Power surge: The US electricity derivatives boom, with ElectronX 

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Bryan Long: Welcome to J.P. Morgan's Making Sense. I'm Brian Long and today I'm joined by Sam Tiegel, the CEO of Electron X. We're going to talk about the changes reshaping U.S. power markets, what renewables and fast growing load look like from data centers and what this means for volatility, and how new more granular power derivatives can help market participants manage risk. We'll also talk about how electronics is building tools to help participants manage short-term power price risk. Sam, thank you so much for being here. So to kick us off, when you look at the U.S. power markets right now, what are the biggest inflection points you're seeing on the supply and demand sides? Why do those changes make this the right moment for a more modern power derivatives market?

Sam Tegel: Thank you, Brian, for having me here today. Really, really appreciate the opportunity. Yeah, when it comes to the changes in the U.S. power markets, what really stands out to us is the tremendous inflection points on both the supply side and the demand side that are triggering catalysts of change. The supply side being driven by the renewable penetration that, that you mentioned, as well as the demand side growth with data centers and AI bringing out a bunch of new users. And within that backdrop, the US power derivatives market is quite a bit, I would say, behind. We're trying to build a base layer of financial infrastructure that can enable the grid transition and this expansion of the U.S. grid. How we come to this space is that most of the team at ElectronX came from quantitative trading firms to help modernize some of the other asset classes. So we're used to markets that have high levels of meritocracy, open access, high levels of granularity, precision, electronic trading, and in every other asset class where that's followed, you've seen huge positive impacts for end users. And so we think this is why this is the right time to bring this to market. So for the last couple of years, we've been building this out, building the team as we work through the process with the regulators, the CFTC, and just launched this market in Texas and in the PJM with other markets coming very soon. 

Bryan Long:  I'm definitely a believer that competition yields the lower electricity costs to the end consumers. And part of that is actually having a stable and transparent rules and regulations that promote private investment. A big part of being able to attract capital is having the venues to be able to manage risks and manage the exposures. So can you talk a little bit about how Electron X functions in providing that intersection between people who are looking to buy and sell and participate in the U.S. power markets?

Sam Tegel: Absolutely. We are very pro competition within the derivatives market as well. And so there are incumbent derivatives markets that serve a strong purpose in the US power markets, but the wedge where we're operating that is new is to be much more focused on the short-term price management, risk management of power, which is a bigger deal today with renewables becoming a bigger part of the stack causing higher short-term intraday volatility. So we're offering products that are much more granular and precise than the incumbent markets. And the other key difference is that we are direct market access, meaning that anyone can sign up as a participant on our exchange. So we've lowered barriers considerably because we think that the power space is not just becoming more complex and growing between the renewables and the new users, but also becoming more decentralized. And we offer a simple path for smaller players to get access to real-time risk management tools that are shaped to their time horizons and to their sizes.

Bryan Long: So it's interesting because our markets right now are very much bilaterally focused between call it large utility users and wholesale generation participants. It really seems like a lot of the short term volatility that's expanding is happening in this energy transition phase that's also linked with just really rapid demand from large scale power users like data centers. How do you envision the different interests between the buyers and sellers actually using the exchange that you guys are growing? 

Sam Tegel: Yeah, one of the fun parts about what we're building is that we get to work with lots of different innovators across the space from the smallest grid edge batteries and compute and retail businesses all the way out to the largest utilities. And when you start compressing time horizons to hours versus days or weeks or months, folks have interest on both sides of the market, long and short, as you compress that time horizon. So we've seen a variety of interest from all those folks, the key differentiator being that some have much smaller sizes that fit their book size. Gen could be short or long in individual time periods. And unlike, uh, structurally, there's certainly a long-term bias, but when you compress to short-term trading, they can be on both sides of the market. We have intentionally focused on, serving end customers from a variety of folks, a variety of customer segments. So we have retail energy providers, we have Bitcoin miners, we have data centers, we have large energy conglomerates on our platform, as well as market makers and traders from various stripes from both sides of the Atlantic. And really, we're looking to be the place where short-term risk gets cleared. And you mentioned, central clearing, that's a big part of what we're doing that we think is different as well, is that there are no bilateral agreements or ISDAs to be signed across participants. So it's an opportunity for more different types of risk to face each other in a centrally cleared, simple model, which we think hopefully is, uh, ultimately beneficial for everyone's business within the space and hopefully get down to driving down volatility in the space and help businesses like yours, Brian, hopefully hedge and, and manage your own books better.

Bryan Long: What's interesting from our standpoint is that we see the short term price volatility starting to evolve and a lot of times you end up reaching risk limitations, credit exposure limitations for bilateral transactions with counterparties pretty quickly. There's also this sort of mismatch between the hedge structures that exist in the marketplace and how precisely they actually fit the hours of exposure that you're looking to cover. Specifically within this new complex power market universe, the sort of inner temporal timeframes where there's risk management tools that are necessary, they're becoming a little bit more exasperated. Sam, can you talk about how exactly do the hourly futures that you guys have on the exchange work? 

Sam Tegel: Yeah, and I'll get into that in just a moment, but we certainly see that dimension evolving. And you think back to, again, other asset classes in markets like equities, there's many ETFs where you can get surgical exposure to very precise long or short positions with, with the, the litany of different products that are out there. And the electronic traders who are in that space that provide the liquidity in that space, that's a really rich opportunity for the folks on that side. So we are looking to emulate that a little bit in the power space because we think that that short-term risk is there and we're looking to build for that future. In terms of how they specifically work is that we list the next 120 hours on all the, the hubs where, and, and products that we list. So you could go in and trade specific hour endings for those hubs and locations for the next 120 hours. So you have an intraday live-forward curve where each product is really just settles to the real-time price of that hour. So we see a lot of players trading anything short-term where they're managing short-term dark spread risk or otherwise getting precise exposure to the specific hours they want. So we have a much more surgical approach than maybe in the past.

Bryan Long: So how do the settlement mechanics actually work? Let's say I were to buy one megawatt of hour ending 18 power from you for today. So that's 6:00 PM for whatever time zone we're in. Let's say I bought one megawatt from you for $35. How does that functionally play out in the mechanics of the settlements that evolve through the exchange?

Sam Tegel: Sure. So if you traded that contract right now, first of all, you wouldn't be trading with me, the exchange, you know, we're essentially cleared. So it'd be with some anonymous other player on the exchange and you would get a fill back saying that you're now long from 35 and you've had that position on your books. That trade, you could hold and think about what you want to do with it, watch the market for that product the rest of the time all the way through the ending of that hour-ending 18. So you could trade out of it. So if the price spikes, the price is now 45 at 50 and you want to hit out of it at 45, you could just hit the bid and be done and lock in that value right away.

Bryan Long:  So if I bought $35 from the exchange and say I sold it for $45 before we got to the end of that hour, I would have a $10 credit that would be allocated into my account? 

Sam Tegel: That's right. Instantly. And if you take it to settlement, what would happen is that we would take the four SPP prints in ERCOT and average them. So whatever those four prints are, that would be the settlement. We average them and that's the settlement price. And then we compare that price versus your position at 35. So let's just say it closed at 50, then you would get $15 credited back to your account. And we settle real time. More or less, as soon as those, that print comes out, within a few seconds, we settle it and it's back in your account.

Bryan Long: And so just to ask, is the exchange open and available for trading 24 hours a day or do you have certain exchange hours? 

Sam Tegel: We list the next 120 hours at all times that you could trade. The exchange is open from 7:00 AM Chicago Time, Central Time till 8:00 PM Chicago Time, Central Time. You could trade all the overnight hours, but during that window, there's no trading available between 8:00 PM and 7:00 AM. We're not, and we're not open on the weekends yet. Settlement still happens twenty-four seven, but we don't have trading twenty-four seven. Now, it is an interesting topic though, because we do want to go twenty-four seven. It's in our roadmap. We think it's interesting because twenty-four seven trading's a hot topic across capital markets right now, but power actually is... Uh, you hear the number 8760 all the time, right? Because the market does have to balance all the time and we think there is a, a real need. People have asked us about opening on the weekends, even for a little lunchtime session. So (laughs) it's always easy for me to say and then my COO would say, you know, "Please, let's wait a little bit before we do this." But we will extend hours and we will be twenty-four seven before too long. But right now, we run long U.S. hours and we are open during the evenings. We've seen trading every evening since we've been open.

Bryan Long: It's interesting because this context for the listeners is that power is this instantaneous matching of supply and demand. There's dozens of real time trading desks in different cities across the nations. There's utility dispatchers. There's enormous amounts of human capital and labor allocated to providing reliable power supply 24 hours a day through all weather and all holiday conditions that can be possible. In the universe of trying to attract private investment versus having to pursue a regulated rate of return for some of this power and transmission infrastructure that's needed, there is private capital that's out there and willing to be deployed if they're able to balance the risks. Having confidence and transparency around the stable market rules that support it is critical. And one of the ways to balance these risks is by having the right commodity hedging and trading products available for market participants. Can you talk a little bit about the pathway that Electron X has navigated in order to be able to get your exchange up and running?

Sam Tegel: Sure. To get our exchange up and running, we first had to become registered with the CFTC. As you had mentioned, we're a, we're a DCM, a designated contract market, plus a DCO, a designated clearing organization. And that's a very lengthy process of, for good reason, right? The CFTC has high standards and we wanted to work under that regulated environment. And so we spent a couple years building the team out to satisfy their requirements and we started that process a couple years ago and just were approved late last summer to operate these markets. And that involves a lot of building the stack across operations, compliance, legal, risk, really across the stack with a high standard, which we think ultimately is a good thing for the industry. And then as we noted, once, once you have that designation, we, we have a lot of freedom on what products we offer as long as we follow the rules and work with our partners at the CFTC.

Bryan Long: Circling back to the traditional participants in the US power markets. Obviously you've been concentrated in terms of large utility scale generation portfolios and other larger financial institutions. It seems like one of the consumer classes that you're going to be bringing into the industry is more of these high frequency trading algorithmic based trading strategy backed funds. What is the pathway to being able to attract more interest from these groups that are eyeing the opportunity set that's unfolding in US power? 

Sam Tegel: Yeah, we're very focused on this because we see this as a wedge that can add a ton of value to, to the ecosystem. What high-frequency traders and quantitative traders care about is having a rich data set, having a consistent API, open access experience, central clearing is also very, very attractive to that set. And so it's really been interesting for myself as a ex quant trader that power, even though it is maybe undiscovered by that sector, is actually very data-rich. I mean, there's actually a lot of public data that is out there, but it's been kind of uncombed or less combed than others. So it's a data-rich environment in a space that has massive catalysts in change on both side and demand side, as we talked about earlier. So the timing is right to build a market that's more smaller contracts, higher frequency. The quantitative trading firms are the ones who are very good at pricing lots and lots of assets. So the idea of, launching hourly products on a bunch of different underlyings is something that fits very well in that model. And I think there's a lot of opportunity for folks in that sector to come in with fresh capital, which would massively help the hedgers who, again, our real end customers are serving the hedgers or looking to manage their risk. But if we can bring in more stable, more sizable capital for more sophisticated liquidity partners, I think that'll serve the entire ecosystem really well.

Bryan Long: So ElectronX has been up and running since February and just give us an idea how has that sort of trajectory of growth been unfolding?

Sam Tegel: Yeah. So we got up and running in, in Texas and ERCOT in February, uh, then up and running in PJM at the beginning of April. And we've gotten a number of our liquidity partners up and live in the last Six, seven weeks or so. And since, during that time, we've seen tremendous growth. We had X growth from March to April as, as some of the liquidity came online and PJM came online. We have over 50 institutional participants already on the exchange. It's closing in on 60 now. And our volume is still tiny, right? It's still just over a thousand contracts a day, most, for the most part. But the liquidity represented in the book is already quite substantial. And so really the way when you start a market, you really need to build the liquidity first. And so we have the liquidity that's out there. So when people come to the liquidity store, there's, there's things to trade. And now in our core markets, you can hit and lift very substantial meaningful size of, you know, 30 to 60 contracts in most hours of today and tomorrow. And now that that's out there, we're onboarding and kind of activating all the customers who are funded and, and learning how to use the market and where to get value. And so we expect the growth to expand pretty aggressively in the coming months.  

Bryan Long: Well, Sam, I think it's a great place to wrap up. Thank you so much for taking the time to share your views.

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