Energy Primer: A Handbook of Energy Market Basics

15

DECEMBER, 2015

The Federal Energy Regulatory Commission (FERC), is the federal version of the Missouri PSC (more on what we do at: www.linkedin.com/pulse/i-am-commissioner-gordon-scott-rupp) The following is an excerpt from a November, 2015 staff report from the FERC that gives a great overview of the energy industry. Enjoy!

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Energy Primer: A Handbook of Energy Market Basics

Natural gas, electricity, and oil are forms of energy that are of particular interest to the Federal Energy Regulatory Commission pursuant to its authority under the Natural Gas Act, the Federal Power Act, and the Interstate Commerce Act. This primer explores the workings of the wholesale markets for these forms of energy, as well as energy-related financial markets. Natural gas is the second largest primary source of energy consumed in the United States, exceeded only by petroleum. A primary energy source is an energy source that can be consumed directly or converted into something else, like electricity. Roughly a third of the natural gas consumed in the United States goes into power plants for the production of electricity. Electricity, a secondary energy source, results from the conversion of primary fuels such as fossil fuels, uranium, wind, or solar into a flow of electrons used to power modern life. Crude oil and petroleum products are of interest to the Commission because it regulates the transport of oil by pipelines in interstate commerce. Energy markets involve both physical and financial elements. The physical markets contain the natural resources, infrastructure, institutions and market participants involved in producing energy and delivering it to consumers. They also include the trading of and payment for the physical commodity – e.g., natural gas. The financial markets include the buying and selling of financial products derived from the physical energy. These financial markets also include market structures and institutions, market participants, products and trading, and have their own drivers of supply and demand. In general, physical and financial markets can be distinguished by the products and by the intentions of the market participants involved. Physical products are those whose contracts involve the physical delivery of the energy. Physical market participants are those who are in the market to make or take delivery of the commodity. Financial products usually do not involve the delivery of natural gas, electricity, or oil; instead, they involve the exchange of money. Physical markets can be further differentiated by:

• Location: regions, nodes, zones or hubs

• Time frames: hourly, daily, monthly, quarterly or yearly

• Types of products: natural gas molecules or electrons, pipeline or transmission capacity and storage

• Nature of sales: retail sales involve most sales to end use customers; wholesale sales involve everything else

Find the full primer here:  https://www.ferc.gov/market-oversight/guide/energy-primer.pdf

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