Rising energy needs powers electricity commodities

The need for electricity generation capacity is higher than ever before.

Diversification in fuel stocks is therefore a huge desire. Dubai has now decided the way to meet such high energy demands is the development of a peaceful nuclear programme.

Electricity, also called power in the financial markets, is the strangest of commodities. Firstly, it is not a natural resource, unlike oil, gas or coal. Electricity is produced by man.

In order to do so, feed stock is used, such as oil, gas, coal or uranium (via a nuclear power plant). Therefore the price of electricity is influenced by the price of the feed stock.

Electricity is also a strange commodity because it can't be stored in an economically viable sense, unlike other resources. And lastly there is the difficulty in transporting electricity, especially from one country to another, where there is a lack of cross-border capacity.

Fine-tuning production

These conditions mean that electricity prices can fluctuate, particularly in extreme circumstances. The fact that electricity can't be easily stored means that production must be fine-tuned to consumption levels on a short term basis. This implies that consumption patterns determine the activity of the power plants (optimisation is even done per 15 minutes).

However, a coal-fired power plant cannot be turned on and off in a second. The complete process from off to full production at its maximum capacity can take two days.

This is a very inflexible way of production or optimisation. Therefore coal-fired power plants are usually used for 'base load' production. 'Peak load' production however is better taken care of by gas-fired power plants which can be switch off and on (or vary their percentage of production) easily.

Electricity can't be stored in an economical viable sense. However, it can be stored indirectly, by use of dams, because falling water generates electricity. Water basins in that respect form an electricity storage facility of sorts (although electricity is still to be produced).

Regular types of power plants need cooling water - some more than others. That is why you'll find them around harbours, rivers or the sea.
This in itself can create issues.

Two years ago in Holland an extremely hot summer (for the Netherlands) saw the water temperature of cooling from rivers hit new peaks every hour. As Holland is a flat country, there was no alternative such as falling water. No mountains meant no power generation and due to the cooling water being hot, the network operator enforced Code Red.

This meant power companies were not allowed to produce at maximum production. As a result, the price of electricity jumped from €200 to €2,000 in one day. After two days, rain was forecast by several weather stations and the price fell in split seconds to €1,300. Once the rain fell, it dropped to €200 again.

Such volatile prices are rare in the stock markets but rather common in the power markets. That's what makes power such an interesting commodity.