By Green Tiger Markets

A cash-settled forward market brings transparency and stability to the Philippines’ electricity sector—if regulators voice their support

Contracts that hedge, not haul

The challenge of electricity markets is that electrons do not travel well across time. Supply and demand must match instantaneously, and generation cannot be stored at scale—at least, not cheaply. But price risk can be.

In other foreign electricity markets, risk is routinely managed using cash-settled forward contracts—financial instruments allowing participants to lock in future prices, without committing to a physical delivery. The Philippines electricity market, burdened by volatility and opaque bilateral contracting, would do well to follow suit.

Those same financial instruments allow both a generator to hedge the price it will receive next quarter, and a large consumer to fix costs for budgeting. Rather than exchanging electricity, parties settle the difference between the agreed forward price and the market price over the contracted period of delivery. The benefit: price certainty without logistical constraint.

This is not speculation—it is risk management. And the Philippines urgently needs to adopt mechanisms to manage risk better.

Why the status quo isn’t working

As discussed in my piece on 21 April, the country’s reliance on the Wholesale Electricity Spot Market (WESM) leaves participants dangerously exposed. Spot prices frequently spike during periods of tight supply or transmission constraints. Long-term bilateral contracts exist, but they are negotiated privately, lack standardization, and often do not reflect real-time market conditions. 

The need for a liquid, centralized marketplace for forward price discovery has never been more acute. Without it, market participants on both sides of the market are forced to fly blind. Without clear signals of future prices, it becomes difficult to make sound investment decisions or enter into competitive supply agreements. The result is a system where risk is not shared or priced—but simply absorbed by consumers in the form of price shocks.

Cash-settled forwards: low-friction, high-impact

Cash-settled forward hedging is especially well-suited to electricity. Physical delivery is complicated by the real-time nature of grid operations, regulatory approvals, and locational constraints. But price exposure is universal.

A financially settled contract, referenced to a well-defined market index (such as WESM’s regional spot price), allows market participants to transfer price risk efficiently. Generators can hedge their revenue exposure. Retail electricity suppliers (RES) and large industrial users can secure price certainty. Even government procurement could benefit from hedging predictable loads.

Importantly, these contracts don’t require changes to grid dispatch or power delivery. They operate alongside existing physical contracts—complementing, not replacing, physical procurement.

What’s missing? A real market.

Cash settled forwards (or Contracts for Difference) are not new products for Philippine companies in the energy industry. What the Philippines historically lacked is an active, trusted marketplace where such contracts can be standardized, traded, and transparently priced. 

Today, most risk is managed—if at all—via bilateral hedges, often on non-standard terms and limited tenors. There is no visible forward curve. Pricing data is proprietary. And because deals are bespoke, liquidity is shallow and credit risk is high.

A trading platform, such as the Green Tiger Markets’ marketplace, can change that. By standardising contract terms, referencing trusted indices, and facilitating anonymous trading with pre-approved counterparties, we have been able to:

• Promote price discovery, producing forward curves visible to all;
  
• Deepen liquidity, making it easier for buyers and sellers to enter and exit hedges;
  
• Enable competitive hedging for market participants who otherwise face limited options.
  

The role of regulators: catalyze, don’t constrain

For a marketplace like Green Tiger Market’s to take root, regulatory support is essential—not to dictate prices or participants, but to create the conditions under which transparency and confidence can grow.

That means:

• Recognising cash-settled forwards as legitimate instruments for compliance and procurement planning;
  
• Requiring utilities to disclose hedge ratios and hedging strategies;
  
• Supporting the development of reference indices based on existing WESM price data;
  
• Allowing or incentivising public and private entities to hedge via multiparty platforms, rather than bespoke bilateral deals.
  

Just as importantly, regulators must be clear in expressing their views that financial hedging is a prudent approach to risk management. It is not speculative. Used responsibly, cash-settled contracts reduce volatility, lower systemic risk, and ultimately deliver more stable prices to end-users.

A marketplace for managing risk, not predicting it

Cash-settled forward trading will not make load forecasts more accurate or power plants more reliable. It does not predict the future. What it does is make the cost of uncertainty visible—and manageable.

As the Philippines faces rising demand, tightening reserves, and ambitious renewable energy targets, the need for capital investment grows. But capital demands confidence. A transparent market for cash-settled forward contracts gives investors, developers, retailers and regulators the price signals they need to make rational, timely decisions.

It is time to embrace tools to manage price risk—efficiently, transparently, and fairly. In electricity, the future can’t be stored. But it can be priced. And traded.

“We’re excited to share how the Green Tiger Marketplace gives you certainty against risk or surprises. Let us show you how we can help.”

This article was originally published on GreenTigerMarkets.com.