How to Trade Electricity

Why trading electricity is different

Electricity has several properties that make trading it very unlike trading other commodities. That is, being an expert in trading corn or gas will not prepare you well for trading electricity. This is true for two, related reasons. First, there is no known way to store wholesale amounts of electricity efficiently. There are systems that can power a house during a blackout, but none for a county, much less a state.

The EU is working on this issue since it is central to the push for renewable energy, such as solar and wind power, which are inherently intermittent. The main strategies under consideration are:

• Using excess electricity to pump water to a high reservoir and retrieve the energy by water turbines.
• Generate hydrogen by electrolysis and retrieve the electricity by burning the hydrogen. I mention these because they are potentially invest-able.

The second, related reason is that electricity must be generated at the time that the demand occurs and consumed at that time. This means that there is a large and extremely complex system that controls and balances the supply of electricity according to demand. There are wholesale traders of electricity, who buy from generating plants and sell to regional distribution centers. But these are intermediaries that have passed some very strict tests and scrutiny because the responsibilities that they must carry out, and the consequences of mistakes, are serious.

Another property of electricity that makes trading it difficult is that it has numerous, often very different, prices at the same time at different places. The retail price of electricity varies by geography and usage and even by time of day. The same is true for any commodities, but the variations are much larger for electricity.

Why trade electricity futures

There are a lot of reasons to trade electricity futures.

• The demand for electricity is growing. This is especially true in less developed but high population areas with high industrial growth, which tend to grow rapidly as people move from rural centers to big cities to find new jobs. In fact, those are the areas where trading electricity tends to be most lucrative.
• The EIA estimates that electricity demand will grow by 3.4% per year from now through 2026. Compare that to the growth of 2.3% in 2023.
• Alternative (that is, “green”) energy sources will continue to add electricity to the grid, increasing supply. That growth will lead to lower prices as the technologies mature. We will talk more about renewable energy shortly.
• Diversification of your portfolio is another reason to consider trading electricity, although overly correlated items should be avoided.
• Probably the best reason is that the electricity market is very volatile. Traders thrive on volatility. Here is a chart of the price of a megawatt from one of the regional electricity generators (PJM). Note how much the price varies!

Figure 1: The cost of one megawatt from PJM ISO

Where to trade electricity futures

If you only want some exposure to electricity, there are a few indirect ways to do so. There are some energy ETFs that include electricity, but some do not; you must look at the components of any ETF you are interested in. Another possibility is to trade in power plants, but those also contain maintenance, regulatory charges, and other expenses. Most electric utilities are publicly traded but are highly regulated and contain much extraneous elements. If you want pure exposure to electricity prices, there are a few tickers in NYMEX, but they are not very liquid. The place to find liquid tickers is the InterContinental Exchange (ICE). Be aware that CFDs are not allowed in the US.

There are many more details that could be added to this, and will be addressed in later issues, as well as potential price directions.