The Derivative - Portfolios of Power Futures with AMPD ETF’s Tim Kramer

Episode Date: August 31, 2023

Is electricity a commodity?  If not, why not? If so, how do you get exposure with the demand for electricity set to possibly outstrip the world's forthcoming technological advancements.  Join us on a high energy episode of The Derivative by RCM Alternatives for an in-depth exploration of "Electrifying America" with Timothy Kramer, a seasoned energy and power trader and CEO of CNIC Funds – the group behind the AMPD electricity ETF.  In this stimulating conversation, Kramer sheds light on the difficulties of accessing the power market, why electricity should be part of any inflation-protecting commodity investments, and what the overall landscape looks like for America's electrification journey, unveiling three key pillars: importance, inflation, and imbalance.   From the coming era of all-electric vehicles to the challenges facing renewable energy, Kramer navigates the complexities and opportunities. He also delves into the creation of innovative indices and the dynamic interplay between power and commodities — SEND IT! Chapters: 00:00-01:53 = Intro 01:54-03:53 = Texas is How Big? 03:54-17:38= The Electrification of America, Power’s Supply/Demand 17:39-23:48= ESG push back & removing carbon = Carbon Neutral 23:49-36:47= Creating an Index- AMPD: Deregulation, power generation & retail providers 36:48-44:12= The power players in the power market 44:13-54:23= Carbon offset vetting and commodity exposure 54:24-01:00:42 = Is Bitcoin mining a legit use on power grids? From the episode: The Electrification of America https://www.cnicfunds.com/ The Kaoboy of convertible Arb with Michael Kao Derivative episode Super storms, mathematical modeling, and hurricane hunting with Dr. Jeff Masters Derivative episode Follow along with Timothy on LinkedIn and check out all the links above for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Welcome back. It's been a couple of weeks. Sorry about that. We had a guest cancel last minute, then some summer vac and well you know thing called life uh but we're back in action

bringing you some 40 act flavor the next two weeks that will be with russell colitis of alpha centric's premium opportunity fund next week talking through the improving environment for volatility and option traders and how you stuff all that into a mutual fund and in today's episode we've got a powered-up conversation, a high-energy guest, an electric atmosphere where the light bulb really came on. See what I'm doing there? All right, enough fun.

We're talking power trading, inflation hedges, and the electrification of America with Tim Kramer, the CEO of CNIC Funds, which is the group behind the ICE, U.S. Carbon Neutral Power Index, and the AMPED, A-M-P-D, ETF, which tracks the index. Send it. This episode is brought to you by RCM's Clearing and Execution Group, which helps ETFs like

the one we're talking about today get access to and efficiently trade exchange-traded futures and derivatives markets, even stuff like power futures. Visit rcmalts.com to learn more. And now back to the show. All right, Tim, how are you? Doing fine, thanks. How are you doing today? Good, thanks. And where are you again? Down in Cool Breeze, Houston? Oh, yes. Tropical Houston, Texas. I think it was as hot here in Chicago yesterday as down there. We were 100 here yesterday. Yeah, that'd be a cold front for us.

Yeah, it's been brutal summer. It's, it's been pretty hot. Yeah. I mean, typically, uh, we usually don't break a hundred very often in Houston because we're close enough to the Gulf. Um, but you know, you'll hit 99 for a heck of a long time. And then the worst part about it is like in the, in the evening and in the morning, you don't get that low, uh, temperature rise, so the humidity just kills you. What was I reading the other day that Vermont, the bottom of Vermont is narrower than Houston is wide? Yeah, that sounds right.

There's all sorts of crazy facts like Harris County is the county that has Houston in it. And somebody had been saying that Harris County is bigger than Connecticut. Yeah. So I'm not sure about my geography on on that but there are interesting soundbites i don't know about that either but maybe texas pretty big down there yes it is uh and what brought you down to houston you born and raised down there are you no no no i'm originally originally from pennsylvania so um in the energy industry they have a saying and that is all roads lead through Houston. I hear you.

So you eventually got down there or decided to stay down there? Yeah, I came down here like in 1999, and I thought it would be like a three-year tour of duty, and here I am. What firm was that with? Originally with Duke Energy. Okay. And so they had a Charlotte utility, but they had an unregulated trading arm that was based here in Houston. Do you get tied up in Enron at all or anything like that with these trading arms in Houston? Not in a bad way?

No. No. So moving on, I read your electrification, try and say that 10 times fast, electrification of America paper and kind of wanted to start there and from a high level, just why you wrote it, what you're seeing, what your concerns are and what it means for investors. So I'll let you take it away. Oh, absolutely. So I've been doing electricity, commodity energy trading for 25 plus years. And we just happen to see kind of what I think is a once in a lifetime opportunity here. So we use the phrase electrification of America because that seems to get people's attention. When we talk about kind of the products and, you know, term structure and

back radiation and all sorts of things like that, people just kind of gloss over a bit because it's new. So electrification of America kind of gets their attention. And then there's just three basic tenets of that thesis. And the first is importance. The second is inflation. And the third is imbalance. So just like, you know, it's difficult to say electrification of America. We go with the alliteration of the three I's on importance, inflation, and balance.

So when we talk about importance, on a retail notional basis, electricity is the most consumed commodity in the U.S. But up until now, it wasn't in any mutual fund. It wasn't in any ETF. There was no index. There was really no way for anybody to invest in that. The second part, inflation, month after month, when the CPI comes out, if you take a look at what the contribution is of electricity is to the CPI, it goes from like 2.48 to like 2.67. It's in that band for like the last 10 years and so you know if you would like not as a percent of the reading but as its inflation itself is 2.4 percent yeah so like when you get the cpi numbers

that come out monthly they'll have like a page and it'll add up to 100 of all the components got it and of that piece 2.5 percent ish is electricity. Okay. I thought you're saying, but also that it's growing at 2.5. It's probably higher than 2.5. It comes in there. Yeah. Now we actually think it's going to be growing a lot more significantly like that than that, because that's the direct component.

But if you think about like the indirect effect of higher electricity prices that you don't really see in that direct reading, I think they're going to go through the roof. So it's the importance of inflation. And the third one is the imbalance. And so we actually think that demand for electricity is massively understated in the US. And we think that supply is overstated. So when we say that we think that demand is understated, the best way to look at this is Elon Musk had an article in the Wall Street Journal on July 31st. And he, in essence, said that whatever you think electricity demand is going to be,

quadruple it and you still haven't hit the number. And some of the soundbites that I believe he uses for that is if you take a look at like a Google search would use about one watt of electricity, an AI search would use somewhere between five to 10 watts of electricity. And it takes anywhere from 100 to a thousand watts of electricity to train the AI to do that search. So that's just kind of one example on the demand. But if you think about, you know, what the U.S. is doing. And that's just that's not anything we actually use electricity for today. Oh, yeah. I mean, Google searches. Yeah. But like. Yeah. that's not anything we actually use electricity for today oh yeah i mean google searches yeah but

like yeah powering your home powering your car well so and you know there's a stated goal by the u.s auto manufacturers almost global manufacturers that's somewhere between 20 and 2035 no new vehicles are supposed to be combustion engines all new vehicles by that time are supposed to be electric. And then in New York state, you can't hook up, you can't have a gas stove anymore. You can't hook up your retail home to the gas supply lines. California has tightened their emission standards. Biden's looking at tightening them even more. I mean, there's just so many things that make you kind of really bullish on what the demand scenario is in the US. How do those, I was thinking about that with California, aren't they going to be the first

to no combustible and no gas engine cars? Yeah. They're, they're, they're getting pretty aggressive with that. They, uh, like one example is I think they've outlawed, um, gas powered leaf blower. Yeah, no, like all of it. And so they actually started a fund where, you know, people can turn in their equipment for electric equipment. So I think it's 24 is when that starts, but I'm not sure the exact date. But how and I don't know if you even know the details of this, but how is it in California won't be that you can't use a gas car. It'll be that you can't buy one in the state, I would believe. Right. They're not going to come around and say you can't drive that car? Well, they tighten their emission standards so much that I think like the example that

people are citing right now is by 2026, Jeeps won't pass the emission standard. So, you know, there's ways that they can kind of make you get rid of those cars. And then there was talk about the Biden administration. They've done a lot of things in the Inflation Reduction Act that are actually geared towards electricity and or the infrastructure of the U.S. But it looks like they're also talking about tightening some of their emission standards. They're also talking about incentivizing people to get rid of their gas or combustion engine vehicles. So I'm not quite sure how this plays out, but it seems like there's a lot of different groups that are serious about getting anything other than electric cars off the

road. And it seems like you're not taking a political stance or whether that's right or wrong, but just saying, hey, this is going to have massive effects on the demand for electricity, for the imbalance. Like we're going to have a huge supply demand imbalance because of all this. Right, right. Exactly. So that's kind of, there's lots of examples we can cite on the demand side. On the supply side for thermal generation, so absolutely coal to some extent, what you're seeing with natural gas fired plants, the coal plants are retiring at a much faster rate than people anticipated. And that's just because of the ESG tidal wave and banks won't finance them now or refi them. They can't get letters of credit.

You can't get directors and officers insurance. There's just so many things that are going against the coal fired plants that those things are retiring at a much faster rate. Now, it's interesting. You work at a coal plant, forget it. We're not giving you insurance. We're not giving you anything. There's banks that before would be providing hedges for these coal-fired power plants. And they're like, you know, sorry, we can't do it.

We can't finance you. We can't give you hedges. We just have to leave you alone. So you're seeing the thermal retire a lot faster than people thought and then why do you call that what's the terminology there with thermal i think of thermal is geothermal but no just yeah it's just burning something heating it up yeah there's all sorts of different terms so um but basically something that burns i'm just talking about coal or natural gas fire and stuff right now probably really cool but to some extent natural gas and so the u.s now is trying to

replace all that with renewables so there's a stated goal in the u.s to have 80 the goal is 85 percent renewable generation by 2030 and 100 carbon free generation by 2035 and so in order to achieve that target there's that there's such a backlog for wind and solar and other types of renewables. So it used to be that you could get those things built within, we'll say, you know, permitted build online in like three to five years. There's a study that came out by Berkeley, I think maybe two, three months ago. That backlog now is like up to seven years. So that's one delay in the supply. And then after continued decreasing in the price of what it costs to build these things, you've seen offshore wind during this year is up about 60% in terms of cost to

build. And then Lazard put out some research on levelized cost of energy, LCOE, and it's also showing increased costs in just onshore wind and solar. So, you know, as you see, interest rates go up and you've got, you know, labor shortages, et cetera. So for those things, the costs are actually going up to build them. So for those, all those different factors, we see the supply as just being, you know, not as robust as people think. We did a pod with Jeff Masters. He does Weather Underground, was the founder of weather underground yeah um but i was was curious like if you threw a wind farm along the entire west coast of the united states right would it basically steal that wind would there be no wind in the midwest and the

east coast because it's all coming mostly west east but he was kind of saying yeah like it's taking it out of the global equation right it's turning that wind power into... So that's just interesting to me of like, at some point, there's a trade-off here. Like we're taking all this from this place. It's not totally free renewable energy. Who knows what that looks like? Where did that wind that we took out of the system go? But anyway, that's off topic. That's an interesting point.

Yeah. And then the other thing too is, I mean, if you take a look at Texas, right? So when you've got normal weather and the wind and the solar show up as anticipated, the prices are $5,000 a megawatt, and it'll stay there for a while. So you're kind of balanced on the knife's edge there. And so there were some studies that were put out in terms of, can we actually have 100% renewable grid? And the issue right now is because energy is not storable, you need to take a look at what the battery capacity is. I think right now we've got less than 2% storage capability with batteries in the US. And because of the difficulty in getting access to those metals, that's not expected to grow anytime soon. But with the actual like wind and solar, New England put out a study and they said, we need 400% more wind and solar than what our actual like

peak hour of the year is just to make sure that we can meet everything. But then MIT put out a study and said, not possible. It is not possible to have enough wind and solar on the ground to meet 100% of the energy demand renewal, because you just can't tell when it's going to show up. The footprint itself, they're saying, or even if you had all those stations, you wouldn't know if it's going to show up? Even if you had all those stations, yeah. So they're saying even if you had 400% more than what you thought your peak was, there are going to be hours where you just get no wind and no solar, and you won't even be close to serving that load. So that's kind of the first problem with those renewables. Second problem is the generation that you're taking offline, like the coal and to some extent, you know, the natural gas plants.

Those plants, you can control the output. They call that dispatchable. And so as the load varies throughout the day, you can kind of use load following services with those types of plants to kind of match the load. But wind and solar, they're not dispatchable. So you just get whatever you get. And so that's another element. And again, there were some recent reports that were done that talked about what the cost is to take wind and solar, the non-dispatchable generation, what they call it, firm it up, or to make it be able to follow load. And it adds significantly to the cost of that. So that's definitely...

Is dispatchable like i'm thinking of the old west steam engine right we needed to go faster shovel more coal in there yeah that's that's it yeah basically yeah we can turn the dial one way the other yeah so so like most gas fired plants you know you've got some pretty decent response times with those and then they've got like oil fired plants that they call peakers that you can bring on pretty quickly and you can have like some diesel engines that you can bring on some really old stuff. But they're inexpensive. I'm sorry, they're really expensive and the emissions are kind of bad. So those things are going away. So the ability to kind of follow that load or meet that load following demand as you add renewables is becoming more difficult.

And as you're getting rid of coal fired it's mostly getting replaced with natural gas so if you take a look at the development queue right now there's some natural gas that's on there but the bulk of what's supposed to get built is primarily um solar and wind and that is that an issue of like nobody wants those pipelines right right to get the gas to all those plants across the country. There's not a good way to do that currently. That's one element that makes it difficult. Another element of it is just, again, the ESG tailwinds. And so even if you're burning natural gas, you still have emissions.

And if you're trying to be 100% carbon-free generation, you can't do that with natural gas. Now, they are talking about carbon sequestration where they'll catch that carbon and bury it underground or they're talking about uh you know helping uh using hydrogen to help uh burning those plants and that way you can reduce what the carbon footprint is but natural gas still gives you a carbon output um we had michael cow kao on the pod once he was saying he said you'd need three to five times more pipeline than is existing in the U.S., which took over 100 years to build out that infrastructure. So it's like that's a pipe dream, literally and figuratively, a pipe dream of like, there's no way that's going to get done politically, financially. Like, there's just no way you can build all that in any sort of reasonable time frame.

Yeah. And the economics of just the carbon sequestration piece of this and or what you're looking at with the green hydrogen, it's really expensive. So, I mean, you do retain load following capabilities with those plants if you use that technology, but it's just really expensive. What's your thoughts real quick on ESG? It seems to me from what I'm reading, there's getting a lot more pushback these days. So yeah, Texas is, I think we get a really good split, right? So there are some people that when we, we even just mentioned the word ESG, like, oh yeah, I want to do something. I want to show I'm doing something ESG done. And there are other people that they're like, I don't even want you to spell ESG in my office or I'm going to kick you out of here. Because again, being in Texas, the land of oil and natural gas, they just don't really see the economic viability of that.

When I think there's been greenwashing. We'll buy this plant, we'll do this that is economic friendly just to get the ESG stamp. It seems there's a lot of I don't know if corruption is probably too strong of a word, but clouding of what's actually going on and whether you just get the stamp or not. When we get into what we did, we created the index and then it is carbon neutral. So what we do, and we'll talk about it, but we buy the correct amount of exchange traded carbon allowances that match the portfolio so that the whole footprint of the overall portfolio is carbon

neutral. And so that's on the index name and it's on the ETF name. So the SEC is allowing us to do all that. so you know we're not trying to say green or esg compliant or something like that because that's just those are just undefined terms yeah and so where we really got kind of a head scratcher was we wanted to find an independent third party that would stamp and verify that said okay you guys are green or you guys are esg compliant something like that and so we talked to pretty much every major rating agency you can think of, and we'll just kind of skip their names so we don't call anybody out. And we're like, hey, take a look at our portfolio. You take your name, you got a lot of gravitas. Just make sure that we

qualify for this. And then we'd like to be able to say, yes, we are ESG compliant. And pretty much every one of those rating agencies said, no, not touching that. I'm like, what do you mean? You guys do that for a living. You do it for bonds.

Why can you not do this? We're not doing that. So we did. Future scary. Yeah. Yeah. Yeah. I'm like,

you gotta be kidding me. Right. So we found one group that does this and they actually do it for a lot of different mutual funds and some big banks, etc. And so we're like, ah, this is pretty cool. So we qualify for SFDR Article 8. So over in Europe, they have like Article 6, 8, and 9. And we qualify for 8, which is like the second highest. And this group that can give us the stamp on this, they said, look, you probably qualify for nine, but you want to really think hard about that. Because for what you're doing with these electricity futures and the offsets, et cetera, you need to tie it back to something to show improvement.

And that needs to be auditable. So you need to be able to say that your fund allowed 16 wind farms to get built or whatever this quarter. And then you've got to track those things getting built and getting online and then show that continuous so like we're not sure that that uh sfdr article nine stays around much longer and just the cost to do it and kind of people's attitudes towards it you you might want to really think hard but you've easily got eight but the point being is um to your question about esg it's still kind of the wild west. You don't really know what qualifies for what classification. And you don't really know if people have an appetite for it or not. And so what we did is

we just said, listen, we are carbon neutral. And if you like ESG, then there you go. We're carbon neutral. And if you don't, well, we're giving you exposure to an asset class that previously didn't exist. Yeah. We'll come back to that. I was coming at it more from the angle of like, it's going to start to be pushed back. It's going to, from the imbalance angle of like, okay, we went too far too fast on, we got to make everything renewable. We got right.

Think of Germany. We're getting rid of all these nuclear plants. Whoops. And the coal plants. We forgot that we still need energy so well it feels to me like there's going swinging back a little bit the other way of like let's pump the brakes on on converting totally to a green infrastructure because it's expensive and it's going to take a long time and so whether we're getting that to right where we are in that if level one is we don't care at all we're burning fossil fuels all

day long level 10 is we have zero fossil fuels like where are we on that range it seems to me we went down to like four and now maybe we're back to seven you're much more polite and politically correct than ever be right i'm very cynical on this so yeah well pick pick the numbers when you're a dow 40 000 and the 10 years at 2% and unemployment's at 3%, we want to be green and we'll spend lots of money. But when the Dow's treading water and you're looking at long-term interest rates rising and unemployment starting to rise, it's like, well, wait a minute, wait a minute. Burn that coal. Yeah. That's kind of what it seems like. Again, it's an example by exaggeration, but

that seems to be the prevailing sentiment here. But I guess bringing it back to you, like, do you think that can swing so far back that it diminishes the imbalance? Right. That this will be back to full load. Right. We're burning coal like crazy and we have full old school energy infrastructure, which will handle the imbalance. So I think from a supply standpoint, it can lessen the imbalance, but you'll still be looking at some pretty sparse reserve margins in terms of like excess capacity. So the demand, I don't really see you curtailing the demand at all. And the supply might be a little bit stronger. It might be. The green might take a little bit longer to get in there. So it may mute ago, 10 times more things than 10 years ago. Right.

Just like that, right. You have a picture frame. You have basically everything has a, a chip in the internet of things. And like all that needs power needs electricity. Yep. Exactly. Any other takeaways from the paper?

So that's kind of the, you know, the three the three, you know, the electrification of America. So it's the importance, the inflation and kind of the supply to minimum balance on that. And then so, you know, what we did is we kind of viewed this as an opportunity. So we we created an electricity index because one didn't. And then, you know, Tim Kramer publishing an electricity index, nobody cares, right? So we partner with ICE, the Intercontinental Exchange, and just absolute great group of guys to work with just amazingly, you know, user friendly, like Varun Pilar and Preston Peacock and the guys that run that group, just very commercial and

they, you know, very dynamic and want to make make things happen so we feel very lucky that we're able to partner with them and create that index and then we launched um the etf we did the we published the index in uh january 18th of this year and then uh in mid-may we launched the etf and the ticker on that is amped a-m-p-d and that's because all the cool tickers like Volt and Shock and stuff like that were taken. That was pretty good. I want to spend 10 minutes on what were some of the other cool names you came up with. Oh, well, so the process is the New York Stock Exchange, which ICE happens to own. When you go to listen ETF, you can contact them and they've got a person there that they do all sorts of research and it's like, give me your top three names and then they'll tell you what's available.

So then they're, you know, again, a great group, but I think we probably went through like 15 or 20 possible names and kind of AMP was the one that kept coming up as nobody was using it. And it was the closest to conveying the essence of what we were doing. Right. There's, we've got a lot of fun ones and and some but they won't let you sit on them right i think a lot of groups grab them but i think you can only unless you launch you have to basically re-release it into the wild it's they're they give you i think it's like a three month maybe a six month period you can kind of hold them for a little bit longer than i thought you you could yeah but it's not it's not in perpetuity now.

So first step, create the index, right? This is so old fashioned. Now people just create an ETF and trade it, right? The old school ETF was, hey, it's supposed to track an index. Now these people just create one and base it on a strategy and it kind of lost the index ability. But for you guys, the index was important. Oh, the index was massive for us because if we just did the ETF, people would say, I don't know what this is. And we're going to watch it for two,

three, four years and see how it trades. And then we'll figure it out. But if we have an ETF that is benchmarked to the index and ICE publishes the index and ICE is the index administrator and the data and the index now go back to January 1 of 2014. So you now say, okay, well, there's a track record for the index. And we know that you guys are having like a 95% correlation to that, which is in the prospectus. So they come back and say, okay, that kind of helps us jumpstart our ability to invest in the ETF because there's a long dated track record, which is the index. And so index name again?

The index is the ICE US Carbon Neutral Power Index. ICE US Carbon Neutral Power Index. And the idea being, right, what's the one line sentence of that? That's this whole concept, electrification of America. This gives you exposure. This is an index of what it costs to provide electricity. Right, right. So what this index consists of, if you think of a map of the U.S., what we did is we took six of the major electricity trading hubs. And so electricity has been trading on ice, intercontinental exchange. It's about maybe 2001, 2002-ish.

And so it's been around for a while and it trades just like other commodities do on exchanges so you've got you know the different months the different contract specifications and so what we did is we took six of the major trading hubs so we took what's called meeple which is New England and then we took New York and then we took what's called PJM which stands for Pennsylvania Jersey Maryland and then we took what's called PJM, which stands for Pennsylvania, Jersey, Maryland. And then we took ERCOT, which is Texas. And then we took MISO, so if you just think like Chicago. And then we took California.

So we take what the average annual power consumption is in each one of those regions, and then we weight the index pro rata across that. And then you go onto the EPA's publicly available information and you see what the carbon footprint is of that portfolio of carbon futures. And then you pick up the right amount of exchange traded carbon futures so that you've got this thing that's carbon neutral. So that's kind of the index and then the carbon neutral piece of it. Let's dig into the index. We'll leave the carbon neutral aside. So right away, I think, well, didn't you leave out a whole bunch of the country? Or you're saying these six cover, right? What's the correlation with the is there a national average cost outside of those six? There hasn't really been any index that was published for a national average cost. I mean, there's there's there's data that the EIA puts out and they do it. You can carve it up and look at that as a national average, but they do it more of like sector, like industrial, transportation, commercial, etc.

But those six are the ones that have the most liquidity and the most activity in the futures market. And geographically, they give you kind of the best representation of the U.S. And what is the BLS? Who does CPI? I'm forgetting who does that, but what's inside the CPI? These six? The CPI takes the retail number from the EIA website. Okay, which is based on these six.

Yeah, yeah, so that should be BLS. Yeah. And then next question is, so ERCOT is famously deregulated or what's the term? They're not, they don't play well with the others. So they're, they're basically their own island. We'll say they're, they're kind of isolated in terms of regulations from the other part of the U.S. And for the most part, there's not much transmission in or out of ERCOT either. Okay. So that's what makes that more volatile sometimes if they can't, they don't have things in place to pull from other grids. Yeah. I mean, even with other grids, there's kind of a limit to what you can do in terms of getting things in and out.

But that is one of the things that contributes to the volatility, yes. And then help me understand. So this is all heavily regulated, right? Price controlled, utilities. So isn't there a cap on how much it can go up? So in what's called the spot market. So if you think about this, electricity is not storable. So anytime you generate it, it's got to get consumed.

And so what happens is you've got different tenors. So just like other commodity markets, you've got contracts for different months out for 60 months or like you do in crude or natural gas. You have the same thing that goes on with electricity. But then just like you've got markets where things are consumed daily in like the natural gas or the crude oil markets, you have electricity and it'll trade on a shorter time frame. So it'll trade what they call Balmo, which is balance of the month. It'll trade, you know, weekly, it'll trade daily. You can even trade like next day and you can trade hourly. So the caps that you're talking about, so for ERCOT, they've got a price cap, which is around $5,000 per megawatt hour. And that's for when you're inside of the day. So that's kind of like the hourly price that it can max out at. And what does that look like? If someone in Texas average home is paying 5,000 megawatts per hour for the whole month, right? What's their electric bill? $50,000 or what? Right, which you saw some of those during that freeze,

some of those huge bills. Yeah, so I mean, but that gets, there's a little bit of a mismatch in this. So what you've got is like some of the retail providers, what they'll do is they'll guarantee you a price. And so, you know, you may pay it kind of above what the wholesale price is, but you're not exposed to that volatility. And then you've got other retail providers that'll say, okay, I will sell you this price and I will sell you this for X amount of volume. But anything above X, then you're just subject to whatever kind of the market prices are. And then there's a third tranche of retail providers that just in essence, just you get kind of what the averages are. So there's different types of plans. So not

everybody's really exposed on a retail basis to what that price volatility is. But if you just kind of think about what that looks like, right? So if you see, like we'll say summer in ERCOT for 24 calendar or like July and August 24. So it's trading around, we'll say 110 or 115 bucks right now. But if you see this summer, like July and August of 23, and it trades, you know, $5,000 several hours a day, that price may average out to be 200, 300 bucks for those months. And so if you say, wow, okay, well, if I hit those caps in the intraday market, and that's kind of what the price averages out to, if I'm two or 300 bucks in summer of 23, then summer of 24 at 110 bucks is a bargain. So you'll see that volatility in the short-term market. It'll kind of propagate out the term structure of the curve. But each of these markets is similar?

Or is ERCOT able to trade it and have more variability than the other markets? Or any other markets, like the caps are way tighter? There's markets. The rest of the country, they've got caps around, we'll say, I think the range is like 1,000 to 3,000. But you still have different dynamics that go on with these things. So one of the interesting aspects right now is California has, I think, the largest penetration right now in terms of renewables. And they've got the highest prices in the forward market and the highest volatility. And then Texas ERCOT has the second highest penetration of renewables.

They've got the second highest volatility and the second highest prices. So that's- Which comes back to being dispatchable. Exactly. Yeah. So it's playing out the way that you think it would given these dynamics. Absolutely. But do the UT in California or elsewhere, do they dampen that volatility to

the customer? So they're kind of taking a price or you said there's some groups basically guarantee you a price and trade the volatility. Other groups are giving the customer the volatility. Yeah. So the retail providers will do different things like that. And so it kind of depends upon what plan you've signed up for or what you look like with your with your provider. But there's different ways that you as a consumer can kind of take that volatility off the table. And is it ever been floated out there politically? Like, why do we let these retail? Why isn't this a government utility?

Why isn't it a capped price? And just here's what every American gets. This is a basic need. So what happened in just reference in Texas again, when you had the winter storm and you had the blackouts and everything else was going on. Yeah, you had a number of those retail providers go bankrupt, actually. There was kind of a call again for, hey, we really need to reevaluate what we're doing here. The issue, though, is if you take a look, I think in any market that's been deregulated, once that genie is out of the bottle, you really don't see it go back in. Yeah, tough to do.

And so it's across the country deregulated, not just Texas. So each of those markets has these private traders and providers. And so you have the retail providers. So how does that work? You have your basic ComEd, they're a retail provider, or they're doing the power generation, then you have retail providers on top of that? ComEd's my Chicago, what I know in Chicago. No, fine. So you have utilities right now that still own generation, and then you've got some utilities that have kind of divested the generation. And they're just, you know, what they call T&D. So it's, you know, the transmission and distribution aspect of it. So it just depends upon which way they want to go. starting around we'll say 2010 2015 where they got shifted into the hands of private equity infrastructure funds things like that so I mean typically the markets that the players that you'll see active in the markets right now so you'll see generators whether they're you know privately held or whether

they're in utilities you'll see generators look to hedge forward and then you'll see retail service providers looking to buy You'll see generators look to hedge forward. And then you'll see retail service providers looking to buy. You'll see developers, guys that want to build plants, they'll hedge forward because they want to have security and cash flow so they can get financing, put leverage on their projects and make their returns. You'll have speculators that do this. You'll have hedge funds that do this. You'll have a number of banks that will do this. So there's a lot of different flavors of guys that will step into the markets and trade this up. And coming back up to the top level, this is very technical,

lots of moving pieces. So you guys said, hey, let's make this simple to get this exposure. One product, one ETF. You can get exposure to this without having to figure out these six markets, without having to figure out the trading, the volatility. Yeah, I mean, the thing that really crystallized it, right, is if you take a look and there's like, you know, numbers will vary, but there's somewhere between like $800 billion to like over a trillion dollars that's tied to commodities in the U.S. And so like right now... In investments, you're saying? Yeah.

Yeah. Yeah. So if people just want commodity exposure, typically they'll go pick up something that is linked to the BCOM, which is the Bloomberg Commodity Index, or the GSCI, which is the Goldman Sachs Commodity Index. And so those indexes tend to have, like, we'll say, five different subsets. So like the BCOM's got energy, precious metals, industrial metals, ags, and softs. And then in each one of those subcategories, they'll have the individual futures. So the BCOM's got like 24 or 25 different futures in it. So if you take a look at the BCOM, and they're all like this, right? The energy subset, it's got WTI, Brent, natural gas, gasoline, things like that, right? Why doesn't that have

electricity? If electricity is like the most consumed commodity in the US, why is it not in any one of these indexes? Because they were designed in 1978? Yeah. Exactly. Exactly. Yeah. And so it just didn't make any sense. And so we saw an opportunity and we said, well, let's just see what happens here. But could you argue, right, if I'm at pension XYZ and I have 5% in those commodities, well, I'm getting it indirectly, right, there's some correlation between natural gas and oil prices and the price of electricity. So I'm getting it indirectly there. What's that correlation look like? Is it getting less perfect? Yeah, yeah, yeah. So if you take a look at the correlation of, and this kind of gets a little bit into the weeds, but take a look at the correlation of natural gas to electricity.

It tends to be, and this is just using like NYMEX natural gas contracts to like the electricity index. That correlation runs anywhere from like 60 to 77%, depending upon the time of year, etc. But if you take a look at it, we make the joke, and it's not true, but it's a good soundbite. We make the joke that electricity is going to go and take over everything and that natural gas and crude oil are going to go to zero. And so if electricity is the most consumed commodity in the U.S. right now on a retail notional basis, and it's not in any index, and natural gas and crude oil are going to go less and less and less, then we just think this becomes a much bigger component of that. So when you talk about pensions and endowments, wouldn't you like, instead of holding a proxy that's 77% correlated and the correlation is supposed to drop down to 44% in the next 10 years, would you want that exposure or would you want something that's like the exact exposure? that's a whole different podcast on whether whether 70 correlation is worth it for them to

remain lazy and not do the work to to get higher um right a lot of them are like yeah this is what we do it's fine don't don't need to change no i get it but the the main idea there is right the renewables is coming online the right electricity is going to be driven by different things. So that correlation, by definition, is going to change. Exactly. So right now, we like to think that you're at the crest of the wave here, and this is the place to be. One of the stats would be, I believe, and this is from the research was from BNEF, but I believe they showed that oil consumption in the U.S. is about 102 million barrels per day.

And of that, I think they said like 40 million barrels per day goes to what they call road fuel and motor fuels. And electric vehicles right now have cut like 2 million barrels out of that. And by 2030, they're supposed to cut, I think, 25 or 30 million barrels out of that. So that just goes again. We recognize that oil is not going to go to zero, but it's going to be significantly less consumed, just like natural gas. So would you like to own one of the most consumed commodities right now, but it's only going to get bigger and better? Or do you want to hold one of those correlative products where the correlation is going to drop, use is going to drop? Well, and by the way, you're not saying don't own commodities you're saying add this right not not replace your commodity exposure with this add this this is a big piece of the commodity picture you're not having yeah

we're saying rebalance your commodity exposure and this is the most efficient way to do that if you want to look at electricity yep the uh I think one of the tough parts in the energy space right now is to drive all that renewables, you need fossil fuels to build, to ship, to do all this stuff, right? So you could almost see the correlation breaking, but breaking the other way of we're using so much fossil fuels to get to the renewable place that it's disconnecting from the electricity price the wrong way but that again like so yeah have that exposure to those commodities but also have the electricity exposure i understand your point about uh what you're doing to the environment in order

to build the renewables and i'm not touching that well i always tell people like okay cool we've got all these electric cars need the batteries the batteries. What do you think? And ignoring people think there's, like, slave labor digging them up in Africa and China. Ignoring that for a sec. Like, what machine do you think is digging them out of the ground and wherever it's coming from? What do you think is driving that machine? Diesel. Okay. How is it getting from there to the factory?

A ship on diesel. Okay. What's the factory running on? That's getting a little different but i know exactly what you're saying and there's a reason why i'm just smiling yeah smiling and letting that go yes um and so let's circle back so got the idea okay we're gonna get electricity exposure this and do you think it's a ignoring all the the white paper the electr exposure this. And do you think it's ignoring all the white paper,

the electrification of America? Do you think it's just a pure play on like GDP as well? I don't know those stats if you know, right. As if there's a recession, does electricity usage go down? Is it rather stable? So what we did is we plotted the index, which goes back to 2014. We plotted it against, you know, COVID and different things like that. Yeah. I mean, whenever a recession and the cove had to etc electricity use went down but uh the correlation of electricity to you know um like uh the sap and uh you know the the bond indexes etc

it's like literally almost 0.00 so uh if you want to talk about recession and GDP, I think the best indicator for that is still the S&P, right? Sure. Yeah. And so our correlation to the S&P is on the day-to-day price changes over a long period of time, it's still like almost zero. So I think you will see electricity use in a recession come off a bit. Absolutely. But I don't think it's going to be muted and it's got to be not nearly what you'd see from other types of exposures. And COVID actually, I don't know what,

what are those stats? They go, it went down. I would assume it went up because everyone's stuck in their houses, but I guess if you shuttered offices and factories and. Yeah, you shuttered offices and factories and stores, everything.

Right. So yeah, it, it fell off pretty hard or it fell off. Okay. everything right so yeah it it fell off pretty hard or it fell off okay and then let's circle back to the carbon offsets so part of me is like that should just be part of the portfolio those carbon offsets that's a bunch of trend followers trade those and different hedge funds trade those to begin with, not for any ESG reason, just because it's by definition supposed to go up every year? Yeah. So the actual carbon markets, like the two prevalent ones in the US that have exchange-traded futures, you've got what are

called REGIs. So they're the East Coast, like Pennsylvania, Jersey, Maryland area. So it's regional greenhouse gas initiatives. And in the West Coast, they call them CCAs, California Carbon Allowances. Washington, state of Washington just came out with theirs, et cetera. So there are legit ones out there. And there are also ones that you just kind of like shake your head and say, I don't know about that. So when we were looking at putting this together, we had somebody say, oh, oh, here, you should be using these offsets. It's like, what? Like, oh, they're Chinese hydro offsets and they're 25 cents a ton. It's like, there's a reason

they're on the discount rack, guy. No one's going to believe it. So there's, I mean, there's actually, this is maybe a year or two ago and I'm probably oversimplifying this, but there was like an article in the Wall Street Journal where some girl, little girl in third grade

plants a tree in her backyard and wants two tons of carbon offsets and wants the money and so it's some of the voluntary things are actually legit and they're good and other ones you're just like wow i'm not really sure that should count and so the the markets are kind of betting that out right now in terms of saying okay wow i'm not really sure we should be looking at this and using this so what we do is we just use the exchange trader ones that are out there, the CCAs and the reggies. And like you said, what happens is they auction off those allowances

and they've got a reduced supply coming into the marketplace every year. And then they've got an increase on the ceiling and the floor of the price. So those things should be going up every year. Right. The risk is that there's regulatory change and they say, okay, we're increasing the limit this year or whatever. But we've seen in Europe that thing's basically stair-stepped up. COVID had a little setback, but your idea was, hey, we don't want to capture that price

increase. That's a nice side of benefit, but we want this. So it's ESG compliant. The whole the fund. Yeah. I mean, if you want to capture if you want to play carbon itself, there's a number of ways you can already do that. Those things are already out there, but there is no way to do electricity. And so one of the things that I forgot to mention this is we've got a three-year exclusive with ICE on the index and the data. So we're the only shop that can do the index. So we're the only one that can do this ETF. And so this is a unique product.

If we did just the carbon, there's a lot of stuff out there that does that. And then the ETF is trading these ICE futures on each of those six markets? Yes. No over-the-counter, that kind of stuff? Nothing over-the-counter because the Bloomberg Commodity Index or anything like that, they assume that you take that $100 and you put that into like three-month treasuries. Right. But the index itself,

the power index is using three-month treasuries for the collateral component that it's benchmarked to. But realistically, you need to put up, we'll say 20% with the exchange for initial and maintenance margin so the reason we do everything on the exchange is because it's legit number one and number two it saves us from having to get is does and credit agreements and everything else with bilateral counterparties so those things are a little bit more difficult to see but we

wanted the transparency of the ETF and, but we wanted the transparency of the ETF and we wanted the transparency of the future so you could see what the price is and know what you're getting. And are you seeing any hedge funds or other types of traders trading the ETF against their own OTC baskets? It seems like there's a couple of different ways you could trade, not just owning it as an investment on electricity, but trading it, right? Even a simple example would be against natural gas or ETF or something, right? You could have these relationships between it and other instruments. So the short answer is yes. The long answer is I think that there are some really, I mean, we just designed it as a long-term, you know, buy hold. And so, again, if you're a pensioner endowment and 2.5% of inflation is electricity, then you should hold 2.5%.

Or if you're a pensioner endowment and you've got 5% commodity exposure, well, you should dial that back and pick up some of this. So we think this is a long-term buy and hold product. But there are some very interesting ARBs that exist. And we occasionally, when we take a look at some of the trading activity, you're like, oh, okay, I think I see what they're doing there. Yeah. And we're okay. I mean, that's great, right? That's why- Right. It should only help the customer bring down the spreads and makes it more liquid. Yeah. I mean, the whole purpose of this is so that you can express a view on the sector

and gives you exposure to the sector. And if guys find a way to make money off it, that's great. Yeah. And talk through a little bit of, okay, why do I need that? I've owned these utilities or whatnot, right? Like the utility versus the raw power. Raw power. Yeah. Yeah.

So look to see if there's a ticker for that, right? So if you own a utility and the utility is hedged then what do you really own okay so that's what their management right yeah yeah okay so i mean you got to take into account how hedged are they what are they actually doing um if they have a bunch of power plants uh are you those things you know assets break um You saw what happened in Hawaii, right? And other things like that. So they're exposed to a lot of these utilities. A lot of the ways that you typically look at getting exposure to electricity have kind of exogenous factors that don't deal directly with the price of electricity.

So this is a clean, clear way to get electricity exposure. Where with the other ones, you get management, you get accounting irregularities you get equipment breaking you get you know overhead it's it's just not that effective to play it anymore and what are you gonna do and people i love this give me europe give me asia right what's can can that be done oh yeah so we we've had inbounds on, okay, this is great. Can you do European? Yes. Can you do Asian? Yes. Can you do global? Yes. But it's the whole crawl, walk, run. So the second product that we're working on, which we're almost done with, is we're taking an existing commodity index, like we talked about, and we're putting power in there. So right now, if you just want power, we've got that. So if you want to do your own version of, fund managers call it smart beta. So if you have $100 tied to a commodity index and you want to do smart beta, you can dial it down to 80 bucks and pick up 20 bucks on amped. And we've done the math on that. It gives you better returns, less volatility, better sharp ratio, et cetera. So it does add smart beta to it. But if you're a portfolio manager and you didn't want to do the math or you didn't want to deal with individual components of that, product number two that we're working with ISON right now, we should be launching an index in, we'll say, late October, early November, that has an all commodity index with power inserted in the correct weight. And then the next move then

would be to launch an ETF with that probably end of the year, early next year. So that's product number two. And then in terms of the other products, we've had a lot of inbound calls. So again, it's like Asian market, global power market, European power market. We've had somebody ask us if we could do water. They said, listen, you guys wrangled electricity. We can't get our heads around electricity because you can't see it, can't store it. We want to find a way to go water, you know, cents per gallon, because everywhere we read water is an issue. And so that's something else that's kind of in the laboratory. And then there are some other products that people have approached us about, but again, it's the whole crawl, walk, run. So we got amped up and running,

like to get a little bit more AUM on that. And then we have the second product that we're going to launch, which is the all commands plus power. And we're looking for a cool name and a cool ticker for that. If you got any ideas. Yeah, I'll mull that one over. What what does it look like in terms of is it dampened volatility? Is it increased the return like for inserting power into that commodity index? Yeah, it does that. It dampens volatility and increases the returns. Yep. Perfect. Yeah. What else? What else? Yeah. What else can you put in? And again, you know, we're looking at this over a longer term period. I mean,

there may be individual periods where it doesn't quite do that. But this is something that, again, we think from a portfolio perspective, if you buy and hold a commodity exposure for as a pensioner endowment and you have that for a long period of time we kind of see this in the same light um all right i might have to sell some of my uranium holdings and and add amped right i'm of the feeling this is eventually going to get to a breaking point and they're just everyone's going to be like okay let's build more nuclear like it's not it's not as scary as we think let's do it but even that what's that take 10 to 20 years to yeah that takes a long time so so um we've uh there there's some interesting companies right now that are doing um smr so it's like small modular reactor um that's still like really expensive and there's still the whole, not in my backyard thing with that.

Yeah. That probably does get some traction. And then there's, uh, there's the, uh, fusion. There's a couple of companies that are really well capitalized that are, that are working on fusion right now. And I mean, that's interesting, but I don't, I might be wrong, but I don't think fusion has done as existed for more than like five seconds outside of a laboratory. So I think those things, like you said, are several years away and they're also like really expensive.

If not hundreds of years away, right? Yeah. Yeah. What else didn't we cover? Got any other thoughts? I just think that, you know, this is, like we said, an interesting product. It's the only way you can invest in the sector. And so there should be an interesting appeal to family offices, pensions, endowments, to some extent the retail investor.

And again, the idea isn't, oh, you know, you should put 40% of your portfolio in here. The idea is just take like whatever your commodity exposure is and just put in the right weight on this and just kind of, it's a buy and hold for the exposure. So we,, the website is www.cnicfunds.com. And what we do is we try to publish a white paper on there once a month that takes whatever is the most asked question by investors that month. And we try to address it like in a five or less page white paper, just because I, my attention span will let me read more than five pages. And then anytime we do a podcast, webcast, interview, something like that, we try to put the link on there also. So again, because this is new, we'd like people to be educated and make an informed decision if they decide to do something. I did have one other question I forgot on crypto and Bitcoin mining and all that. Do you think it's a legit use on the power grid

probably not in America right now but maybe in America or elsewhere in the in the world right that was one of the knocks on Bitcoin takes up too much power and it was like all the mining was as much power as Sweden was using or some couple of these different stats look it's energy intensive but I mean all the different um cryptos have been out there long enough and kind of established that I don't know how you would shut that down. And you're saying AI will dwarf that anyway. Oh, yeah, I think it will. I mean, there's like some Bitcoin miners. And during some of the extreme weather events, they actually have provisions in their contracts where they will shut down and not pull electricity and actually sell back into the grid at a profit. So some of these Bitcoin miners made a lot of money by actually not operating during some of these extreme events. And then last thought, as we're talking about Bitcoin and the volatility, as more renewables come online, we fix that imbalance.

But it's also causing volatility in those individual markets. So will the whole thing become a little bit more volatile as you have a larger renewable mix? Yeah, it will. We've kind of seen that volatility trending up in terms of the renewable mix. So the areas that have higher renewable penetration tend to have higher volatility right now. And there's no way to fix that until they solve storage? You can have storage that will help you solve that. Or if you just kept some of the dispatchable generation around to kind of firm it up or fill in.

But then that kind of defeats the purpose of having the renewables. So I'm not really sure people want to go to that solution. Right. What comes first, fusion or efficient electricity storage? Well, you have efficient electricity storage in the batteries right now. It's just that they're expensive to build. And on a merchant basis, they're just not profitable yet. Some areas are still putting battery storage in.

They're making a directional bet on what's going to happen with prices. And or they're just, you know, they just want to check a box and say, I want to be 5% battery storage. And they just make a call and they get 20 offers I want to be 5% battery storage. And they just make a call and they get 20 offers and they lift the three cheapest to get the 5%. So it's kind of out there right now, but it's like you talked about, it's really difficult to get the metals and the, yeah, it's just a tough one to address. I just don't think that you're going to see the storage you need come on with the speed that you needed to come on.

Right. And like ERCOT, it's not, they couldn't store like a day's worth of ERCOT usage, right? Like what, how big would that battery farm be? Like a quarter of Texas or something? Right. Well, we started out by talking about how big Texas is. Yeah. Yeah.

That'd be huge. Right. All right, Tim. Thanks so much. We'll leave it there. I, yeah. Yeah. That'd be huge. Right. All right, Tim. Thanks so much. We'll leave it there. Um, go check out amped,

go check out the website and we'll put some links to this electrification white paper and everything else in the show notes. And I appreciate you having me on here. Thank you for this. I am going to, I am going to hold you responsible for helping me figure out a ticker for product number two. Done.

I'll, I'll, I'll think on it. Awesome. Thanks, Tim. Appreciate it. Thank you for your time. Okay, that's it for the pod.

Thanks to Tim for coming on. Thanks to RCM for sponsoring. Thanks to Jeff Berger for producing. We'll see you next week with Russ Kalaitis. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe

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