ISSN: 2225-8329
Open access
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.
Federal Energy Regulatory Commission. (1996). Order No. 888: Promoting wholesale competition through open access non-discriminatory transmission services by public utilities. Washington, DC: FERC.
Federal Energy Regulatory Commission. (1999). Order No. 2000: Regional transmission organizations. Washington, DC: FERC.
PJM Interconnection. (2025). Markets and operations overview. https://www.pjm.com/markets-and-operations
ISO New England. (2025). How the markets work. https://www.iso-ne.com/markets-operations/
U.S. Department of Energy. (2021). The U.S. electricity system and markets (DOE Energy Information Brief). Washington, DC: DOE.
U.S. Energy Information Administration. (2023). U.S. renewable energy factsheet. Washington, DC: EIA.
North American Electric Reliability Corporation. (2022). Reliability Issues Steering Committee report on energy transition. Atlanta, GA: NERC.
Hogan, W. W. (2002). Electricity market restructuring: Reforms of reforms. Journal of Regulatory Economics, 21(1), 103–132. https://doi.org/10.1023/A:1013615727133
Mansur, E. T. (2007). Measuring welfare in restructured electricity markets. Review of Economics and Statistics, 89(3), 523–538. https://doi.org/10.1162/rest.89.3.523
Electric Reliability Council of Texas. (2025). Review of Winter Storm Uri 2021. https://www.ercot.com/
Joskow, P. L. (2008). Lessons learned from electricity market liberalization. The Energy Journal, Special Issue, 9–42.
PJM Interconnection. (2025). Financial Transmission Rights (FTRs) market. https://learn.pjm.com/markets-and-operations/ftr.aspx
California Independent System Operator. (2023). Congestion Revenue Rights (CRRs) market. Folsom, CA: CAISO.
Commodity Futures Trading Commission. (2022). Energy and Environmental Markets Advisory Committee reports. Washington, DC: CFTC.
Hledik, R., Chang, J., & Lueken, R. (2018). The role of financial transmission rights in U.S. power markets. The Brattle Group.
Federal Energy Regulatory Commission & North American Electric Reliability Corporation. (2021). Report on the February 2021 cold weather event. Washington, DC: FERC & NERC.
Federal Energy Regulatory Commission. (2018–2019). GreenHat Energy default proceedings (Docket Nos. EL18-170). Washington, DC: FERC.
Harvey, S., & Hogan, W. W. (2000). Market power and market simulations (Working Paper). Harvard University.
Woo, C. K., Horowitz, I., Moore, J., & Pacheco, A. (2011). The impact of wind generation on the electricity spot market. Energy Policy, 39(7), 3939–3944. https://doi.org/10.1016/j.enpol.2011.04.033
ISO/RTO Council. (2024). The state of U.S. electricity markets 2024. Washington, DC: ISO/RTO Council.
CME Group. (2023). Electricity futures and options: Contract specifications and market overview. https://www.cmegroup.com
The Brattle Group. (2018). The role of financial transmission rights in U.S. electricity markets. Washington, DC: The Brattle Group.
Ghori, S., Rafiq Ahmed, G., Mumtaz Ali, M., Nabi, M. G., Shaikh, M. A., Surahio, M. K., & Ali, E. (2025). Occupational exposure and physiological risk perception among workers in the textile sector: A cross-sectional study from Hyderabad, Pakistan. Journal of Medical and Health Studies, 6(3), 125–138. https://doi.org/10.xxxx/jmhs.2025.6.3.125
Ghori, S., Rafiq Ahmed, G., Ali, S. E., & Shaikh, M. A. (2025). Evaluating case-based learning in physiology: A study at Indus Medical College. Journal of Medical and Health Studies, 6(3), 101–107.
Ghori, S., Rafiq Ahmed, G., Shaikh, M. A., Surahio, M. K., & Ali, E. (2025). From comparative risk assessment to multi-criteria decision analysis and adaptive management: A review. International Journal of Academic Research in Psychology, 12(1), 1–19.
Khatoon, M., Ghori, S., Ali, E. & Motaber., A, S (2025). Strengthening internal controls and fraud risk management in utility companies: Lessons from K-Electric. International Journal of Academic Research in Public Policy and Governance.
Khatoon, M., Ghori, S., Ali, E. & Motaber., A, S (2025). Integrated risk assessment framework for enhancing operational resilience in utility companies: A case study of K-Electric. International Journal of Academic Research in Economics and Management Sciences, 14(3).
Shaikh, M. A. S., Nebhwani, M., Soomro, A. S., & Gopang, M. (2016). Awareness of workplace hazards among workers in textile mill: A pilot study. In Proceedings of the 2nd Multi-Disciplinary Student Research Conference 2016.
Khatoon, M., Ghori, S., Shaikh, E. A., & Shaikh, M. A. (2025). Developing the U.S. Electricity Financial Market: Strategic Design of Derivatives for Risk Management and Market Stability. International Journal of Academic Research in Accounting, Finance and Management Sciences, 15(4), 1–7.
Copyright: © 2025 The Author(s)
Published by HRMARS (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode