I was invited to Prague, to speak at a conference on electricity, along with other regional experts. Until recently, electricity was traded as part of equity, but now Europe, the US and even India have started trading it as a commodity. Technology, utility infrastructure and user sophistication are some of the drivers for the electricity market. Europe is the leading electricity initiative. Today, electric cars earn $1,000 a year as they are plugged back into electricity grids to assist grids as a buffer for peak time. Electricity is traded based on anticipated demand of the quarter ahead (Front Quarter), as 24 hour electricity benchmarks (The German Baseload), etc.
Climate, currency, consumption, catastrophes and Greece drive the business. Henning Gloystein, energy editor at Thomson Reuters, in his presentation, brought out the variables and their likely influences on the sector. How would the sector behave if the euro strengthened or weakened? He highlighted coal as a dark horse in the energy segment. Though the fossil fuel is underplayed in policies, it continues to suggest resilience, especially as energy becomes expensive. Another aspect was the stagnating nature of electricity, which was stuck up in a multi-year trading range.
Frank Brannvoll, head of European power markets, GDF Suez talked about the move towards convergence of electricity exchanges in the region. He illustrated how markets were trying to organically grow, following the path of least resistance, overcoming regional biases and constraints. An ex Forex trader, Frank built on his trading experience. He illustrated how underlying currencies influenced regional electricity assets.
Rona Scherer, portfolio manager from Zurich, talked about the connection between interest rates and power and how electricity, like everything else, was part of the inter-market relation, and how understanding the conventional bond versus power relationship was essential to comprehend the power outlook in 2012. Utilities generally trended with bonds and against commodities. A secular rise in commodities was conventionally bad for bonds and utilities. And one had to keep a thorough eye on global interest rates, which were still in the bottoming process and hence still suggesting upside for power and electricity.
Bill Meridian, Time cycles expert from Vienna, reiterated that the commodity bull market was still intact, but a correction was expected in 2012. Oil low was likely in Q1 in 2012. He expected natural gas low in Q1 2012, followed by a trading range into a lower low in Q3 2012. Patrick Oberhaensli, quant money manager from Zurich, showcased how electricity could be replicated as part of a composite portfolio and deliver enhanced returns.
For me, commoditisation of electricity was a necessary step that improved efficiency, created a new asset class that could be used to diversify the global portfolio further. And, the ongoing stagnation in electricity was part of the primary degree multi-month underperformance on electricity, that should reverse into outperformance well into 2012. Since performance was cyclical and commodities were inversely related to power, Bill’s cycle view of negative commodities in 2012 confirmed my view of reversal in power and electricity outperformance till then. Most electricity benchmarks were ranked as the worst performers on the quarterly holding period along with renewable energy like solar, wind and water. Commodity was a high ranked performer and dollar was worst. In the Indian context, utility companies in the BSE Power index should start to outperform in the coming months.
The electricity exchange is a late economic business and the very fact that society starts to give it importance suggests that on a larger time we are beginning to give utilities more importance than technology. This is food for thought.
The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm
