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Don't blame speculators for rising electricity prices

Luke Sharrett

Julie Creswell and Robert Gebeloff have a very interesting New York Times article about algorithmic traders in the electricity market and the opportunities they've found in the somewhat obscure world of congestion derivatives.

Sadly, as is often the case with popular press treatments of speculators and arbitrageurs they feel the need to work a not-so-plausible consumer angle into the story. "The idea behind deregulation," they write, "was to eliminate old monopolies and create robust, competitive markets that would encourage investment and ultimately lower costs for consumers. But in most places, electricity bills have been rising, not falling."

Here's a chart of electricity prices (red), against all prices (green), and against the price of natural gas (blue):

energy prices

As you can see, the price of electricity did indeed shoot up during the late-aughts. But the price of natural gas absolutely soared during this period, indicating that it was a time of high commodity prices across the board. Meanwhile, growth of electricity prices in the past generation has been considerably slower than growth in overall prices. There's just no rising electricity prices trend to explain.

If you want to worry about this trend, you should worry not about the trading but the traders: "Investment funds and major banks are wagering billions on similar trades using computer algorithms and teams of Ph.D.s, as they chase profits in an arcane arena that rarely attracts attention."

Those Ph.D.s could probably be doing something more useful with their lives than racing each other to devise trading algorithms. That's a key part of the case for a maximum wage.

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