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I have been reading around energy markets recently and recent schemes such as Voluntary Carbon Markets, similar to the 'cap and trade' style of the Kyoto Agreement in 1997.

I have been reading in particularly about energy derivatives. But I have a question about the delivery of these commodities. I understand how, for example, oil gets delivered. Simply, barrels get shipped to your location with arrival at maturity. However, with electricity market derivatives, how does that get delivered? Say if a trader were to take a futures contract for a certain wattage of electricity, how does it get delivered? I doubt it would be as simple as a fuel cell showing up at your front door? Or does some other kind of deal with an energy supplier/ national grid get worked out?

I have done some research but I can't see anything about the method of delivery. This site here says that electricity derivatives are deliverable, but how?

Edit: I'd like to specify a particular market, anything regarding Europe or North America would be really insightful. Especially if anyone has any answers regarding delivery during the recent winter storm in Texas.

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  • $\begingroup$ I'm not sure but it might make sense to specify which market / region you're covering. If I remember correctly, in the Netherlands physical delivery of a fixed amount of kW takes place over an agreed period. $\endgroup$
    – Bob Jansen
    Apr 13 at 18:59
  • $\begingroup$ Thanks for your comment, I'll edit my question accordingly to include a specific market. In the example you mentioned, what's the mechanism of delivery? Is it by drawing additional current from a national grid? Or a temporary external supply? $\endgroup$ Apr 13 at 19:02
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    $\begingroup$ Do mind, my knowledge stems from an internship at an energy provider I did in 2009, so quite fuzzy. End-users would buy the derivative from us and take delivery by drawing from the grid. I guess they finally settled during invoicing. For energy providers or traders, they would either close out our cash settle. So maybe it's better described as a mix of both. Delivery tends to take place (the energy company has to deliver!) but you could view the whole as cash settled where end-users draw from the grid as normal consumers would and add their trading PnL to their bill. $\endgroup$
    – Bob Jansen
    Apr 13 at 19:10
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    $\begingroup$ Each contract is good for 10 barrels of electrons. Or positrons (shipper's choice). Just don't mix them. $\endgroup$
    – Brian B
    Apr 13 at 19:37
  • $\begingroup$ There is usually a National (or regional, eg Texas) Grid Operator and physical delivery would consist of supplying power to the grid. $\endgroup$
    – noob2
    Apr 13 at 20:30
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The exchange defines contract terms (including settlement). Usually on the exchange website they state exactly how the contract is settled. Try looking there.

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