the story of modern electrical supply is mainly one of accounting. electrons, like water, like to flow from source to destination. the only way to check their flow is to turn off the taps at either end. assuming you have a source of electrons, and someone willing to pay you for them, then, if you have means of electron transportation, a meter to assess consumption, and some sort of understanding on how much that consumption is really worth, you’re in the electricity supply business, at least on a fundamental level of abstraction.
except things aren’t quite so straightforward. people in the electron-source owning business typically also aren’t allowed to be in the electron transportation business. this is done to prevent monopolisation. the latter is usually carried out by a dedicated “distribution company”. by entering into supply agreements with a large number of electron source owners, and subsequently agreeing to provide electrons on tap to whoever needs them, distribution companies effectively act as aggregators of market supply and demand.
that’s not too bad, i can hear you saying - distribution companies take on demand risk, and so they should naturally be compensated for it. unfortunately, distribution companies are also exposed to supply risk, which is usually worse, since sources of electrons tend to react badly to annoying real-world stimuli like geopolitics and the climate.
and so, distribution companies act like mini-auction houses, matching demand to available, cost-effective, sources of supply. the cheapest electrons get utilised first, followed by the next-cheapest, and so on, until either all demand, or all available supply, gets exhausted. this process repeats itself several times a day.
electron supply prices are, of course, governed by supply agreements with electron source owners. unfortunately, making contractual obligations subject to the outcome of an auction process reduces them to little more than a gentleman’s handshake that says maybe, should the stars align, we’ll buy some electrons from you. it is therefore, entirely possible that a given set of contracted-for electrons never sees the light of day, so to speak, and so, electron source owners usually try to make sure that they get paid regardless1.
at this point, we now have three distinct layers of accounting:
(i) for flowing electrons;
(ii) for price discovery of flowing electrons; and
(iii) for not-flowing electrons?
the last one is especially significant because it tells us that not only is there a price on electricity, but also a price on not having it now. effectively, by treating electricity like any other commodity, and not taking immediate physical delivery, you can expect to realise some financial value. this is of course, commodities 101, and so, electricity markets. or not-electricity markets?
like all markets, not-electricity markets need buyers and sellers to agree on prices. standard marketplace conventions apply - if it’s cheaper to buy not-electricity elsewhere2, then no trade happens. similarly, indirect network effects exist - having a large pool of buyers on your marketplace attracts more sellers there, and vice versa. this leads to better (well, more accurate) not-electricity prices. this is a good thing for you! now, even more people will be incentivised to use your marketplace, leading to even more accurate not-electricity prices, and allowing you to collect even more in transaction fees.
but, if markets exist, so does the incentive to profit from information asymmetry, otherwise known as insider trading. what does insider trading on the not-electricity markets look like? a lot like insider trading on the stock markets, as it turns out, where, usually, if:
(i) you have some information which is likely to affect the price of a security;
(ii) this information isn’t available to the general public; and
(iii) you trade in that security,
you’re guilty of insider trading. don’t do this! this is a bad thing!
hypothetically speaking, if you’re a sensitive-commodity markets regulator, you’d probably want uniform commodity pricing across marketplaces. this would, however, make all your marketplaces start competing on service quality and fees, instead of underlying commodity prices, and wipe out all network effects.
assuming you’re okay with that, is your decision to couple commodity prices across marketplaces material non-public information?
india’s securities and exchange board certainly seems to think so. they also think you shouldn’t text your former student about it, let him attend a closed-doors meeting about it, or encourage him, his parents, sibling, friend, friend’s siblings, friend’s sibling’s wife, and astrologer, to buy puts on the country’s only listed power exchange right before you announce your move, in a week-long trade that earns the participants slightly under 20 million dollars in cumulative profit despite them having never traded in derivatives, that particular stock, or any stock, ever before.
the jokes write themselves. the public official responsible for overseeing free and fair markets leaked information to their astrologer? that’s two people really bad at their jobs! on the other hand, i suppose that sophisticated financial crime by unlikely suspects points to an increase in general financial literacy? that’s some consolation, i guess!