Trading Electric Power

sillymonkey123What are some ways to trade electricity? I know most of the power instruments are OTC but the ICE also has these tradable contracts on their exchange called "BalMal" contracts that can allow traders to speculate on electricity. What are some common type of power instruments to trade power? Are the instruments homogeneous (eg. in oil their are many different types of crude oil types, bonnie light, WTI, WCS, LLS, MARS, Brent, etc)? Is it the same in the power markets? I know contract delivery is day-ahead and is contracts are broken out by maturity (1M,2M, etc) and Peak vs NonPeak Contracts.

Electricity prices are weird they swiggle up-and-down and then spike up for no arbitrary reason. Its not like stock/bond charts that seem to trend and have some rhythmic movement. How can anyone trade electricity profitably? Electricity prices look like noise, their doesn't seem to be a pattern or trend to their movement.

Would love some info on this as well.

sillymonkey123How can anyone trade electricity profitably? Electricity prices look like noise, their doesn't seem to be a pattern or trend to their movement.

I'm not a trader, but I've built energy models for about a year -- obviously, I'm no expert.

A co-worker was an energy trader, in Houston. He left after a short time complaining that it was too difficult to trade against power producers. He also cited that this was during the Enron era so energy trading had a negative stigma at that point.

Energy prices may look like noise, but when you start evaluating specific grids it makes much more sense (although, still very complex). Some large factors in energy prices are congestion, load size, demand, weather, regulations, location, limited plant operation, etc. Every second of every day is an optimization problem for an IPP (independent power producer).

Assume an IPP in the Houston load zone of ERCOT. What happens if energy sells for 5x in the North ERCOT LZ? Does it make sense to push your energy into another grid? What happens when other regional IPPs shut down for maintenance? How many hours per year is the plant permitted to operate (is it a peaker?)? What time of the year is it? What type of plant is it? Are their price restrictions to product consumers? There are so many factors in determining how much the energy is worth to a consumer.

Generally, before a power plant is built, the IPP will do analysis to determine its levelized cost of energy. Based on the LCOE, the IPP will find an agency (government? municipality?) to purchase that energy at a set price. Most IPPs won't get financing to build their plant unless there is a purchase agreement for all the energy that a plant will produce. Feel free to read about GE Capital and how they finance an IPP with debt or an equity stake.

Sorry, I don't have more perspective on the energy trading aspect - but hopefully this helps with some of the pricing pieces from the view of an IPP.

Forward power trading is basically speculating on weather unless you take a position to cash, when operational issues can come into play. That's not to say that cash prices don't affect forward curves, but its a much slower grind than weather. Basically, the same thing as trading fixed price natty. Supply is known by most good shops, and demand is the toss-up.

In case of an interview, I think you mean "bal-mo" which would mean balance of month.

No offense, but if you believe that's noise you need to read up a bunch on the fundamentals of power trading.

You have completely inelastic supply, or damn near close to it, with a wildly fluctuating demand. Markets are regional, and if you look at the differences in consumption even between when it is and isn't raining, you'll see how demand also changes very quickly. Frequently, power is in very high demand but it takes too long to bring more capacity online, or is probably not cost-efficient to do so. You have nukes and coal plants running almost 24/7, but other plants only running a few times a month, depending on their type. Transmission issues can cause big problems, also causing those spikes.

I guess what I'm getting at is that that price action looks perfectly normal if you understand how power is generated and transmitted.