Building modern financial infrastructure for the changing energy sector: Our investment in ElectronX
Increasing volatility on the grid calls for novel financial products to manage risk
By Sam Smith-Eppsteiner and Josh Rapperport
The power and complexity of renewables
The energy transition is underway. Solar is still growing over 15% year over year, battery deployment on the grid has grown 10x in the past three years alone, and the overall energy mix is shifting toward more renewable and distributed sources. Electricity demand in the U.S. alone is expected to 2–3x before 2050 with soaring EV, green industrials, and data center demand. ‘Electrify everything’ is no longer an aspiring slogan but a real possibility — you can read more about our perspective on escalating energy demand and potential solutions to help us meet the moment sustainably.
There are a few key structural shifts associated with this transition. First, most of these renewable assets are intermittent. Solar and wind are, of course, time and weather-dependent. As a result, they are neither consistent nor “dispatchable.” This generation will never align perfectly to demand curves, such as peak AC demand during a heat wave. This brings us to the second key development, the ability to store electricity and consume it when needed. Historically, electrons on the grid have been consumed in real-time the moment they are generated. Given that fossil fuels are dispatchable, they’ve historically played the role of filling gaps on the grid. With the rollout of grid-scale batteries, we expect to see much cleaner, more efficient, and more precise peaking. Lastly, renewables are far more distributed than historical generation. What this means, is a far greater number and diversity of suppliers to the grid.
With these shifts, the transition toward renewables is massively increasing the complexity of managing and operating our electrical infrastructure. Even more challenging, we’re pairing this gargantuan transition on the supply side of energy with an equally important one on the demand side. With more frequent and more severe weather events associated with climate change, we expect to see peak energy demand exacerbated. The net effect of increased intermittency on the supply side with more extreme demand scenarios on the load side is volatility. As an example, during 2021’s winter storm Uri in Texas, electricity was selling at 40–80x typical price per megawatt-hour. This event was particularly painful given both failures on the supply side, with natural gas plants and wind turbines affected by freezing conditions, and demand exceeding ERCOT’s scenario planning.
Looking forward, the good news is flexible loads have huge potential to solve this problem. For example, in mid-August last year, a 1.8 GW discharge from batteries onto the grid in Texas quickly reduced wholesale electricity prices from $5,000 to $2,700 per megawatt hour. It’s important to note just how novel this is. This would not have been possible even a year or so prior: ERCOT only had 3.2 GW of energy storage capacity in 2023, up by 1.2 GW installed in 2022. Energy storage, largely in the form of batteries and thermal systems, is the ultimate flexible asset as it enables optimization of charging and discharging. Additional flexible loads like vehicle charging, refrigeration, and some kinds of computing workloads, also have very compelling potential on the demand side. This is because these loads don’t always need to be running 24/7 at constant intensity and can be selectively scheduled.
What’s missing: sophisticated financial exchanges and markets for electricity
So, how do we mitigate the challenges associated with intermittent renewables and the downstream energy market volatility?
Behind all this complexity is an ecosystem that has received little attention: the power markets. Power markets today look a lot like securities did in the 1990s, or advertising in 2005. You used to have to call your stock broker to put in a trade for you; now, you open your RobinHood app. You used to have to buy annual or seasonal blocks of ad inventory in magazines, TV, or on the internet; now, this is powered by programmatic media infrastructure provided by Google, The Trade Desk, Meta, and others. These innovations have unlocked trillions of dollars in value purely by bringing efficiency and granularity to their respective markets.
Today, power is traded using similarly antiquated methods as the old world of securities and ads: much is bought and sold over-the-counter in day, month, and year-ahead markets. Essentially, the largest power buyers and generators submit bids — digitally or over the phone — and secure large 4–8-hour blocks of power for the coming period. Their bids are typically in the tens of millions, and their hedging and risk-management strategies are rooted in this bulky and imprecise model. This imprecision makes the risk management of power portfolios extremely challenging. Every time there is a major heat event in Texas, for example, numerous energy retailers go bankrupt based on their bulk positions and being unable to meet their financial obligations as they come due. This is largely what power looks like today.
Enter ElectronX. ElectronX is building a new financial exchange to trade electricity futures. The platform offers much more granularity and sophisticated risk management than existing solutions, which unlocks better hedging and pricing of intermittent energy assets on an increasingly volatile grid. This granularity is achieved through two key innovations: (1) time — intra-hour and hourly tradable derivatives products for each operating hour in both day-ahead and real-time markets, and (2) size — a reduction in the minimum trade size to 1MW, decreasing the implied multimillion dollar trading requirement today. Users of ElectronX will no longer need to “overhedge” to manage risk and can instead optimize upside. Moreover, ElectronX is bringing the first open access, direct exchange to market in the category. This will enable smaller players, startup VPPs and developers, and aggregators to be able to participate in financial markets directly.
We anticipate a virtuous flywheel here. By leveraging more precise financial products, renewable assets should see better return profiles and faster payback periods. The increased stability and financial performance of these assets should encourage more capital to flow into renewables, only accelerating the clean energy transition further.
ElectronX, a world-class team and a massive opportunity
ElectronX is capitalizing on a major and once-in-a-century shift in the energy mix. Such an ambitious effort requires a highly specialized and interdisciplinary skill set, as the inner workings of power markets are esoteric and complex. Few people outside of power trading understand how the financial infrastructure that keeps our lights on actually works. Yet it’s not just power market expertise that’s required — financial exchanges themselves are unique and delicate systems.
We could not have come up with a more ideal founding team than Sam Tegel (CEO), Evan Caron (Co-founder), and Philip Krim (Co-founder). Sam has been trading at large scales across different asset classes (e.g., derivatives, fixed income, equities, FX) for decades, worked at top quant funds like Millenium and Jump Trading, and has been a key contributor to early exchange success. He has seen this movie before and knows how to solve the cold-start problems of market liquidity. Evan was a power trader in ERCOT — Texas’s unregulated power market — for over a decade and has experienced firsthand the pain of existing trading workflows and systems.
We see ElectronX as a core piece of infrastructure and a true catalyst for the clean energy transition. We couldn’t be more excited about the massive opportunity ahead and potential for the company — we are grateful to be along for the ride. Currently, ElectronX is seeking regulatory approval and expects to launch next year with many of the world’s largest power traders.
See here for The Wall Street Journals’ coverage of ElectronX and their financing, and here for the company’s press release.
