What is Energy Trading?

Simply put, energy trading is the buying and selling of bulk energy.  Global energy sources have become a commodity because most countries cannot provide the amount of energy that their population consumes.  Countries need to buy and sell energy just like they do any other commodity.

In addition to just being able to provide the energy that the country consumes; trading energy can help protect against price fluctuations and other risks like shortages.

Commodity markets are usually very volatile.  Prices fluctuate widely and quickly in the energy market.  One of the major differences between the energy market and any other market is that energy is consumed immediately.  Electricity cannot be stored so buying and selling electricity is different than buying and selling anything else.

One of the major differences between the energy market and any other market is that energy is consumed immediately. Electricity cannot be stored so buying and selling electricity is different than buying and selling anything else.

In Europe, there are more than 20 different energy exchanges. They either mostly markets selling energy products which will be delivered in the future or spot markets for short-term trading. Just like any other trading, the price is determined by supply and demand.

This means that when a material is scarce it trades at a higher price.   Most trading actually takes place outside of these exchanges.

Many different types of energy are bought and sold.  Electricity, gas, coal and oil are all traded in these energy exchanges. The products are usually sold one day and deliverable the next day unlike the forex market or stock market, people can end up with the physical product.

The electric companies in various places are purchasing the actual electricity that people in that country will use the next day.

Energy markets are much more segmented than any other financial market.  The intraday and real-time markets are managed separately and differently than the future markets.

These markets are managed by Independent System Operators.  There are 7 of them in the United States.  They are nonprofit organizations that act as clearinghouses for electricity trading.

Because electricity cannot be stored, the market for it is extremely volatile.  There are also many factors that contribute to both the supply and the demand of energy.

The weather can be a factor on both sides for example.  The efficiency of the usage, and the efficiency of delivery are both factors as well.

The price of gas is determined in a similar way to electricity, and although gas is storable, gas also has a complicated delivery system which contributes to the costs.