Momentification of Everything: Power, Gas and Satellite Intel, with Bill Perkins

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

The Return of Power Demand Growth

Paul Chapman: Historically, power demand growth has been relatively low. Why stand up an electricity futures ETF now?

Bill Perkins: Historically, we’ve had very low power demand growth and the power story has been pretty boring. We’ve been sub-1% or flat for many years, and that’s now changing domestically with the reshoring of manufacturing capacity, the electrification of automobiles and now AI data centres.

There’s been a renewed focus on power, particularly electricity, to drive the economy forward. Depending on the region, demand growth rates have broken the 1% barrier. You’re starting to see estimates of 3% to 6% power growth, and it’s unprecedented.

Either way, I think now is a time where you have a situation in power where you’re going to have some price signals that need to be sent. I don’t think it’s going to be as boring as it used to be. 

Can the US Power System Keep Up?

Paul Chapman: How concerned are you that structurally the US grid is set up to meet that demand growth, and about the impacts if we don’t meet that future moment?

Bill Perkins: I would say moderately, between moderately and very. We used to argue whether you had power demand growth at 0.25%, 0.5% or 0.9%. Now you’re talking about 3%, 6%, 5%. Pretty astounding numbers.

The apparatus hasn’t been set up for that. It’s not just the grid and the regulations and the permitting. It’s also the people that make transformers, the people who make wiring, the people who make turbines. They haven't seen this demand in quite some time, and the whole supply chain is under stress.

If you dig deep, particularly in AI, you’ll see that the pent-up demand is amazing. When you start looking at robotics and the power it could require, you’re like: how is this going to happen?

But I tend to believe these things will be worked out. There’s a lot of capital at stake. I think America’s prosperity is at stake. So these things have to be worked out.

Building an Electricity Futures ETF

Paul Chapman: How exactly have you constructed the ETF? There are a lot of pitfalls in commodity indexes, rollovers and power futures in particular.

Bill Perkins: Historically, power is a niche trading market, so you don’t have that large an open interest. You have to be careful that the ETF doesn’t dwarf the underlying futures contract.

For now, we’ve split it 50-50 between ERCOT and PJM, two of the fastest-growing regions for electricity demand. It’s a 12-month strip and, rather than rolling contracts, it rolls cash. As the market matures, we’ll probably add products specific to individual markets. 

Why Power Could Be Underpriced

Paul Chapman: With fewer large risk warehouses participating in energy markets, particularly banks, how much does that affect power pricing and the opportunity you see?

Bill Perkins: There probably is a mispricing and an opportunity in the power markets. It’s illiquid to begin with. There aren’t that many players. It’s not the crude oil contract, and it’s not even the natural gas contract, so you don’t have that many risk warehouses out there.

At the end of the day, irrespective of the large load growth, we have large loads growing. We have giga centres going up, chip factories coming in, migration from around the country to Texas, people building shipyards, electrification of autos, and the robots are coming.

I think over time you have a very, very bullish setup relative to current pricing for electricity. It’s basically underpriced.

AI and the Natural Gas Story

Paul Chapman: You’ve spent the vast majority of your career looking at gas. How does AI feed into the natural gas story, and do you see a similar increase in demand?

Bill Perkins: You have this push and pull on power generation. You have alternatives like solar, wind and battery capacity, but you also have rising production and natural gas looking for a hero, whether that be exports or gas turbine demand.

There’s this demand pull from the electricity sector saying, we’ll take all comers. We need solar, we need battery, we need natural gas, we need nuclear.

Natural gas is saying, “We’ve got the gas for you to make the power,” and on the demand side it’s, “We want all the power.” But somebody has to build the power plant, permit it, site it, go through the regulations and environmental studies, get a transformer and wire it up.

Has the US Gas Market Outgrown Its Storage?

Paul Chapman: Is there some complacency in natural gas? It’s now very much a global market, with growing LNG demand internationally and rising power generation demand in the US. Where do you stand?

Bill Perkins: If you look at the infrastructure that’s been put down, you’ve had fantastic supply growth and demand growth aided by exports. What you haven’t seen much growth in is storage.

Storage acts like the brakes on the market. We’ve basically been growing this market from, let’s say, a Kia to a Mack truck, but we still have Kia brakes.

We have plentiful supply except during acute times, say January and February, when we start to have deliverability issues. That has nothing to do with total storage or total supply, but the system's ability to deliver gas at a very specific moment relative to the size of the market has declined.

In both the bull case and the bear case, we lack storage to balance these things in the short and intermediate term, and it’s only getting worse.

I think the market has somewhat outgrown its storage capacity here in the US, particularly given that the world doesn’t really build that much storage capacity. 

Europe’s Winter Gas Risk

Paul Chapman: With low storage levels in Europe, are you concerned that complacency sits there as well?

Bill Perkins: I think Europe has a unique scenario. Everybody looks at total storage in Europe, which is low and concerning going into a winter.

I don’t think Europe has seen a deliverability issue in the middle of winter. When you break down the regional storage in Europe, there are some very dicey scenarios, particularly in Germany.

You’re going to have a certain probability, based on storage levels and the chance of a cold snap or extended cold period in January or February, that you may have days when you cannot deliver the gas you need. The price is going to have to go very, very high in order to induce some demand destruction.

The world has a lot of problems going on right now and a lot of focus points, so I don’t think this is getting enough attention. Hopefully we don’t find out, because there’s only a certain probability that you’re going to have this issue, but it looks a little scary to me. 

Natural Gas Trading and the “Momentification of Everything”

Paul Chapman: Natural gas trading has seen enormous opportunities but also periods of lower volatility. What has stayed the same and what has changed?

Bill Perkins: The cast of characters and the amount of risk capital in the market have pretty much stayed the same over the past five years. The exchanges have added some liquidity in certain areas and maintained the ability to trade the market.

The total capital has stayed pretty much the same, maybe a little bit more, but we haven’t had as much capital in terms of the large warehouse space commensurate with the growth of the market.

When the market is pretty quiet, you can’t see the danger. Things are fine. Then when something moves, and the market is wrong collectively, or you’re wrong, that liquidity disappears, and you feel it. You get bigger moves. So you have these periods of complacency and then, all of a sudden, it’s chaos.

Natural gas is moving around; it’s hot, we flow capital. Then it’s dead, and we’re out. The name of the game is to stay in the game. The opportunities will come up, but there will be dead periods, and there will be hot periods.

Can Gas Traders Still Be Regional Specialists?

Paul Chapman: Twenty years ago, you could trade one region in natural gas. Do traders now need global reach and understanding, or can an individual still be laser-focused on one region?

Bill Perkins: There are still people who specialise in the Northeast or the West, looking at the infrastructure, what can get in and out and how that local market will respond.

Domestically in the US, there are still some specialists with an edge. But if you’re trading natural gas and LNG, it’s a global market. You kind of have to pay attention to what’s going on around the globe.

Turning Satellite Data into Trading Intelligence

Paul Chapman: With Simmax, you can see where data centres and generation are actually being built. What has surprised you about it as an information source?

Bill Perkins: As someone running a hedge fund, we’re always digging into the weeds. What Simmax has done is industrialised that and productised it so that the average person, the largest hedge fund or even a hyperscaler can keep an eye on what’s going on on the ground across many verticals, whether it’s AI data centres, renewable power, actual power plants or industrial demand.

You see news headlines saying this is the demand number for AI, this is how many data centres are going to come online, or this is how many battery plants are going to come online. But you can actually match that to ground truth.

Anybody who’s done any kind of construction knows there are delays. Timelines are a guess. Knowing what is really going to come onto the grid and at what time is valuable to many different people, whether it’s hyperscalers looking at their competition, power traders trying to understand regional demand, or economic analysis.

The pace of the market has changed, and so you have to change what types of information you observe. 

A World Awash in Data, but Lacking Understanding

Paul Chapman: Technology that was once cutting-edge is now available at an extraordinary level of granularity to traders. How do you think about turning all that data into something useful?

Bill Perkins: The world is awash in data, and it’s kind of lacking in understanding.

It’s like a GPS signal. What are you going to do with GPS signal? What you really want is Google Maps. That’s the product you want. Geospatial data and the analytics on top of it are getting better, more accessible and cheaper.