EA Ireland

What is Hedging?

Wholesale price is not immediately reflected in customer price; indeed wholesale price changes every 30 min and can show huge variation depending on the time of the day (peak (5pm-7pm) versus non-peak (2am-4am). Customers therefore received a blended price that takes account of the daily, weekly and monthly fluctuations in price, the cost of generation and the financing of these costs.


These financing costs include the costs to buy electricity and gas in advance on long-term contracts at fixed prices in order to try and avoid the volatility of prices.  This is called hedging into the future, and it helps maintain steady prices for consumers if there are external shocks in the wholesale market. When the prices dramatically rose in 2021, consumers were protected from the worst of the sharp price increases as it took some time for them to feed into higher costs for customers. For example, while gas prices in that period rose by 1500% the wholesale cost of electricity rose by 300%[1].  Likewise, now that prices have lowered, there is a lag before customers will feel the effects. Suppliers are locked into higher prices due to hedged positions negotiated during a period of high prices sometimes 1-2 years previously.   The overall effect of hedging is a smoothing out the highs and lows of price volatility to yield a more stable price for customers.

[1] Wholesale Price Index