The geekiest asset class in the world sings the body electric
The past couple of months have not been easy for most Wall Streeters. What can a speculator do when even cash is underperforming cash?
“Our banks are firing us,” says one of my friends in that world. “They don’t want our cash, so if we stay in repos [a cash equivalent that is collateralised by risk-free Treasury securities], we earn negative five basis points.”
Ah, but there was one market in the dollar world that did very well in August. I am referring to the auction for electricity generation capacity three-year forward contracts that was held by PJM Interconnection, the largest American grid operator. Capacity, one of the geekiest asset classes in the entire world, is the ability to supply electricity whenever the grid operator needs it, as distinct from the energy itself, for which you get an additional payment.
Wind turbines, for example, can supply a lot of energy over the course of a year, but cannot commit to providing capacity on what might turn out to be calm days three years from now.
In most of the PJM territory, generation capacity for the 2018/2019 delivery year was awarded a price of $165 a megawatt per day, or 30 per cent higher than last year. In the EMAAC region of PJM (think New Jersey), the capacity price increased by 88 per cent to $225/MW-day, and in the COMED region, centred in Chicago, the price went up by 79 per cent, to $215/MW-day. This was on a large amount of generation. The PJM auction procured 166,837MW of capacity, about three times the peak demand in the UK.