Future of Energy Trading?
Hey all,
I am a recently graduated electrical engineering (power systems) student with an interest in energy trading. During college, I interned at a small utility for two years as an analyst in their power marketing group, and gained a lot of great experience involving energy markets, energy scheduling, and analysis of operational strategies. I really enjoyed following the markets and devising possible trading strategies, although our power marketing group was mainly focused on managing risk and maximizing operational revenue rather than actual trading.
After graduating, I took a job at a consulting firm doing economics and strategy consulting for utilities. I've been gaining great experience on the business/economics side of the utility industry, and have been developing skills (transmission modeling, power flow analysis, production cost modeling, energy market knowledge) that a lot of energy trading positions seem to seek.
I've been seeing job postings for trading positions at utilities and trading firms, and have been getting the itch to get back into the power marketing/trading realm again. I am curious if anyone has insight on the future of energy trading - I know that consulting is a safe career with a relatively stable future, but I don't know so much regarding the future of energy trading.
I would be very appreciative if there is anyone in the field who could give some general thoughts!
Kind of depends where you go. As you mentioned utilities are generally more focused on risk mitigation, Asset Management and hedging. Generally speaking at a utility you are pretty damn secure, particularly if you are on a real-time desk. When you get into the cash and term trading you are in a marginally riskier position as you may start actual trading but still fairly safe. Most often you will just be executing long term hedge plans or on modelling and analytics from other departments with a small opportunity to spec along the way. Whichever direction your book goes it its easy for management to just write it off as the costs/benefits of hedging rather than your performance.
If you go to a spec shop or hedge fund things are a bit different. Comp is generally based on the results of your trade book. You are only as good as your trade book results and if you aren't earning them money then you might not be around long.
If you want safety and a career go to a utility. Far more exit opportunities and stability but probably less comp and risk tolerance although there are exceptions.
Thank you for your reply - I really appreciate your advice! Yeah, the utility desk I was at was pretty low risk, and there wasn't the pressure to perform that would probably be seen at a desk that specializes in energy trading
I know this is a pretty poor and open-ended question, but what kind of compensation could be expected in energy trading say ~5 years down the road? Are there concerns over energy markets being less conducive to trading opportunities, with depressed natural gas prices and increased wind/solar penetration lowering LMPs? What about regulatory changes affecting the energy markets? Do you think there will still be opportunity to make good money in energy trading in the long run?
What kind of exit opportunities exist in energy trading? Do exit opportunities vary between trading at a utility desk (Exelon, NextEra) and trading at a more specialized desk (EDF Trading, Tenaska)?
Most common exits are other commodities they have exposure to (fuels/gas, RECs, environmental products etc), origination, BD, forecasting/analytics/strategy and many more.
5 years down the road? Hard to say. Renewables lower LMPs but also increase volatility. It is pretty much impossible to hedge renewable so all that volatility is managed in real-time. Cheap gas lowers price which hurts hydro, coal, nuc etc but that's more of a and BD problem, is portfolio optimization on short-run costs. All that capex is sunk and irrelevant once an asset hits the trading desk to manage.
I haven't been in the game long enough to talk long term evolution but I'd say it seems there is less and less appetite for risk. Lots of the market makers have exited and most of the people left are just there to manage their assets and exposure. It seems long-term contracting is increasing and taking liquidity out the forward markets which I think is the bigger risk. Not all markets are alike though so depends highly on the region you're looking at.
As with everything else comp varies with company/portfolio/responsibility. The guy working at some local PUD won't be making the same as a guy managing a 15GW portfolio of generation.
If you look at the utility route figure out why they are in the market. Are they there to trade, take on merchant risk and make money or there simply to hedge their volume and attempt to manage some DAM/RT or basis risk they couldn't contract for.
To answer your question, compensation varies shop to shop. Utilities offer stability of paycheck, job, and usually solid benefits. I've been on the regulated side and unregulated side and my experience has been that salary levels seem pretty consistent. 75-100k for junior front office roles and 120-175k for Senior front office roles. Bonus potential is where there is deviation. I'd say a 15-30% of base salary bonus is fairly consistent on the reg. side. The unregulated side has way more deviation and will be tied to performance. I've seen bonuses ranging from 0 to millions. Again, it's all about what you want out of your career. Do you want the added stress, the hours, and the grind of a trade shop job?
As far as prospects for the industry, I think the industry has seen better times, but there are a lot of smart people throwing money at starting desks. I'm sure you've heard the saying, "the cure for low prices is low prices." The market is way too dynamic to lull for long.
I don't know too many people that leave the industry all together. You typically see folks exit high stress roles to ones on the asset side or consulting. It's a huge network and no one really ever leaves.
I think it really depends on your risk appetite. Where do you want to see yourself in 5 years. Not being too familiar with the power market (although I've noticed it's been tougher and tougher each year to make money in that market), I tend to agree with west.power on stability being with the utility. Still, markets are cyclical and there will always be a need for market makers. You will get exposure to a more sophisticated approach if you go to a trading shop versus utility. I'd weigh importance of team/manager at the trade shop more heavily as their success/approach will likely determine how you start your trading career.
west.power - I dabble in a bit of Mid-C but mostly Aeco/sumas/malin . Would you rather be at a utility?
I'm just a real-time pleb at an IPP, but one with a relatively high risk appetite. I feel it is a good middle ground for now. Definitely see the benefits in both paths though.
In east markets, we are are seeing all time low prices and it's currently the hardest it's ever been to make money. I'm not sure if it is short term or not since this winter has been horrible for power demand with the warm temps, but structurally there are tons of new gas plants being built in the northeast there are killing the markets. This industry is changing so quickly, at a faster pace than anyone could have imagined. There is no more transmission congestion that was a very widely traded product, many people made millions a year trading that product. Energy storage could potentially kill volatility, renewables will generally bring in lower prices but will likely bring in more volatility as renewable output is much less table than those from fossil fuel plants. And gas prices are still low, which sets the margin in a lot of markets. Electric Vehicles demand growth could potentially bring in a ton of more demand in the next 10 or more years, depending on how widely adopted they become. Basically, it is next to impossible to predict the fate of the markets going forward. It is too dependent on technology, energy storage, fuel prices, transmission congestion, regulation, gas markets, etc.
February should be averaging $50-60s, we may be below $30 this month. There is virtually no volatility in the financial markets for the balday contract right now, you would be lucky if you can make $2-3 a day. There are times when the market would sometimes move $20 or more in a day before. Power Trading has a higher cost of capital and barrier to entry than other shops, physical trading has even more barriers than financial. If you want to trade oil and gas, all you need is a $100 and you can start trading some etfs. Power is a very niche market, and your cost to trade is over $200k when all is said and done. The point is, with oil and gas you have a ton of guys that have no idea what they are doing trading these products. Power traders generally know what they are doing as you don't blindly commit all of those capital and start learning on the go, unless you are at an established shop.
energy trading needs Chaos. This business doesn't produce value when things are stable.
well said
The golden age of energy trading is probably past us. Back in the early 2000s, as long as you knew about the industry you could probably make a lot of money. It was a new and nascent market, and had tons of volatility and inefficiency. Today, those same people never left and have been trading for the past 15-20 years, and are struggling big time to make some good money. Markets are way more efficient now, but it is honestly too hard to predict if this will continue in the future.
The same hedgers, retailers and even spec players do dumb stuff. We'll be OK.
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