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FERC releases Energy Primer on U.S. energy markets

The Federal Energy Commission has released Energy Primer: A Handbook for Energy Market Basics.

According to the introduction:

Natural gas, electricity and crude oil are forms of energy that are of particular interest to FERC pursuant to its authority under the Natural Gas Act, Federal Power Act, and Interstate Commerce Act. This primer explores the workings of the wholesale markets for these forms of energy, as well as energy-related financial markets.

Energy markets consist of 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. The financial markets include the buying and selling of financial instruments that derive value from the price of the physical commodity. These financial markets have their own set of market structures and institutions, market participants and traded products which have their own drivers of supply and demand.

Much of the wholesale natural gas and electric power industry in the U.S. trades competitively, while some markets and their prices are established through administrative processes based on the cost of providing service. In competitive markets, prices are largely driven by the economic concepts of supply and demand. Underlying the supply and demand for energy are physical fundamentals – the physical realities of how markets produce and deliver energy to consumers and how they form prices.

Market participants buy and sell energy based financial contracts for a number of reasons. Physical market participants, such as producers and large consumers, usually use financial contracts to manage price risk and to protect against price volatility. That is, financial contracts can serve as a tool for managing risk akin to insurance. Other market participants use the energy markets to speculate, or to assume a market risk in hope of profiting from market fluctuations. Additionally, companies turn to the capital markets if they need to raise or invest money. This primer explores the market participants, products, market mechanisms and trading at work for natural gas and electricity in the financial markets.

Hydroelectric power is included in the discussions of electricity generation and electric storage, as well as in several other sections of the primer.

This primer is written to be used either as a traditional text or as a reference guide.

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