Electricity is the form of energy that powers the vast majority of the world’s consumer goods, and many industrial machines. It is produced nowadays by processing other forms of energy, such as coal and oil, or by harnessing the elements, such as can be seen in wind turbines. It is not a physical object that is tangible to humans, and thus can only be transported via cabling and wires directly into the appliances and objects which it powers.
Though electricity has been transported across distance for over a hundred years, the idea of electricity as a tradable commodity is a very recent development. Contending for the distinction of the first commodity exchange to have become involved in electricity trading is the New York Mercantile Exchange (NYMEX): electricity futures are traded there under the ticker symbol of JM. Amongst other exchanges trading in electricity are the Mumbai-based Multi Commodity Exchange (MCX), the Intercontinental Exchange, the European Energy Exchange (under the designation ‘Power’) and the Australian Securities Exchange.
As electricity is fairly unique in its qualities as a commodity, there are obviously several special features which make electricity futures appealing to traders. Electricity is in use all over the world, ensuring a massive potential market base. Another special feature is the fact that electricity requires special electrical equipment to handle storage: it is not stored in the same way as other commodities, which tend to take the form of physical raw materials. This means that electricity futures contracts contain no arrangements for transport of the product to a specified delivery point: electricity can be quickly and easily transported via the globe’s grid system, as long as final delivery of the product is required.
In addition to this, power stations must respond to supply and demand spikes instantly, which makes the market incredibly volatile. Wildly fluctuating prices are popular with traders , which explains why electricity is gaining status as a valuable product for those participating in commodity trading. Electricity also boasts the quality of being fungible, in that it can be exchanged for another item with relative ease. In this regard it is generally considered to be a liquid asset in the same way as stocks and bonds, another appealing quality. Lastly, electricity futures and electricity trading is seen as valuable as it allows other utility companies to establish how much they can charge, in the aim of increasing profit.
Electricity is produced at power stations all over the world, with demand increasing each year. A large percentage of the world has access to mains power, and this helps to exemplify the sheer size of the potential market that is available.
There are several factors that affect the price of electricity options and the value of the electricity commodity. The electricity market, as previously mentioned, is incredibly volatile and constantly in a state of flux. The supply and demand balance can shift in a matter of hours, owing to the immediate nature by which electricity must be supplied. This requires accurate predictions by utilities companies in regards to how much electricity is needed, and traders in electricity futures could stand to benefit from miscalculations. Also, as more countries improve their economies, the demand for electricity will increase, which will drive up the price of electricity futures.
Ready to Start Trading Electricity Commodities?
We recommend Plus500, who offer…
- Up to 1:50 leverage
- £20 free credit
- Smooth web-based, Windows, iPad & iPhone trading