An Insight into Trading in Electricity Commodities

Commodities in the Electricity Market

Power - Power is the basic unit of electricity, and is measured in kilowatt-hours (kWh). Traders can buy and sell power in the wholesale market, which is where generators sell electricity to distributors and retailers. These wholesale prices are used to calculate retail prices for consumers.

Energy - Energy is a measure of the amount of electricity that will be delivered over a certain period, usually one hour. Traders can buy and sell energy in the wholesale market as well.

Ancillary Services Commodities - Ancillary services are used to maintain the reliability of the grid, such as by providing frequency response and voltage control. They include regulation services (responding to grid imbalances), capacity services (responding to the loss of supply), and other services. Traders can buy and sell ancillary services commodities in the wholesale market.

Renewable Commodities - Traders can buy and sell certain energy commodities generated by renewable sources, including solar, wind, hydropower, and biomass.

Network Capacity Commodities - Network capacity commodities are used to keep the grid balanced and include interruptible loads and non-spinning reserves. Interruptible loads (also known as curtailable loads) are energy commitments that have been agreed to be temporarily disconnected when the grid is overloaded. Non-spinning reserves are generators that are ready but not actively generating power. Traders can buy and sell network capacity commodities in the wholesale market.

Customers Commodities - Utilities can buy and sell customer loads, which refers to the amount of energy each customer is expected to use during a certain period.

Power Markets

Power markets are where generators sell electricity to distributors and retailers. Different regions have different rules for how this market works, but in general, generators bid in prices at which they are willing to sell electricity, and distributors buy from the lowest-cost generators. When generators bid in their prices, they do so based on assumptions about how much demand there will be, and what other generators will be willing to sell at. The wholesale prices of power are used to calculate retail prices for consumers. In the United States, the power markets are administered by the Energy Policy Act of 2005 or EPA. This act sets rules for how distribution companies buy power, and how generators sell power to them. Power markets in other countries will have a different set of rules, but will likely be based on similar principles.

Energy Commodities

Energy commodities are a measure of how much electricity will be delivered over a certain period, usually one hour. When a firm buys energy commodities, they’re essentially agreeing to buy a certain amount of energy at a certain time. When they sell energy commodities, they are committing to sell a certain amount of energy at a certain time. Energy commodities are used in the day-ahead and real-time markets, but not the balancing market. The day-ahead market is used to buy and sell electricity for the next day. The real-time market is used to buy and sell electricity for immediate delivery. The balancing market is used to balance supply and demand, but energy commodities are not traded there.

Ancillary Services Commodities

Ancillary services are used to maintain the reliability of the grid, such as by providing frequency response and voltage control. They include regulation services (responding to grid imbalances), capacity services (responding to the loss of supply), and other services. Ancillary services are traded in both the day-ahead and real-time markets. Regulation services are intended to keep the frequency of the grid between 50 and 60 Hz. If the frequency starts to fall below 50 Hz, regulation services kick in to boost it back up. If the frequency starts to climb above 60 Hz, regulation services are used to bring it back down. Capacity services are used to respond to sudden loss of supply by bringing more generating capacity online. Utilities can purchase capacity services to ensure they have enough supply to meet peak demand. Other services include energy re-dispatch and spinning reserves. Energy re-dispatch means transferring energy from a plant that’s operating below capacity to a plant that has extra capacity. Spinning reserves are generators that are running but not actively generating power, ready to provide capacity services if needed.

Renewable Commodities

Renewable commodities are generated by renewable sources, including solar, wind, hydropower, and biomass. They are traded in the day-ahead and real-time markets. Solar generation follows a predictable pattern as the sun rises and sets each day. Solar generation usually peaks in the middle of the day and falls off significantly when the sun sets, but it can vary based on weather conditions. Solar generation can be lower than expected if it’s cloudy or rainy, or higher than expected if the sun is particularly strong. Wind generation is dependent on the weather. A high-pressure system will result in low wind generation, while a low-pressure system will result in high wind generation. Wind generation can also vary based on the time of day. Hydropower generation varies depending on the flow and volume of water in the river. Water flow is usually highest during spring, summer, and early fall. Biomass generation varies depending on the amount of biomass available for burning. It can also vary depending on the type of biomass being used.

Network Capacity Commodities

Network capacity commodities are used to keep the grid balanced and include interruptible loads and non-spinning reserves. Interruptible loads (also known as curtailable loads) are energy commitments that have been agreed to be temporarily disconnected when the grid is overloaded. Non-spinning reserves are generators that are ready but not actively generating power. Network capacity commodities are traded in the day-ahead and real-time markets. Interruptible loads are demand commitments that have been agreed to be temporarily reduced when the grid is overloaded. Utilities can purchase interruptible loads to ensure they have enough network capacity to meet peak demand. Non-spinning reserves are generators that are ready but not actively generating power, ready to provide network capacity if needed. Utilities can purchase non-spinning reserves to ensure they have enough network capacity to meet peak demand.

Managing Risk with Commodity Trading

Traders can use a variety of tools to manage the risk associated with electricity commodities, including options, futures, and derivatives. Electricity options are contracts that give the buyer the right, but not the obligation, to buy or sell electricity at a specific price at a specific time. Unlike futures, which are standardized contracts that are traded on a centralized exchange, electricity options are tailored to each specific customer. Electricity futures are standardized contracts that can be traded on a centralized exchange. Unlike options, which give the buyer the option to buy or sell electricity at a specific price at a specific time, futures are binding contracts that require the buyer to buy or sell electricity at a specific price at a specific time.

Wrapping Up

The global electricity market is complex and highly competitive. Trading in electricity commodities can be risky, but it can also be profitable if done correctly. Traders can use a wide variety of tools to manage their risk, including electricity futures, electricity options, and derivatives. To profit from trading electricity commodities, it’s important to understand the different types of commodities that can be traded, and the factors that drive demand for each type of commodity.