Power

Accounting staff deal with these contracts when applying hedge accounting, and systems staff when managing the trading unit of each contract month.

How the price of electricity moves when it cannot be stored

Unlike other commodities, electricity is hard to store. To keep the power system running, generation (supply) and consumption (demand) must be equal in every 30-minute period, which is known in Japan as the principle of simultaneous balancing. As a result, there is no arbitrage through storage between the current spot price and the price of futures for a future period¹. The general relationship between futures and spot prices (storage costs and the convenience yield) is covered in Overview of Commodity Derivatives.

The spot market price is set every 30 minutes by the balance between demand and the available generation at that time. After plans are set the day before, demand may rise because of hot weather or a power plant may stop because of an accident. Retail electricity suppliers and generators can then buy what they are short of on the intraday market². After the full liberalization of electricity retailing in April 2016, trading on the spot market grew, and as of February 2025 it accounted for about 30% of Japan's total electricity demand. At the same time, with the expansion of renewable energy and a tighter global supply and demand balance for liquefied natural gas (LNG), spot prices have at times moved sharply and suddenly³. Both generators, which sell electricity, and retail electricity suppliers, which buy electricity and sell it to households and businesses, therefore need to hedge against price changes.

The JEPX spot market and area prices

According to the January 2019 edition of the trading guide, the Japan Electric Power Exchange (JEPX) is a membership exchange for trading physical electricity. One requirement for trading members is to be a business that handles physical electricity and has a contract to transmit and receive electricity over the power grid. There is also a net assets requirement⁴. The core of JEPX is the day-ahead market (the spot market), which trades electricity delivered the next day. There is also an intraday market used for later adjustments. Generators sell the part of their planned generation that has no buyer yet, and retail electricity suppliers buy the amount they are short of against their demand forecast².

The spot market divides each day into 30-minute periods and trades them as 48 products. The trading unit is 0.1 MW (50 kWh over 30 minutes), and prices are quoted in yen per kWh in steps of 0.01 yen⁵. Bidding closes at 10:00 every day, and JEPX calculates the next day's trades on the same day⁶. Participants bid without seeing other participants' bids. After bidding closes, JEPX combines all buy and sell bids and sets the clearing price and volume where the supply and demand curves cross. Every participant trades at this single clearing price, regardless of the price it bid (a blind single-price auction)⁷.

The price calculated from all bids nationwide is called the system price. However, the transmission lines connecting regions (interconnectors) can carry only a limited amount of power. When the flow would exceed that limit, JEPX recalculates separately, for example for eastern and western Japan, and trades are completed at each region's clearing price (the area price). This is called market splitting⁸. Power futures use these area prices as the basis for settlement.

Power futures on Tokyo Commodity Exchange and EEX

Power futures on Tokyo Commodity Exchange are cash-settled futures contracts on JEPX spot market prices, with no physical delivery of electricity. The following six products are listed, one for each combination of area and time of day⁹. The underlying prices and hours are from the contract specifications for monthly contracts¹⁰.

Baseload covers a constant volume of electricity through all 24 hours of the day, and peakload covers the 12 hours from 8:00 to 20:00 on weekdays. Depending on the length of the period covered, there are monthly, weekly, and fiscal-year contracts⁹. The main terms of the monthly contracts are as follows¹⁰.

The trading unit equals 100 kWh (0.1 MW) of electricity per hour, added up over the covered period. For baseload in a 30-day month, one contract is 30 × 24 × 100 = 72,000 kWh, so the volume of one contract changes with the number of days in the contract month. Since July 2020, listed commodity derivatives on Tokyo Commodity Exchange have been cleared by Japan Securities Clearing Corporation (JSCC), which steps in between the buyer and seller as the counterparty for settlement¹¹. Monthly contracts were listed on a trial basis on September 17, 2019, and moved to full listing on April 4, 2022¹⁰. Participants that had opened power futures accounts grew from 13 companies when the market opened in September 2019 to nearly 200 as of December 2024, and more than 100 domestic electricity businesses actually trade³.

JSCC marks the listed derivatives it clears to market at least once a day and pays or receives the resulting variation amounts with its clearing participants¹². Marking to market means revaluing open futures positions every day, and it also happens daily between trading participants and their customers¹³. The total amount a futures buyer receives from the trade date to final settlement (including daily mark-to-market amounts) can be written as follows. Here $P$ is the final settlement price and $K$ is the contract price (both in yen per kWh). $Q$ is the trading unit of one contract (kWh), and $n$ is the number of contracts. If the value is negative, the buyer pays that amount. The seller's amounts are the same with the opposite sign.

$$\text{Buyer's total receipts (yen)} = (P - K) \times Q \times n$$

The European Energy Exchange (EEX) has also offered Japanese power futures since May 2020, with Tokyo, Kansai, and Chubu among the areas covered. Since February 2025 it has also offered monthly options for the Tokyo and Kansai areas, which settle against the average JEPX spot price for the month covered. All EEX Japanese power trades, whether executed on the exchange order book or registered through brokers, are cleared through the central counterparty ECC (European Commodity Clearing)¹⁴.

Hedging by retail electricity suppliers and generators

A retail electricity supplier buys on the spot market what it is short of against its customers' demand, so its procurement cost rises when spot prices rise. By buying power futures for the same area, period, and volume as the electricity it plans to buy on the spot market, it can fix its future procurement cost when it starts the hedge¹⁵.

Consider a hypothetical example in which Company F, a retail electricity supplier in the Tokyo area, plans to buy a constant 1,000 kWh per hour (1 MW) from the spot market next month, which has 30 days, and fees are ignored. Company F buys 10 contracts of East Area Baseload Electricity for next month at 10 yen per kWh. Ten contracts are 72,000 kWh × 10 = 720,000 kWh, the same as the volume Company F plans to buy in the month.

If next month's average rises to 15 yen, Company F pays 720,000 kWh × 15 yen = 10.8 million yen on the spot market. On the futures, it receives a total of (15 − 10) × 720,000 kWh = 3.6 million yen on the futures from the trade date to final settlement. If the average falls to 7 yen, its spot market payment drops to 5.04 million yen, while the futures come to (7 − 10) × 720,000 kWh = −2.16 million yen, so it pays 2.16 million yen. In both cases the net cost is 7.2 million yen, or 10 yen per kWh. Because of the 2.16 million yen it pays on the futures when prices fall, Company F does not benefit from the lower spot price. The table assumes that Company F buys the same volume every hour and that this volume exactly matches the futures volume.

Figure description

Company F, a retail electricity supplier, receives 720,000 kWh of electricity next month from the JEPX spot market. If next month's average price is 15 yen per kWh, it pays JEPX a total of 10.8 million yen for it. Because Company F has bought the same volume of power futures at 10 yen per kWh, it receives a total of 3.6 million yen from the central counterparty (CCP), its counterparty on the futures, from the trade date to final settlement. Its net cost is 7.2 million yen, fixed at 10 yen per kWh.

A generator sells the electricity it produces on the spot market, so its revenue falls when spot prices fall. It therefore hedges with a trade in the same direction as its future sales, that is, by selling power futures¹⁵. If it had sold the same volume of futures as in the example at 10 yen, then when the average falls to 7 yen, its spot market revenue drops to 5.04 million yen, but it receives a total of 2.16 million yen on the futures. When the average rises to 15 yen, its spot market revenue rises to 10.8 million yen, but it pays 3.6 million yen on the futures. Either way, its revenue is 7.2 million yen.

Fixed-price swaps traded over the counter

Besides exchange-traded futures, electricity prices can also be hedged with OTC derivatives agreed bilaterally between two parties. In a fixed-price swap, the parties agree on a volume, one side agrees to pay a fixed price and the other to pay the average spot price for the period, and in practice only the difference changes hands. In Company F's example, if Company F enters into a swap on 720,000 kWh in which it pays a fixed 10 yen and the counterparty pays the average Tokyo area price for next month, the net payments are the same as buying 10 futures contracts at 10 yen.

The Commodity Derivatives Transaction Act includes in "commodities" electricity traded in units of a fixed amount of electricity over a fixed period¹⁷. A transaction outside an exchange market in which the parties pay money based on the difference between the agreed price and the actual future price is an "over-the-counter commodity derivatives transaction" under the Act¹⁸.

Risks that remain after hedging

What futures fix is the cost of buying (or selling) a constant volume of electricity in the covered area through the period at the period's average price. A retail electricity supplier's actual demand changes every 30 minutes, so if prices are also high when demand is high, the actual procurement cost is higher than the amount calculated at the average price. The Ministry of Economy, Trade and Industry and Tokyo Commodity Exchange compiled a hedge accounting report in February 2025. It says that, in practice for electricity businesses, these peaks and troughs in demand are part of actual demand and carry an especially large risk of price changes¹⁹. If the futures volume is set to the lowest-demand time of day, the demand above it is left unhedged. One way to define the hedged item (the forecast transaction) is to fix the lowest volume in the period with baseload. A business can add peakload for the extra volume on weekdays from 8:00 to 20:00[^meti-test]. Even then, gaps from the 30-minute demand shape remain.

Area differences also create gaps. When market splitting occurs, area prices diverge, so if the futures area differs from the area where the business actually trades, the futures payments and the spot market payments do not offset each other⁸. And if the actual purchases or sales are smaller than the hedged volume, only the futures profit or loss remains for the difference. For a short hedge, oversupply from solar generation can leave electricity unsold even at 0.01 yen per kWh on the spot market, so the business may not be able to sell the volume it planned²⁰.

On an exchange, futures participants deposit margin¹⁰. Futures positions are also marked to market every day, and clearing participants and JSCC pay or receive the variation amounts daily in Japanese yen¹². As a result, a retail electricity supplier that hedged by buying futures has futures losses from daily mark-to-market when prices fall, even before the covered period. Its spot market purchase costs only go down once the covered period arrives, so it may need to find cash in the meantime²¹. How margin is deposited and how daily gains and losses are settled as prices move is covered in Futures Margin and Daily Settlement. If an OTC swap is a bilateral trade that does not go through a central counterparty, the party you settle with is the counterparty itself, and the risk remains that it cannot pay the difference¹¹.

Handling in systems and operations

The final settlement price of Tokyo Commodity Exchange power futures is calculated from the JEPX spot market area prices. Under the test method set out in the hedge accounting report, when you check hedge effectiveness at the time the forecast transaction is executed, you use the 30-minute spot market clearing prices for the forecast transaction. For the futures, you use the 30-minute clearing prices underlying the final settlement price¹⁶. To apply hedge accounting, you therefore need to keep the 30-minute area prices and the volumes your company bought or sold on the spot market, in addition to the contract prices and numbers of contracts for each contract month.

Notes

1. Commerce and Service Industry Policy Group, Ministry of Economy, Trade and Industry, and Tokyo Commodity Exchange, "電力先物におけるヘッジ会計適用に関する報告書" (Report on applying hedge accounting to power futures, in Japanese; February 2025), page 2, "（２）ヘッジ対象となる電力の特性" (2. Characteristics of electricity as a hedged item). ↩

2. Japan Electric Power Exchange, "日本卸電力取引所取引ガイド" (Japan Electric Power Exchange trading guide, in Japanese; January 2019 edition), pages 5–6, "取引の種類" (Types of trading). ↩ ↩²

3. Commerce and Service Industry Policy Group, Ministry of Economy, Trade and Industry, and Tokyo Commodity Exchange, "電力先物におけるヘッジ会計適用に関する報告書" (Report on applying hedge accounting to power futures, in Japanese; February 2025), page 2, "（１）電力システム改革と市場リスクへの対応" (1. Electricity system reform and responses to market risk). ↩ ↩²

4. Japan Electric Power Exchange, "日本卸電力取引所取引ガイド" (Japan Electric Power Exchange trading guide, in Japanese; January 2019 edition), page 5, "取引の準備" (Preparing to trade). ↩

5. The same guide, page 7, "取引の単位" (Trading units). ↩

6. The same guide, page 8, "入札受付時間" (Bidding hours). ↩

7. The same guide, page 9, "約定の方法" (How trades are executed). ↩

8. The same guide, page 10, "約定の方法（市場分断）" (How trades are executed: market splitting). ↩ ↩²

9. Tokyo Commodity Exchange, "商品概要（電力先物）" (Overview: Electricity Futures, in Japanese; updated May 28, 2026). An English version is available: "Overview" (updated April 13, 2026), which does not describe JJ-Link. ↩ ↩² ↩³ ↩⁴

10. Tokyo Commodity Exchange, "制度概要（月間物取引）（電力先物）" (Contract specifications (monthly): Electricity Futures, in Japanese; updated April 13, 2026), the tables for "ベースロード電力" (Baseload Electricity) and "日中ロード電力" (Peakload Electricity). An English version is available: "Contract Specifications (Monthly)" (updated April 13, 2026). ↩ ↩² ↩³ ↩⁴

11. Japan Securities Clearing Corporation, "JSCCとは" (About JSCC, in Japanese), "沿革" (History) (the July 2020 merger with Japan Commodity Clearing House Co., Ltd. and the start of clearing for listed commodity derivatives on Tokyo Commodity Exchange and other exchanges) and "「清算機関」の機能" (The functions of a clearing house). ↩ ↩²

12. Japan Securities Clearing Corporation, "リスク管理 証拠金" (Risk management: margin, in Japanese; as of December 18, 2024), the second paragraph and note 1 for futures and options in "各清算業務における証拠金算出スケジュール" (Margin calculation schedule for each clearing business). An English version is available: "Margin" (as of December 18, 2024). ↩ ↩²

13. Japan Exchange Group, "値洗い（用語集）" (Glossary: marking to market, in Japanese). ↩

14. European Energy Exchange AG, "Japanese Power Market," the "Japanese Power Futures," "Order Book Trading," and "EEX Japan Power Options" sections. ↩

15. Commerce and Service Industry Policy Group, Ministry of Economy, Trade and Industry, and Tokyo Commodity Exchange, "電力先物におけるヘッジ会計適用に関する報告書" (Report on applying hedge accounting to power futures, in Japanese; February 2025), page 3, "（３）ヘッジ手段となる電力先物とヘッジ会計" (3. Power futures as hedging instruments and hedge accounting), and page 18, "② 事前テスト" (2. Prospective test) (long hedges and short hedges). ↩ ↩²

16. The same report, pages 18–19, "② 事前テスト" (2. Prospective test) to "⑤ 事後テスト" (5. Retrospective test) under "（１）電力ヘッジに対するヘッジ会計適用" (1. Applying hedge accounting to power hedges). ↩ ↩² ↩³

17. "商品先物取引法" (Commodity Derivatives Transaction Act, in Japanese), Article 2, paragraph 1, item 4. An English translation is available: "Commodity Derivatives Transaction Act" (Japanese Law Translation, https://www.japaneselawtranslation.go.jp/en/laws/view/3191/je); it reflects amendments only up to Act No. 86 of 2012. ↩

18. "商品先物取引法" (Commodity Derivatives Transaction Act, in Japanese), Article 2, paragraph 14, item 2. An English translation is available: "Commodity Derivatives Transaction Act" (Japanese Law Translation, https://www.japaneselawtranslation.go.jp/en/laws/view/3191/je); it reflects amendments only up to Act No. 86 of 2012. ↩

19. Commerce and Service Industry Policy Group, Ministry of Economy, Trade and Industry, and Tokyo Commodity Exchange, "電力先物におけるヘッジ会計適用に関する報告書" (Report on applying hedge accounting to power futures, in Japanese; February 2025), page 10, "② 期間中の合計数量（期間平均数量）に合せた箱型" (2. A box shape matched to the total volume for the period (the period-average volume)). ↩

20. The same report, page 5, "【課題２】ヘッジ対象の予定取引の適格要件（事前テスト）" (Issue 2: Eligibility requirements for forecast transactions as hedged items (prospective test)). ↩

21. Japan Electric Power Exchange, "日本卸電力取引所取引ガイド" (Japan Electric Power Exchange trading guide, in Japanese; January 2019 edition), page 10, "清算決済（買い代金支払，売り代金受領）について" (Clearing and settlement: paying for purchases and receiving payment for sales). ↩ ↩²

22. Commerce and Service Industry Policy Group, Ministry of Economy, Trade and Industry, and Tokyo Commodity Exchange, "電力先物におけるヘッジ会計適用に関する報告書" (Report on applying hedge accounting to power futures, in Japanese; February 2025), page 3, "（３）ヘッジ手段となる電力先物とヘッジ会計" (3. Power futures as hedging instruments and hedge accounting). ↩