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Electricity As A Commodity: An Introduction

The Essential Guide
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In this guide to understanding electricity as a commodity, we discuss why electricity is valuable. We also explore a brief history of electricity and how it is produced.

By the time you finish reading this guide, you’ll have an idea of ways electricity is generated, the main uses of electricity, and what experts think about the future of electricity as a commodity.

Interested in learning how electricity is traded? See our full guide, or if you want to get started trading right now, here are options available in to consider:

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Between 74-89% of retail investor accounts lose money when trading CFDs.

What Are The Main Uses Of Electricity?

Electricity has many uses cases, though the following four cover the core use cases:

Uses Description

air-con unit
The residential sector consumed about 38% of annual US electricity demand. Space cooling (air conditioning) was the largest contributor to residential usage followed by water heating, lighting, space heating, refrigeration, and televisions and related electronic equipment. Clothes washers and dryers, computers and related equipment, dishwashers, small appliances, and other electrical equipment combine to use 40% of total US residential-sector electricity.

The commercial sector consumed about 37% of annual US electricity demand. Refrigeration accounts for the largest component of demand in this sector followed by computers and office equipment, space cooling, ventilation and lighting.
The industrial sector consumed about 25% of annual US electricity demand. Machines account for about half of this demand, while process and boiler heating comprise the next biggest category.
Transportation accounts for only about 0.2% of US electricity demand. Most of this use is by public transit systems.

What Makes Electricity Valuable?

Electricity is the result of a reaction that produces the flow of electrical power or charge.

It is both a naturally occurring phenomenon and one of the most prolific forms of energy used around the world.

People have been aware of electricity for thousands of years. Ancient societies marveled at electric fish and noticed static electricity when they rubbed certain objects.

Benjamin Franklin Drawing Electricity from the Sky via Wikimedia
Benjamin Franklin’s Kite Experiment – Benjamin West, Public domain, via Wikimedia Commons

However, it was only in the last 250 years that scientists made attempts to harness electricity.

How Did We Find Out About Electricity?

In 1752, American inventor Benjamin Franklin conducted research on lightning using a kite and a key.

This famous experiment demonstrated that lightning is electricity.

However, an even more important breakthrough took place in 1831 when British scientist Michael Faraday discovered the principles of electricity generation.

Electric Current And Magnetic Induction

Faraday’s law of induction describes how an electric current produces a magnetic field and how a magnetic field generates an electric current in a conductor.

This discovery of magnetic induction made possible electric motors, generators, transformers, and the electric grids that power modern societies.

Prior to the last 100 years or so, most people relied on candles or kerosene lamps for light, iceboxes to keep their food cold and wood- or coal-burning stoves to provide heat.

However, Faraday’s law hastened modern advances in electricity.

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Electricity Pioneers: Thomas Edison And Nikola Tesla

In the late 1800s, Thomas Edison invented the first long-lasting incandescent light bulb, and inventor Nikolas Tesla pioneered the use of alternating current electricity.

Edison’s work made electric lightbulbs an everyday reality, while Tesla’s work reduced the cost of transmitting electricity over long distances.

Today electricity is so prevalent in daily life that we take it for granted. The largest global economies consume trillions of kilowatt-hours (kWh) annually to power governments, businesses, and homes.

As the global economy has grown, so too has demand for this vital resource.

How is Electricity Produced?

A common method of producing electricity is through the use of a generator, which is a device that replicates what Faraday described in his law.

Essentially, Faraday described how a magnet moving inside a coil of wire produces electric current flow in the wire.

Faraday emf Experiment via Wikimedia
Image by Eviatar Bach, CC0, via Wikimedia Commons

How Does The Generator Work?

A generator consists of electromagnets (magnets produced by electricity) and a series of insulated coiled copper wire.

The wire forms a stationary cylinder, and a rotary shaft made out of electromagnets surrounds this cylinder. As the electromagnetic shaft rotates, it induces a small electrical current in each segment of the coiled wire.

The combination of all of these small currents produces a much larger electrical current. This larger current is the electricity that moves through power lines to reach consumers.

What Are The Sources Of Energy Production?

Electric power plants use turbines to power their generators.

Turbines are rotary mechanical devices that take fluid and convert it into mechanical energy. This mechanical energy allows the generator to do its work and create electrical energy.

There are many different kinds of turbines – steam, gas, water and wind, for example – but they all require a source of power to operate.

In other words, generating large amounts of electricity requires large amounts of energy.

Energy SourceShare of Electricity GenerationDescription
Natural gas0.34Natural gas heats water for steam and also produces the hot combustion gases used by gas turbines.
Coal 0.3Some coal-fired plants convert coal to a gas for use in electricity-generating gas turbines.
Petroleum0.01Petroleum can be used to produce hot combustion gases or steam.
Nuclear power0.2Nuclear fission creates steam that powers some turbines.
Hydropower0.07This process uses flowing water to spin a turbine.
Wind power0.06This source is a growing contributor to electricity generation.
BiomassAbout 2%This source uses materials derived from plants, animals, food scraps and paper mills to power turbines.
Solar power<1%Photovoltaic (PV) and solar-thermal power are the two main technologies for converting solar energy to electricity.
Geothermal<1%This source uses heat beneath the earth to power steam turbines.

Electricity power plants choose energy sources based on their cost, availability, and efficiency.

Westinghouse Steam Turbine via Joe Mabel on Wikimedia
Westinghouse Steam Turbine Image by Joe Mabel, CC BY-SA 3.0, via Wikimedia Commons

Steam Turbines In The US

In recent years, about two-thirds of US electricity generation occurred using steam turbines. Steam turbines use biomass, coal, geothermal energy, natural gas, nuclear energy, and solar thermal energy for power.

Historically, fossil fuels have comprised the largest energy source for the 4 trillion kWh of electricity generated each year:

Steam turbines are surprisingly energy-intensive. For every 100 units of heat energy that go into a power plant, only 33 units are converted into useable electricity.

Electricity is necessary for every facet of a modern economy. Therefore, it is not surprising that the largest electricity producers are also the largest economies in the world.

Top 10 Electricity Producing Regions

Top Electricity Producing Countries

Electricity use across the globe has risen dramatically over the last several decades. In the United States alone, electricity use today is 13 times greater than in 1950.

RankFlagCountry(kWh in billions)
#1Flag of ChinaChina6,142
#2Flag of USAUnited States4,088
#3Flag of European UnionEuropean Union3,166
#4Flag of IndiaIndia1,289
#5Flag of RussiaRussia1,008
#6Flag of JapanJapan976
#7Flag of CanadaCanada643
#9Flag of BrazilBrazil559
#10Flag of FranceFrance536

The proliferation of computers, electronics, and industrial machinery has played the biggest role in increasing demand.

Expert Opinions on Electricity

One leading expert believes that electric utilities offer safer and more attractive returns than other low-risk trades.

Ross Baldick Professor at the University of Texas at Austin

“Although there are some potential risks to that return, historically there have been few if any, interruptions to the remuneration. Moreover, current regulated rates of return are attractive compared to other low-risk investments, such as bonds. “

Ross Baldick, Strategic Consultant, Professor at the University of Texas, Austin

Where Can I Trade Electricity?

If you are looking to get started trading electricity or other energy commodities, here’s a list of regulated brokers available in to consider.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

Further Reading

If you’ve familiarized yourself with electricity as a commodity, you may want to see our guide on electricity trading.

Our team of experts has also put together a general energy commodity introduction, along with guides on:

See these statistics on US electricity production, consumption, and trade:

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