What is Energy Trading?

Anyone who is engaged in purchasing, selling and then moving various types of bulk energy such as electricity and gas from the area where it is produced to a different region where it is needed is involved in energy trading. Just like wheat and coffee, natural gas and wholesale electricity are commodities that can be traded. Supply and demand are the driving forces behind the prices of wholesale energy. When the energy is needed and demand is up the prices rise. If the commodity is suddenly not needed, the price drops. Take for instance countries where the climate is freezing during the winter. Demand is up in those cold months so the heightened need for heating fuel props up the prices of the energy supplies. Vice versa, in the summer months the requests for electricity to power air conditioners rise in climates where there are sweltering heat waves. But where it gets tricky is that there are also daily fluctuations in the cost of energy. For instance, during work hours the price will increase but during overnight hours the cost might drop back.

Entering the Energy Market

To be able to move any type of energy across markets, you need to buy gas transportation and purchase transmission rights from pipeline owners and providers of transmission. This type of energy trading matches the energy supply with the specific demand. Keep in mind that unlike traditional commodities, electricity is consumed at the same instant that it is produced. Since it cannot be stored, there needs to be a constant balance of production and use. The energy market is best navigated by traders with sufficient knowledge of energy patterns and a strong financial portfolio.

High Volatility

Since energy can’t be stored, spot prices can be extremely volatile. To soften the price volatility load-serving suppliers and generators try to fix the estimated price of electricity, but for delivery at some date in the future. This is typically short term, with only one day out, which is why it is referred to as Day-Ahead Market (DAM). Working together, the DAM and the real time markets are called the dual settlement market design.

Price Factors

The prices of energy are directly affected by a number of different factors, all making adjustments to the supply and demand balance. The demand is usually referred to as load. The factors directing the load have to do with economy, weather changes and the way the energy is consumed. From the side of supply, which is called generation, the prices and availability of the fuel have a direct affect. Other sources that drive the prices are the cost of construction and regular fixed costs. The physical factors that have an influence on supply and demand tend to make a difference in the real clearing price of energy. These are factors connected to the transmission grid, which is a network composed of high voltage lines and substations. They allow for the safe transportation of electricity from its origin to the place where it is consumed.

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