Electricity as a traded energy commodity: distinguish MW from MWh, price a delivery profile, and understand location, timing and storage constraints.
Electricity
Electricity is electrical energy supplied through a power system and traded for delivery at a specified place and time. For a quant, its value depends on the delivery profile as well as the total energy: a factory using more power during expensive intervals can pay more than another factory using exactly the same number of megawatt-hours.
Power is a rate; energy is an amount
A megawatt (MW) measures power, the rate of producing or consuming energy. A megawatt-hour (MWh) measures energy. A constant 1 MW supplied for one hour delivers 1 MWh. EIA's measurement guide distinguishes power at a moment from energy used over time.
Consider a fictional supply agreement for 10 MW continuously for two hours, at one specified delivery point, priced at USD 50 per MWh. The delivered energy and energy charge are
E=10 MW×2 h=20 MWh,C=20 MWh×50 USD/MWh=USD 1,000.
This is the energy charge only, excluding network charges, losses, taxes and other fees. A 10 MW connection rating alone does not say that 20 MWh was consumed: actual power drawn and duration determine energy. Nor does a generator's nameplate rating guarantee that it can deliver at that rate throughout the agreed window.
Equal energy can produce unequal bills
If both power and price vary, divide the delivery window into intervals. Let Pi be average power in MW, Δti the interval length in hours and Si the applicable price in USD per MWh. The simple interval energy-charge ledger is
E=i∑PiΔti,C=i∑SiPiΔti.
Now replace the fixed price with two fictional one-hour prices at the same delivery point: USD 20 per MWh in the first hour and USD 80 in the second. These are illustrative intervals, not a claim about a particular market's settlement rules.
Load profile
First hour, MW
Second hour, MW
Total energy, MWh
Energy charge, USD
Flat
10
10
20
1,000
Concentrated in the expensive hour
5
15
20
1,300
For the second profile the charge is 5×20+15×80=1,300 USD. Both profiles average 10 MW over two hours, but moving 5 MWh from the cheaper hour to the dearer hour adds 5(80−20)=300 USD. Multiplying total energy by the unweighted average price would miss this difference.
Two synthetic two-hour loads each consume 20 MWh. A flat 10 MW load costs USD 1,000 at interval prices of USD 20 and 80 per MWh; a 5 then 15 MW load costs USD 1,300. Both have the same average power, but different exposure to the expensive hour.
Same energy, different purchase cost. Original synthetic one-hour intervals at one delivery point; prices are USD per MWh, with no network charges, losses, taxes or hedges.
The relevant price can be an interval spot price, a fixed contract price or another specified reference. The time basis must be explicit. For example, AEMO records that Australia's National Electricity Market aligned operational dispatch and financial settlement at five minutes on 1 October 2021. That jurisdiction-specific change does not establish a universal electricity settlement interval.
Delivery and storage constrain the trade
Electricity supply and demand must be balanced through the power system. Available generation, transmission capacity and the ability of demand or storage to respond affect that balance. Power available in one place or hour may be unable to meet an obligation somewhere else or later. A hedge against a regional benchmark can therefore leave basis risk relative to the customer's actual price and load profile.
Electricity can be stored through energy-storage technologies, including batteries and pumped hydro. EIA's storage guide distinguishes power capacity in MW from energy capacity in MWh and explains that charging requires more electricity than is later supplied. Storage needs equipment, available energy capacity and charging/discharging capacity; losses and operating costs matter. A battery cannot shift an unlimited volume between any two hours simply because their prices differ.
Consequently, the cash-and-carry reasoning used for a readily storable commodity cannot be applied unchanged to electricity. A proposed trading strategy must establish how energy is stored and transported, what can actually be delivered, and what each step costs.
For hedging, match the price reference, delivery location, time window and quantity profile. A futures contract settled in cash may offset a financial price exposure; it does not itself assure physical supply. The Commodities primer develops physical contract matching and basis differences. Its preview is public; the full lesson requires a signed-in free account.
Sources
John C. Hull, Options, Futures, and Other Derivatives, ninth Global Edition, Pearson, 2018, Chapter 34.3, “Electricity,” printed pages 800–801. Grounds location, transmission constraints and time-specific delivery; the examples and figure here are original.
