Tidal Financial Group has partnered with the Carbon Neutral Investment Group (CNIC) to launch what I believe to be a game-changing product – one I’ve spoken to several issuers about launching over the years, but I’m excited to launch have never experienced. This product focuses on the power futures markets: The CNIC ICE US Carbon Neutral Power Futures Index ETF (AMPD).
Let’s take a quick look at this market and the fund that gives investors access to it.
Are electricity futures – electric?
In the area of energy markets, we all know the markets for oil and natural gas, including all derivatives such as heating oil, petrol and the like. One area of energy that many people may not even know is present in the futures markets is the power market, better known as electricity.
These markets have been around for quite some time, but have traditionally been traded over-the-counter (OTC) and, if you want to understand it technically, were futures contracts, not futures. While both types of contracts allow future transaction of some underlying assets for cash, forwards are fully bespoke with customizable contract sizes and tenors, while futures have standardized features and are traded on exchanges, allowing for robust secondary market trading including central settlement and clearing. About a decade ago, the Intercontinental Exchange (ICE) began reporting these transactions on its platform, and it wasn’t long before it began listing and trading standardized contracts, or futures, on these markets.
Power generation is managed by the Federal Energy Regulatory Commission (FERC) and is subordinate to various regional transmission organizations (RTOs), whose operators are also known as independent system operators (ISOs). Although there are more than six ISOs, this fund focuses on the six that see the most liquid markets. This group includes New York (NYISO), Texas (ERCOT), California (CAISO), New England (ISONE), which includes everything east and north of New York, Midcontinent (MISO), which extends from Wisconsin to Louisiana, and PJM (PJM). ), covering everything bounded from New Jersey to Ohio and from Pennsylvania to Virginia. There are almost 440 contracts between the various ISOs and contract types, which include real-time, day-ahead, 15-day-ahead, peak, off-peak, and various megawatt contracts. When you factor in the different expiry dates, that number increases by at least tenfold. To be clear, not every contract trades in large volume, but there are areas that are strong enough to support this product.
Get AMPD
This fund actually offers investors two things. The first is that it essentially faces a mixed national electricity price. The other reason is that the fund offers investors a truly carbon neutral energy investment option through the fund’s investment in carbon credits.
The strategy involves tracking the ICE Power Futures Carbon Neutral Index, which consists of a specific contract type, the Real-Time Calendar Year One Time Mini Fixed Price Future, an example of which can be found here. For each ISO, an energy futures ladder is constructed by buying the next 12 month expirations from the current front month contract. “Mini” refers to the contract size, which is one megawatt (MW) for these, as opposed to 50 MW-hour contracts or, in some cases, 400 or 800 MW-hour contracts. These mini-contracts are for speculative or investment purposes as they are cash-settled, while the other contracts I mentioned are for the supply and receipt of actual electricity, which is why these contracts are based on megawatt hours and relate to larger nominal sizes. For more information on the index, including a link to the methodology, go to ICE’s index data portal and search for the ticker ICECNPI.
wrap it
I’m a fan of this fund, if only because it takes me back to the days when exchange-traded funds gave access to entirely new markets and asset classes. The fund is a basic access product. Although it has the advantage of offering a carbon neutral investment product, the issuer is not trying to play 3D chess. Another thing I like about this fund and strategy is that while there are areas in the power market that can be extremely volatile, this fund offsets much of that volatility by not only investing in the various ISOs, but also invested along the curve of each market. Additionally, the contracts used are specifically designed for investment purposes, so you don’t have to worry about a contract expiring and having to figure out how to source say 800 MWH of electricity or where to find 800 MWH of power to deliver.
Overall, this fund offers another way to capitalize on the energy sector and while it may be highly correlated with natural gas markets, this should change over time as more non-hydrocarbon energy sources are added to the various ISOs and as electricity prices begin to base characteristics increasingly pointing to their own supply/demand curve.
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