Electricity as a commodity

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With regard to physics, electricity is defined as the fact of accumulation and movement of electrons — elementary particles that hold electric charges. The economic interpretation of electricity slightly differs. Specifically, electricity is the commodity that includes both energy itself and its transportation to consumers. Unique qualities of electricity as commodity define the essence of power market. It is therefore necessary to discuss these qualities at a glance.

To start with, electricity is the commodity that should be supplied immediately. Unlike oil, crops, metals, or other typical commodities, the delivery period for electricity is zero. There is therefore no predetermined conditions for transportation and delivery such as the International Commercial Terms (Incoterms) or similar rules. By way of illustration, consider the consumer of electricity who is supposed to get his or her light as soon as he or she turns a switch on. Immediate consumption causes in turn immediate generation.

Immediate generation and consumption lead to another quality of electricity. The logistics of the power market is, in a nutshell, an electric circuit that contains a continuous flow of electricity. The continuous flow is a very important characteristic because it allows to provide consumers with electric power instantly — it stands with the immediate supply characteristic.

Moreover, electricity is intractable and intangible, meaning an individual cannot see electrical current as well as the one cannot grasp it. This implies for electricity consumers that they are unaware of which generator have supplied to them precisely. Frankly, all of active power plants constantly supply electricity to a common transmission network, whereas consumers just take electricity from the network whenever they need it.

Although true, the process is in fact slightly more complicated than that. For the sake of clarity, I move to the other quality of electricity as commodity — a common grid. Transmission network of a country is defined by its grid. The one may think of the grid as a chain or, more accurately, a system of interconnected power lines and nodes that form the electric circuit with a continuous flow of electric current and transmit this current from producers to consumers. Electric current carries in turn some amount of electrical energy. This energy is partially wasted while being transmitted by means of power lines. The following relationship is true: the longer is the total length of lines used to transmit electricity from one location to the other one, the more energy is wasted in the process of transmission. This is why the existence of several competing grids is not optimal. This also describes the monopoly on the transmission market.

Additionally, electricity is a variable and unpredicted commodity in the sense that the quantity of electricity produced often depends on unpredicted factors such as the weather. Indeed, various hourly, daily, weekly, monthly, and seasonal discrepancies define the amount of electricity that enters the grid. In the power markets full of solar energy, for example, the amount of energy produced is highly sensitive to the amount of sun during days. The power markets with dominating hydro power, as another example, are affected by precipitation during either rainfall or snowfall seasons, or both. Norway is a good case in point. Furthermore, weather has impact on the other side of the market too, meaning it influences the demand for electricity.

Last but not least, electricity is not storable. This is probably the most important difference between electricity and crops, oil, metals, and other typical commodities. Here, I need to shed light on the issue. There exist batteries nowadays that can store electrical energy in actual fact. A good and contemporary example would be the famous Powerwall. This product of Tesla Motors is mainly for households, but there are larger and more powerful batteries as well which can even charge small factories for some short time interval. Nevertheless, there is currently just under 1 gigawatt of storage capacities in the form of the batteries connected to the grids around the world. Although Bloomberg New Energy Finance (BNEF) forecasts the increase in market value of the world battery market to astonishing USD 250 billion by 2040, none of the today’s battery technologies is capable of storing the amount of electrical energy that makes difference to national economies. There is even no battery technology that can provide an economic unit such as an aluminium smelter with electricity over some noticeable period.

For the reason stated above, the one is eligible for saying that electricity is the commodity that cannot be stored directly. Electricity can be stored, however, if it has been changed into some other form of energy in advance. Bulk electricity storage which stores electrical energy in the form of water is the case in point.

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Topics on energy, natural resources and the environment from the perspective of a commodity trader

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