Energy Commodities: Invest in Electricity Futures through RTOs - dummies

Energy Commodities: Invest in Electricity Futures through RTOs

By Amine Bouchentouf

Investing in coal as well as nuclear power is one way to invest in electricity commodities. But you can invest directly in the power industry in several other ways as well.

The most direct way of investing in electricity is . . . to buy it! The Chicago Mercantile Exchange (CME) offers a futures contract that tracks the price of electricity as administered by PJM Interconnection.

PJM is a Regional Transmission Organization (RTO) that oversees the largest electric grid system in the world and services more than 50 million customers in the United States. It’s responsible for generating more than 700 million megawatt-hours of electricity across 55,000 miles of transmission lines.

Because of its dominance in the U.S. electricity market, the PJM electricity futures contract on the CME/NYMEX exchange provides you with a widely recognizable and tradable electricity benchmark.

The PJM contract gives you the option of trading both on-peak and off-peak electricity hours. On-peak times are defined as Monday through Friday between 7 a.m. and 11 p.m., the times when the most electricity is consumed in the United States. Off-peak hours go from midnight to 7 a.m. local time Monday through Friday and include Saturday and Sunday as well.

On-peak hours are usually more liquid because that’s when most of the electricity is consumed.

The PJM contract is traded in units of 40 mWh (megawatt-hours) under the ticker symbol JM. For more information on this specific contract, check out the CME/NYMEX website.

Although most of the market participants in the electricity futures market are local and regional power providers and suppliers, the futures contract lends itself to being traded by individual speculators as well. In recent years, as interest in commodities as an asset class has increased, the number of speculative participants in the electricity market has grown as well.