Electricity Futures
Also known as: Power futures, Baseload/peakload contracts, PPA (cousin)
Futures on the one commodity that cannot be stored — where prices go negative at noon and 100× at dinnertime.
- Asset class
- Commodities (energy)
- Instrument type
- Futures on average power prices per delivery period
- Traded
- EEX, Nasdaq Commodities, ICE; national hubs
- Typical users
- Utilities, industrials, energy traders, funds
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
Electricity is the commodity that breaks every rule: it cannot (economically) be stored, so it must be produced in the same second it is consumed. Supply and demand rebalance continuously — and the spot price does things no other market does: routinely negative on sunny, windy weekend middays (producers pay you to take power), and occasionally 50–100× normal during cold snaps (Texas, February 2021: from $30 to the $9,000/MWh cap for days).
Because spot is untradeable chaos, the real market lives in futures on time-averages: contracts settling on the average spot price over a delivery month, quarter or year. The two standard shapes: baseload (all hours) and peakload (business hours, when demand and prices concentrate). A German "Cal-26 baseload" future fixes the average price of every hour of 2026 today.
Who needs this? Everyone in the chain: power plants selling years of output forward (remember the EUA hedging story), industrials locking in electricity costs, retail energy suppliers hedging fixed-price customer tariffs — and, since the 2021–22 energy crisis multiplied prices tenfold, everyone's CFO.
3 · IntermediateHow it works in practice
Pricing without storage
For storable commodities, cash-and-carry pins the curve. For power, the future prices expected spot plus a risk premium:
with the expectation built from fundamentals: the merit order (which plant sets the marginal price at each demand level), fuel and carbon costs, renewable buildout, plant retirements, interconnector flows. The marginal-cost anchor makes power a derivative of other commodities: in most European hours a gas plant sets the price, so power ≈ gas/efficiency + carbon×intensity — the spark spread arithmetic from the fuel-switching calculator, running the grid in real time.
The spreads that organise the market
- Spark / dark spread: power price minus gas/coal cost — a gas or coal plant's margin, tradable as a package; "clean" versions subtract carbon.
- Peak/off-peak: the daily shape. Solar buildout has famously hollowed out midday prices (the "duck curve"), turning the old peak into a valley.
- Geographic spreads: national hubs (German, Nordic, French power) diverge with interconnector limits — France's 2022 nuclear outages sent French-German spreads to historic extremes.
- Cap products: futures on price caps/spikes for retailers hedging scarcity events.
The margin-call lesson of 2022
Futures hedging works on margin — and when European power rose 10×, utilities' short hedges (against physical generation they genuinely owned) generated margin calls in the tens of billions before the offsetting physical revenue arrived. Governments extended emergency credit lines to solvent-but-illiquid utilities across Europe. The hedge was right; the liquidity design wasn't.
4 · AdvancedPricing & valuation
Modelling an unstorable underlying
Power spot demands its own process family: mean-reverting diffusions with jumps and spikes (fast reversion after scarcity events), regime-switching models (normal vs. scarcity states), and structural "stack" models that simulate the merit order directly. The workhorse reduced form:
with seasonal mean \(\mu_t\) (daily, weekly, annual cycles) and jump process \(N\). Negative prices force arithmetic rather than geometric dynamics. Averaging into delivery periods tames the spikes at the futures level — but option books on hourly shapes live with the full distribution, which is why power optionality (physical assets, cap contracts) is priced with structural models, not Black–Scholes cosplay.
The renewables transformation of the curve
- Cannibalisation: solar depresses prices exactly when solar produces — each added panel lowers the capture price of all panels. Capture rates (achieved/baseload price) are now the key number in renewable finance.
- Shape risk migration: as intermittency grows, value shifts from average price to flexibility — batteries and peakers monetise spreads between hours, and intraday/balancing markets trade what futures can't reach.
- Negative-price economics: subsidised generation with production-based payments bids negative rationally; hours below zero (record-setting each year in Germany) redistribute value to flexible demand and storage.
PPAs — the futures market's shadow twin
Corporate power purchase agreements (a datacenter buying 15 years of a wind farm's output at fixed price) are bespoke long-dated forwards beyond exchange horizons. They price off the futures curve where it exists, plus basis (location, profile/shape, volume risk) modelled off it where it doesn't — the liquid curve is the pricing spine for a contract market now financing most new renewable construction. The AI-datacenter demand wave has turned long-dated power — for two decades a sleepy market — into one of the most-watched curves in commodities.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.