Barclays Makes Power Play

July 02, 2008

Barclays Capital launches a power index family covering electricity prices.

Barclays Capital has launched a new family of "investable" power indexes tied to the price of electricity nationwide. The main index tracks the price of electricity at six major regional hubs based on peak power forward contracts with a range of maturities. Subindexes covering the different regions and maturities are also available. The indexes are weighted by region based on historical annual peak electricity demand.

Since the press release describes the index as investable and the index family appears on the Barclays Web site alongside Barclays' global carbon trading index, which underlies a recently launched exchange-traded note, it seems fair to guess that an ETN covering the U.S. power market might be forthcoming in the near future.

If it does, what does that mean for investors?

Well, it would offer investors a hedging tool to quickly protect themselves from rising peak electricity prices. A large user of electricity, or even an individual, could effectively lock in a certain rate of power by going long the ETF, as they would then benefit from any rise in power prices. Others could use them to speculate on short- or long-term price trends in the market.

Electricity futures were created in the aftermath of the deregulation of the electricity markets, and were seen primarily as a way for large power generators to hedge themselves against sharp prices swings in their end product. They got a bad name in the aftermath of the California energy debacle, when traders were accused of using futures to manipulate prices (sometimes in conjunction with producers, who could create artificial price spikes by temporarily shutting down production at certain facilities). However, the markets have evolved and become more mature since then, and futures are largely seen as playing a largely stabilizing role in the market today.

 

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