Up until now, fixed rate contracts have been hedged with financial contracts where the electricity supplier purchases the same amount of electricity in the futures market as they have sold to the customer.
The only thing that is fixed for the customer here is the price - so they are free to consume as much or little as they wish - leaving the supplier with the volume risk, which means they must buy or sell the correct amount of power in the spot market to match the actual supply by the end of the contract.
The supplier also usually hedges their futures sales of electricity with standardized contracts listed on electricity exchanges such as Nasdaq where the volume is the same for the whole period, , whilst the end customer will consume differently over the day, the month and over the year. That leaves the supplier with another risk: the so-called profile risk.
Also, it is important for the supplier to hedge the price for the area where the customer lives or has its business, meaning they need to purchase the EPAD for that area.
Until now, volume and profile risks were something that most suppliers could calculate and get paid for, whilst the differences between the price areas in the Nordic region were typically both low and predictable. As a result, offering fixed rates to customers was not a big problem.
This has changed in the new energy market environment. High prices and high volatility, combined with large differences in prices in the different price areas, has made it difficult or sometimes impossible for the electricity supply companies to hedge their future sales of electricity due to the increased high profile and volumes risks.