On a napkin
The short version
The electricity forward curve is the market's current best estimate of what electricity will cost in each future month or year. It is constructed from exchange-traded futures, broker markets, and over-the-counter transactions at major hub locations — PJM Western Hub, CAISO NP15, ERCOT North Hub, and others. Energy buyers use the forward curve to evaluate whether to fix prices now or wait, and to benchmark the competitiveness of supplier quotes.
The forward curve is not a forecast. It is the price at which buyers and sellers are willing to transact today for future delivery. It reflects the market's expectation of future prices, the cost of hedging, risk premiums, and the liquidity of the forward market. Sophisticated buyers treat it as a tool for decision-making, not a prediction.
Electricity is not natural gas: Electricity forward curves are derived partly from natural gas forward curves — in most US markets, gas-fired generation is the marginal price-setter for a significant portion of hours. Understanding natural gas forwards is therefore prerequisite to understanding electricity forwards. The relationship is expressed through the implied heat rate: electricity price / gas price = implied heat rate.
Reading the seasonal shape
Electricity forward curves have characteristic seasonal shapes driven by load patterns. Summer peaks (July–August) reflect air conditioning demand in most US markets. Winter peaks (December–February) reflect heating demand, particularly in gas-dependent heating regions like the Northeast. Shoulder months (spring and fall) are typically the lowest-priced periods when mild weather keeps load and gas prices both low.
The spread between on-peak and off-peak prices — traded as separate products in most markets — reflects the value of dispatchable generation during high-demand hours vs. low-demand hours. This spread is a signal of supply adequacy and transmission constraints.
Contango vs. backwardation
When the forward curve slopes upward (each successive year is priced higher), it is in contango — the market expects prices to rise, or is charging a risk premium for locking in farther-out periods. When the curve slopes downward, it is backwardated — the market expects future prices to be lower than current. Backwardated curves create an opportunity for buyers to lock in rates below expected spot, but the curve prices this in. Neither shape guarantees future outcomes.
Liquidity and the far curve
Electricity forward markets are most liquid 1–2 years out. Beyond 3 years, liquidity thins substantially and bid-ask spreads widen — suppliers building large risk premiums into longer-term fixed quotes to compensate for their inability to hedge at competitive rates. Buyers seeking 5+ year fixed price certainty typically pay a meaningful premium for it, and large industrial buyers often accept index pricing beyond the 3-year horizon for this reason.
Common questions
Related reading on The Outlet
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