In the electricity market, like any other market, different players will have different price risk management objectives. Many generators are option holders who do not have to produce if the price is too low. For generators, the higher the market price, the better. Less simplistically, many generators are effectively option holders. Efficient risk management must take into account this optionality.
Electricity retailing is a margin business.
Although retailers that have locked in customer prices may prefer low wholesale prices, those without committed sales may be less concerned if price increases can be passed on to customers. A good comparison is the home lending market, where lenders pass much of their interest rate risk on to borrowers. The use of derivative hedges, such as short-dated price caps, has increased in recent months. Electricity derivatives have emerged in response to demands for hedging price risk. The Sydney Futures Exchange lists electricity futures contracts, although liquidity is still quite low.