What is Wholesale Energy?

202 reads · Last updated: December 5, 2024

Wholesale energy is a term referring to the bulk purchase and sale of energy products—primarily electricity, but also steam and natural gas—in the wholesale market by energy producers and energy retailers. Other participants in the wholesale energy market include financial intermediaries, energy traders, and large consumers. Wholesale energy markets developed following the deregulation and restructuring of utilities and electricity markets around the world in the 1990s.

Definition

Wholesale energy refers to the term used for the bulk buying and selling of energy products (primarily electricity, but also steam and natural gas) in the wholesale market by energy producers and energy retailers. Other participants in the wholesale energy market include financial intermediaries, energy traders, and large consumers.

Origin

The wholesale energy market developed after the deregulation and restructuring of global electricity and utility markets in the 1990s. This change allowed market participants to trade in a more liberalized market environment, enhancing market efficiency and competitiveness.

Categories and Features

The wholesale energy market can be divided into spot markets and futures markets. Spot markets involve energy transactions for immediate delivery, while futures markets involve contracts for future delivery. Spot markets are characterized by high price volatility, suitable for short-term trading; futures markets offer price stability, suitable for long-term planning. Key features of the wholesale energy market include high transaction volumes, price volatility, and a strong reliance on market information.

Case Studies

A typical example is the PJM power market in the United States, one of the largest wholesale electricity markets in the world. PJM effectively manages electricity supply and demand through its market mechanisms, ensuring reliability and reasonable pricing. Another example is the Nord Pool market in Europe, the wholesale electricity market for Nordic countries, known for its transparent market structure and efficient trading system.

Common Issues

Investors in the wholesale energy market may encounter risks such as price volatility and information asymmetry. To address these challenges, investors need to conduct thorough market analysis and risk management. Additionally, the complexity and technical requirements of the market can be barriers for novice investors.

Suggested for You

Interest Rate Future

An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset.The interest rate futures contract allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

Historic Pricing

Historic pricing is a unit pricing method used to calculate the value of an asset using the last valuation point calculated. Historic pricing is used when the value of an asset does not update in real time.

Rational Behavior

Rational behavior refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual. The assumption of rational behavior implies that people would rather take actions that benefit them versus actions that are neutral or harm them. Most classical economic theories are based on the assumption that all individuals taking part in an activity are behaving rationally.

Discrete Distribution

A Discrete Distribution, also known as a Discrete Probability Distribution, refers to a probability distribution in statistics and probability theory where the random variable can take on a finite or countably infinite number of specific values. Common examples of discrete distributions include the binomial distribution, Poisson distribution, and geometric distribution. In a discrete distribution, each possible value has an associated probability, and the sum of these probabilities is equal to 1. Discrete distributions are widely used in finance, insurance, engineering, and other fields to describe and analyze the probabilities of discrete events. For instance, the number of times a stock price changes, the number of insurance claims, and similar discrete occurrences can be modeled and analyzed using discrete distributions.

White Elephant

A white elephant is something whose cost of upkeep is not in line with its usefulness or value. From an investmentperspective, the term refers to an asset, property, or business that is so expensive to operate and maintain that it is extremely difficult to actually make a profit from it.White elephants also tend to be illiquid assets, meaning they cannot be easily or quickly exchanged or sold for cash without the seller experiencing a significant loss.

Lehman Formula

The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1960s while raising capital for corporate clients.