Tidal Financial Group has partnered with the Carbon Neutral Investment Group (CNIC) to launch what I consider a breakthrough product -- one that I have talked with several issuers about launching over the years but never got to see come to market. That product focuses on the power futures markets: The CNIC ICE U.S. Carbon Neutral Power Futures Index ETF (AMPD) .
Let's take a quick look at this market and the fund that provides investors access to it.
Power Futures Are -- Electric?
Within the sphere of energy markets, we are all familiar with the markets for oil and natural gas including all their derivative products like heating oil, gasoline, and the like. One corner of energy that a lot of folks may not even know has a presence in the futures markets is known as the power market, better known as electricity.
These markets have been around for quite a while but had traditionally been traded on an over-the-counter (OTC) basis and, if you want to get technical, were forward contracts as opposed to futures. While both types of contracts facilitate the future transaction of some underlying for cash, Forwards are completely bespoke with customizable contract sizes and expirations while Futures have standardized characteristics and trade on exchanges which allows for robust secondary market trading, including centralized settlement and clearing. About a decade or so ago the Intercontinental Exchange (ICE) started to report these transactions on its platform, and it wasn't long before they started listing and trading standardized contracts, or Futures in these markets.
Electricity generation is managed by the Federal Energy Regulatory Commission (FERC) and is set up under various Regional Transmission Organizations (RTOs), operators of which are also referred to as Independent System Operators (ISOs). While there are more than six ISOs, this fund is focused on the six that see the most liquid markets. That group includes New York (NYISO), Texas (ERCOT), California (CAISO), New England (ISONE) which includes everything east and north of New York, Midcontinent (MISO) which runs from Wisconsin down to Louisiana, and PJM (PJM), which includes everything bounded by New Jersey to Ohio and Pennsylvania to Virginia. Between the various ISOs, and contract types that include Real-Time, Day-Ahead, 15-Day ahead, Peak, Off-Peak, including various mega-watt size contracts there are close to 440 contracts. When you include the various expiration dates that number grows at least tenfold. To be clear, not every contract trades with a lot of volume but there are pockets that have strong enough open interest to support this product.
Get AMPD
This fund actually does two things for investors. The first is that it provides exposure to what essentially is a blended national electricity price. The other is that through the fund's investment in Carbon Credits, the fund offers a truly carbon-neutral energy investment option to investors.
The strategy involves tracking the ICE Power Futures Carbon Neutral Index, which is made up 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 established by buying the next 12 monthly expirations from the current front-month contract. The "Mini" refers to the contract size, which for these is one mega watt (MW) as opposed to the 50MW hour or, in some cases 400 or 800MW hour contracts. These mini contacts are constructed for speculative, or investment, purposes as they are cash settled while the other contracts I mentioned are for the delivery and receipt of actual electricity which is why those contracts are based in Mega Watt Hours and why they are for larger notional sizes. For more information about the index including a link to the methodology, head over to ICE's Index Data Portal and do a search for the ticker ICECNPI.
Wrap It Up
I am a fan of this fund, if only because it brings me back to the days when exchange-traded-funds provided access to entirely new markets and asset classes. The fund is a basic access product. While it does have the bonus of providing a carbon-neutral investing product, the issuer isn't out there trying to play 3-D chess. Another thing I like about this fund and strategy is that while there are pockets of the power market that can be extremely volatile, this fund smooths a lot of that volatility out by investing not just in the various ISOs but also along the curve of each market. Further, the contracts used are designed specifically for investment purposes so there are no worries about having a contract expire and having to figure out how you're either going to take delivery of, say 800MWH of electricity or where you're going to find 800MWH of power to deliver.
Overall this fund provides another way to play the energy sector, and while it may correlate strongly with natural gas markets, this should be changing over time as more non-hydrocarbon energy sources are added to the various ISOs and electricity prices start to display characteristics based increasingly on their own supply/demand curve.
