Electricity Price Shocks, Financial Fragility, and Counterparty Risk: A Dynamic Minskyan Analysis

Abstract

This study develops a dynamic framework for examining financial fragility and systemic risk in electricity markets by integrating Minsky’s Financial Instability Hypothesis with agent-based computational simulation, behavioral participant classification, scenario analysis, and stress testing. The framework conceptualizes financial instability as an endogenous process arising from changing leverage, market exposure, contractual commitments, and counterparty interconnectedness. Historical regulatory microdata from electricity-market records are used to characterize heterogeneous market participants according to financial capacity, traded energy volume, contractual structure, market experience, and network connectivity. Financial resilience is evaluated through open margin and adjusted net equity, while alternative electricity-price scenarios are used to examine potential changes in financial positions and vulnerability. The participant classification identifies distinct groups with substantial differences in financial resources, trading volumes, contracting horizons, and connectivity. Central Traders exhibit particularly high connectivity and exposure, highlighting the importance of network structure in assessing systemic vulnerability beyond individual balance-sheet characteristics. The scenario analysis demonstrates that gradual and abrupt electricity-price increases generate different financial trajectories, while the performed-price scenario follows a distinct path. The equity simulations further indicate that current financial stability can coexist with subsequent deterioration, as adjusted net equity remains comparatively stable over portions of the observed horizon while subsequent adjusted equity exhibits a more persistent decline. These results emphasize the intertemporal nature of financial fragility and the potential for accumulated exposure and contractual commitments to weaken financial resilience. The proposed framework provides a basis for monitoring margin positions, evaluating counterparty exposure, conducting price-shock stress tests, and identifying potential channels of financial contagion within interconnected electricity markets.