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Glossary · Energy industry & energy transition

Collateral

Collateral collateral Clearing electricity market futures market risk margin

Collateral is security provided by a market participant so that its financial obligations arising from trading, supply or hedging transactions are covered. This applies even if the participant itself becomes insolvent or prices move sharply. In electricity and gas trading, this mainly means cash, high-quality bonds, bank guarantees and, in some cases, emission allowances. Which assets exactly qualify is determined by the counterparty or the clearing house. Collateral is not an energy carrier, not a component of the electricity price and not a technical reserve. It is purely a financial instrument for risk protection.

Why collateral is needed in the electricity market

There is often a long period between the conclusion of a contract and delivery. Electricity is not only traded in the short term on the spot market. It is often hedged months or years in advance via the futures market, via bilateral supply contracts or via a Power Purchase Agreement. Market prices can change significantly before delivery. As a result, one contracting party has an economic advantage over the other long before the first kilowatt is delivered, and thus a default risk. An example: A utility has bought electricity for the coming year at 80 euros per megawatt hour, and the market price rises to 200 euros. If the seller goes bankrupt, the utility would have to buy again at the high price. Collateral is intended to cover this counterparty risk financially on an ongoing basis, rather than only addressing it after a default.

Clearing and bilateral transactions

In exchange-traded and centrally cleared transactions, a clearing house steps in as the central counterparty between buyer and seller. In European energy trading, this is, for example, European Commodity Clearing (ECC), based in Leipzig. It assumes the default risk and guarantees payments to the other participants if a clearing member defaults. The main means for this are the initial margins required for open positions. On the futures market, ECC calculates these requirements using the SPAN method, which is designed for a liquidation period of at least two days. On the spot market, ECC measures credit risk around the clock in near real time. These requirements must be covered by collateral at all times.

Over-the-counter (OTC) transactions can also be secured bilaterally, usually through master agreements with collateral annexes. What this looks like in practice depends on the contract, as well as on the creditworthiness of the parties, the product, the term and the volatility. In the EU, the European Market Infrastructure Regulation (EMIR) governs, among other things, which collateral central counterparties may accept. Non-financial companies below certain clearing thresholds, by contrast, are exempt from the obligation to clear and collateralise OTC derivatives.

Distinction from margin, credit line and equity

Collateral and margin are often equated but are not the same thing. A margin is the calculated security requirement for a position. Collateral is the asset used to meet this requirement. There are two types of margin: Initial margin covers possible future losses during the time until a defaulted position has been closed out. Variation margin settles the daily valuation gains and losses according to the mark-to-market principle. A credit line, by contrast, is merely a commitment to provide money up to a ceiling. Equity describes the financial substance on the balance sheet. A company can be sound in balance sheet terms and still get into difficulties if it has to post high collateral in an accepted form at short notice.

Which assets are accepted

The example of ECC shows how narrow the rules are (as of the website, retrieved in November 2026):

  • Cash: euros for all types of margin and all types of members. Certain Direct Clearing Participants may additionally post pounds sterling.

  • Bonds: only highly liquid securities that are eligible at the ECB and at Eurex Clearing. They are valued with discounts, so-called haircuts, which come from Eurex Clearing. Own issuances are excluded because of wrong-way risk. Wrong-way risk means: The collateral loses value precisely when the collateral provider defaults.

  • Emission allowances (EUAs): After a discount, they are credited as margin, up to a maximum of 20 percent of a participant's total margin requirement.

  • Bank guarantees: permitted in certain constellations. ECC does not accept shares or gold.

Price risk versus liquidity risk

In hedging, one risk is exchanged for another. A producer who sells its future production on the futures market secures a fixed revenue. If market prices then rise sharply, its short position loses value on paper. It must then pay variation margin, even though it later generates the electricity itself at the higher market value and the overall price remains economically secured. For the buyer, such as a utility with a long position, variation margin flows in when prices rise. It faces margin calls mainly when prices fall. For both sides, the following also applies: With higher volatility, initial margins usually rise. Such additional demands are called a margin call and often have to be paid within one day. How much liquidity is tied up therefore does not depend on whether a company ultimately wins or loses. What matters are the valuation and margin call rules during the term.

Experiences from the 2022 energy price crisis

In 2022, prices and their fluctuations on energy markets rose sharply. The European Commission found that this put non-financial counterparties in particular under liquidity pressure, because they typically hold less liquid assets. Some companies therefore reduced their hedging or shifted to less collateralised OTC trading. As an emergency measure, Delegated Regulation (EU) 2022/2311 temporarily extended the list of eligible collateral at EU clearing houses: Non-financial clearing members were allowed to use uncollateralised bank guarantees, and public guarantees were permitted for all counterparties. The rule entered into force on 29 November 2022 and was initially limited to twelve months. Delegated Regulation (EU) 2024/818 extended it until 7 September 2024.

This has been permanently regulated since EMIR 3, that is, Regulation (EU) 2024/2987. It amended Article 46 EMIR so that clearing houses may accept public guarantees, guarantees from public banks and guarantees from commercial banks as collateral, even if uncollateralised. This applies to non-financial clearing members and to non-financial clients of clearing members. Clearing houses are entitled to do so but not obliged. The precise conditions, such as concentration limits, credit quality requirements and rules against wrong-way risks, are to be set by ESMA in regulatory technical standards. In February 2026, it published a draft for consultation.

Costs and distributional effects

Collateral is not free protection. Cash posted as collateral is missing for investment, procurement or ongoing operations. Bank guarantees tie up credit lines and incur fees. Securities are only counted with a discount. This gives rise to financing and opportunity costs, even if the collateral is never drawn. Not only speculative traders are affected, but also municipal utilities, industrial companies, direct marketers and operators of renewable plants with long-term offtake contracts. Large companies with good credit lines can post collateral more easily than smaller providers. Collateral therefore does not eliminate default risk. It translates it into requirements for liquidity, creditworthiness and collateral quality.

Significance for security of supply

For security of supply, collateral is only indirectly important. Collateral does not generate electricity and does not replace firm capacity. However, it helps determine whether market participants can fulfil their role in trading and supply stably. If many companies have to post high collateral at the same time, liquidity can become scarce. Then hedging becomes more expensive, trading volumes fall, or state aid becomes necessary. A power plant or a storage facility can support the ability to deliver. However, it only counts as collateral if it is contractually recognised as security, valued and realisable. At central counterparties, this is practically not the case for physical assets. Those who use the term precisely separate price risk, default risk and liquidity needs from one another.

Sources

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Edited by eCMS on 11.11.2026 17:48

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.