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- CRB Fundamentals - 2008 Commodity Articles

Electric Power

The modern electric utility industry began in the 1800s. In 1807, Humphry Davy constructed a practical battery and demonstrated both incandescent and arc light. In 1831, Michael Faraday built the first electric generator proving that rotary mechanical power could be converted into electric power. In 1879, Thomas Edison perfected a practical incandescent light bulb. The electric utility industry evolved from gas and electric carbon-arc commercial and street lighting systems. In 1882, in New York City, Thomas Edison's Pearl Street electricity generating station established the industry by displaying the four key elements of a modern electric utility system: reliable central generation, efficient distribution, successful end use, and a competitive price.

Electricity is measured in units called watts and watt-hours. Electricity must be used when it is generated and cannot be stored to any significant degree. That means the power utilities must match the level of electricity generation to the level of demand in order to avoid wasteful over-production. The power industry has been deregulated to some degree in the past decade and now major utility companies sell power back and forth across major national grids in order to meet supply and demand needs. The rapid changes in the supply-demand situation mean that the cost of electricity can be very volatile.

Electricity futures trade at the New York Mercantile Exchange (NYMEX). The futures contract is a financially settled contract, which is priced based on electricity prices in the PJM western hub at 111 delivery points, mainly on the utility transmission systems of Pennsylvania Electric Co. and the Potomac Electric Co. The contract is priced in dollars and cents per megawatt hours.

Supply - U.S. electricity production in 2007 (through November, annualized) rose +1.4% yr/yr to 2.519 trillion kilowatt-hours. That was well below the record high of 3.212 trillion kilowatt-hours in 1998 and indicated that recent electricity production has been reduced by more efficient production and distribution systems, and to some extent conservation of electricity by business and residential consumers. U.S. electricity generation in 2006 required the use of 2.478 trillion cubic feet of natural gas (+16.1% yr/yr), 753 million tons of coal ( 1.0% yr/yr), and 54 million barrels of fuel oil (-45.5% yr/yr).

In terms of kilowatt-hours, coal is the most widely used source of electricity production in the U.S. accounting for 59% of electricity production in 2006, followed by nuclear (17%), hydro (11%), natural gas (11%), and fuel oil (2%). Alternative sources of fuel for electricity generation that are gaining favor include geothermal, biomass, solar, wind, etc. but so far account for only 0.3% of total electricity production in the U.S.

Demand - Residential use of electricity accounts for the largest single category of electricity demand with usage of 1.352 trillion kilowatt hours in 2006 accounting for 35% of overall usage. Business users in total use more electricity than residential users, but business users are broken into the categories of commercial with 34% of usage and industrial with 27% of usage.

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