Electricity can be traded in the financial marketplace like any other commodity. Electricity futures trading offers an alternative investment that can help traders diversify their investment portfolio.
Commodities can be found the world over and are traded like any other asset. The business of commodities trading is one in which billions of dollars are invested from one day to the next. Commodities can be traded in real time at spot prices but are much more commonly traded in the futures markets as a contract and made available for purchase or sale within a given time frame. One of the appeals of futures trading is the ability to go long or short with equal ease and without the short-selling restrictions common to stock trading. Commodity futures trading offers the opportunity to invest directly in raw materials, such as cocoa or cotton, if an investor can withstand the market's volatility and learn to manage trading with a high degree of leverage.
Primary differences between futures trading and stock trading include the much greater degree of leverage available in futures trading, trading in standard size contracts as opposed to shares and the fact futures trading involves investing in basic commodities rather than in companies.
Electricity as a Commodity
Electricity as a tradable commodity is relatively new. One of the first commodity exchanges that got involved with offering electricity trading was the New York Mercantile Exchange (NYMEX). Other exchanges also trading electricity as a commodity include the Multi Commodity Exchange (MCX), the European Energy Exchange and the Australian Securities Exchange.
As of 2015, there are 10 electricity futures contracts available for trading on the NYMEX, where the standard contract size is 5 Megawatts hours, or MWh. The most widely traded contract is the PJM Western Hub Day-Ahead Off-Peak Calendar-Month. The contracts available for trading represent electricity in a variety of geographic "hubs" across the United States, and traders can trade both "peak" and "off peak" electricity prices. PJM, a Regional Transmission Organization (RTO), oversees a large electric grid and provides electricity to over 50 million customers in the U.S.