Developing the U.S. Electricity Financial Market: Strategic Design of Derivatives for Risk Management and Market Stability

As the United States advances its decarbonization agenda and faces rising electricity demand from electrification and data center growth, the volatility introduced by extreme weather events and increasing renewable penetration underscores the need for robust financial risk management.This paper outlines the fundamental principles of electricity financial derivatives, evaluates their performance within U.S. markets operated by regional transmission organizations (RTOs/ISOs), and analyzes lessons learned from stress events such as the 2018 PJM FTR default and the 2021 Texas Winter Storm Uri.It highlights structural and regulatory challenges in balancing liquidity, credit risk, and market resilience across diverse regional market designs.The study proposes strategic enhancements to derivative instruments including Financial Transmission Rights (FTRs), Congestion Revenue Rights (CRRs), virtual power purchase agreements (VPPAs), and hub futures aimed at improving hedge effectiveness, transparency, and systemic stability.By addressing price volatility, congestion risk, and renewable integration, these financial tools provide a pragmatic pathway for ensuring market stability, enhancing investor confidence, and supporting the U.S. transition to a cleaner and more resilient energy system.