infrastructure EMIR, Regulation (EU) No 648/2012, a CCP interposes itself between the two contracting parties. It becomes the buyer to every seller and the seller to every buyer. Its main task is to manage the risk that a counterparty fails to make payments when due. Legally, this usually happens through novation: the original transaction between buyer and seller is replaced by two transactions with the CCP. The default risk of individual trading partners is thereby pooled, assessed and limited by collateral.

For the trading venues of the EEX Group in Europe, this is European Commodity Clearing AG (ECC) in Leipzig. It was founded in 2006 as a subsidiary of European Energy Exchange and clears, among other things, EEX futures transactions as well as EPEX SPOT day-ahead and intraday transactions. For the exchanges on which it acts as central counterparty, ECC handles both the financial and the physical settlement of transactions. Transactions concluded off-exchange can also be registered with it for clearing. ECC is authorised as a central counterparty under EMIR. There are other clearing houses for energy, for example ICE Clear Europe for ICE Endex contracts.

What is cleared: volumes, prices, payments

Most electricity trading transactions are measured in megawatt hours (MWh). Energy is traded for defined delivery periods, for example a quarter-hour or hour on the day-ahead market and the intraday market, or a month, a quarter or a year on the futures market. The price is quoted in euros per megawatt hour. An example: a baseload annual contract of 1 MW corresponds to 8,760 MWh in a non-leap year. At €80/MWh, it has a contract value of around €700,800. Clearing translates such transactions into payment flows and collateral requirements. For physically settled products, it also allocates the volumes to delivery positions. Clearing does not generate electrical energy and does not transport electricity through the grid. It arranges the financial obligations so that the market functions reliably.

Distinction from trade execution, settlement and delivery

Clearing must be distinguished from several neighbouring terms. Trade execution is the moment at which price, volume, delivery period and product are fixed. Clearing begins immediately thereafter. Settlement refers more narrowly to fulfilment itself, that is, the final payment or credit and, for physical products, delivery. Clearing covers more: it maintains positions, values open transactions, demands collateral, monitors risks and prepares settlement. Finally, physical delivery concerns the feed-in and withdrawal of electricity in balancing groups and grids. It is linked to trading but is not the same as financial processing.

The distinction from balancing group settlement is also important. A balancing group is the energy-industry accounting unit in which feed-ins, withdrawals and schedules are balanced against each other. If a trader sells electricity, the volume must be reflected in schedules and balancing groups. For physically settled exchange transactions, the clearing house handles delivery processing: the traded volumes are notified as schedules between the participant's balancing group and that of the clearing house. If actual feed-in or withdrawal subsequently deviates from the balanced position, balancing energy becomes payable. However, these costs arise in balancing group settlement, not in clearing. Both processes are thus connected but have different tasks: clearing settles the trade financially and contractually, while balancing group settlement accounts for the physical volumes.

Access: clearing members and trading participants

Not every exchange participant is itself a member of the clearing house. At ECC, a company is generally a Non-Clearing Member. It then needs a clearing bank admitted as a General Clearing Member and concludes a three-party agreement with it and ECC. On the futures market, the clearing bank contractually steps in between ECC and the trading participant. On the spot markets, it guarantees the participant's transactions and processes the payments. For certain spot markets, such as day-ahead and intraday electricity trading, ECC additionally offers direct access without a clearing bank (Direct Clearing Participant). Those who do not wish to become exchange members themselves can trade via access providers. This tiering distributes credit risk: first the clearing member is liable for its clients, and only then the CCP.

Margins and collateral

The most important tools of clearing are margins and other collateral, also called collateral. Initial margin covers possible price movements during the time needed to close out or transfer the position of a defaulting participant. Variation margin offsets ongoing changes in the value of open positions. For this purpose, these are regularly valued at the current market price, see mark-to-market. An example: someone who has sold the annual contract mentioned above and sees the futures price rise from 80 to €120/MWh has a paper loss of around €350,000. They must settle this as variation margin. Because initial margin rises with volatility, it may increase at the same time. Such a short-term demand for additional collateral is called a margin call. The mechanism ties up liquidity. However, it is not a surcharge on the electricity price but part of risk limitation. With sharply rising or fluctuating prices, the requirements can become very high. Clearing then becomes a question of liquidity for suppliers, traders and larger buyers. More on this under margining, provision of collateral.

If the collateral of a defaulting participant is insufficient, the CCP's defined liability sequence, the so-called default waterfall, applies. First, the defaulting participant's collateral is realised. This is followed by contributions to a mutual default fund and the CCP's own funds. The exact order and amounts are governed by the clearing conditions and supervisory law.

Common misunderstandings

High margin requirements are sometimes regarded as a cause of high electricity prices. In fact, they react to price level, volatility and position risks. They can intensify financial strain because companies need more liquidity at short notice. But they do not set the wholesale electricity price. That arises from supply, demand, expectations, fuel and CO₂ costs, power plant availability, grid congestion and weather. Clearing makes the financial consequences of this price formation more binding and more visible.

Equally wrong is the notion that clearing eliminates every risk. A CCP reduces counterparty risk by standardising, collateralising and continuously monitoring it. It cannot dissolve market risk. If a company pursues an unfavourable procurement strategy, holds excessively large open positions or overestimates its ability to pay, clearing does not protect it from the loss. It primarily limits the damage spreading to other market participants. The CCP itself is also a risk, since positions are concentrated in it. It is therefore subject to strict supervisory rules.

Exchange, OTC trading and legal framework

On the electricity exchange, many players meet: generators, suppliers, traders, municipal utilities, industry and financial players. Without central processing, each party would have to check the creditworthiness of every other, negotiate framework agreements and bear payment defaults itself. In over-the-counter (OTC) trading, two parties conclude directly. If they settle bilaterally, each bears the counterparty risk itself. However, they can also have such a transaction registered for clearing with a CCP. An individually negotiated transaction is then transferred into a standardised risk infrastructure.

Legal framework in the EU (as of the sources reviewed here): EMIR goes back to the G20 commitment of 2009 to settle standardised OTC derivatives via central counterparties. The regulation governs authorisation and supervision of CCPs and requires certain standardised OTC derivatives to be cleared. It also requires derivative transactions to be reported to trade repositories. For OTC derivatives that are not centrally cleared, it prescribes risk mitigation procedures. Whether an energy trading company is actually subject to the clearing obligation depends, among other things, on whether it is classed as a financial or non-financial counterparty and whether it exceeds clearing thresholds. It also depends on whether a transaction is classified as a derivative at all within the meaning of financial market law. Electricity supply contracts to be physically fulfilled are in part to be treated differently. For an individual case, the version of the law in force at the time must be checked. The competent supervisory authority for ECC in Germany is BaFin.

Significance for the electricity system

Clearing is important for the electricity system because trading positions are fixed very precisely in time. Errors in processing then affect not just an invoice but can extend to schedules and balancing groups. Electricity markets are strongly shaped by futures products: suppliers buy volumes for future periods, generators hedge their revenues, industrial companies limit price risks. The longer the time between trade execution and delivery, the greater the risk from price changes can become. Clearing determines how this risk is borne until delivery.

With more wind and solar power, the residual load changes, that is, the demand remaining after deducting weather-dependent generation. As a result, very low, very high or rapidly changing prices occur more often. For physical operation, the system needs flexibility from storage, load shifting, flexible power plants and grids. For trading, it needs procedures that make the financial consequences of such fluctuations manageable, and clearing is one of them. It does not organise technical flexibility. But it influences which trading and hedging strategies remain financeable.

Clearing houses determine which products they clear, which collateral they accept, how they calculate risks and what happens in the event of late payment. These rules act like a market architecture. If collateral requirements are too low, default risk rises. If they are too high, they can push participants out of the market or tie up liquidity needed for procurement and supply. The design is therefore not a purely technical administrative question.

Clearing in the 2022 energy crisis

How strongly clearing acts in crises became apparent in 2022. When electricity and gas prices rose sharply after the Russian attack on Ukraine, companies with open futures positions had to post large amounts of additional collateral. This also affected companies whose business model was viable and whose positions would later have been covered by deliveries or customer payments. The problem lay in the time gap between immediately due collateral and later revenues. The German federal government therefore launched a margining financing instrument in June 2022: KfW credit lines with a federal guarantee. These financed collateral for electricity, natural gas and emissions contracts at EEX and ICE Endex as well as for OTC transactions cleared there. A condition was that the margin calls resulted from exceptional price and volatility increases. Loan agreements could be concluded until the end of 2022, with terms running until 30 April 2023. Such aid is not intended to replace losses but to secure solvency during a phase of extreme collateral requirements.

Assessment

Clearing explains part of the financial stability of the electricity market. It does not explain the entire electricity price, nor physical security of supply, nor grid stability. It is the regulated infrastructure between trading and fulfilment. Its contribution is that it does not leave the risks of electricity transactions invisibly in bilateral relationships but measures them, collateralises them and settles them according to fixed rules.

Sources

Related glossary entries

Edited by eCMS on 11.11.2026 17:23

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