Commodification

Published on June 17, 2019 by Entrima

‘Commoditisation’, or ‘commodification’, concerns a process of standardisation or creating fungibility. In particular, commoditisation occurs as a goods or services market lose differentiation across its supply base. This is typically characterised by no longer being able to identify its source. In such a case, it is impossible to tell who has been the producer of the product. For electricity this certainly is the case, although it often also applied to cargos of corn, nickel or natural gas.

Commoditisation is a form of ‘securitisation’. Securitisation takes place in financial markets. An example concerns the bundling of various types of contractual debt and selling the related cashflows (slizes) to investors as securities.

One has to consider the classification ‘commodity’ as a dimension instead of a binary distinction, because it does not concern ‘commodity versus differentiable product’. After all, only few products are completely non-differentiable and, as a consequence, fungible. In this respect, electricity can be differentiated in the market based on the way it has been generated. Have coal-fired power plants been dispatched, or was it a park of wind turbines or a hydro facility that was allocated? All lead to the generation of electrons, which effectively all are identical. As a consequence of the allocation of different types of capacity, one could differentiate prices, by labelling electrons. This kind of certification should take place by an independent party. Consumption of products being generated with renewables could then be priced at a different level than generation whereby emission of greenhouse gasses takes place.

The latter point brings us to another type of tradable product which is highly fungible, namely carbon dioxide emission rights. Allowances, green certificates and guarantees of origin (GoO) could be seen as a commodity. These products can be seen as documents which are man-made in large volumes and do not concern a natural resource. Moreover, it is just paper.

 

Our Labels

Entrima and Market Abuse Centre (MAC) are the two labels we operate to provide learning services for professionals in the commodity & energy markets.
 
 


Content & Context

Entrima’s mission is to transfer knowledge regarding the business, controls & operations of parties in (or relating to) the wholesale markets.

www.entrima.org


Conduct & Culture

MAC’s mission is to facilitate the prevention & detection of misconduct and to foster proper behaviour in organisations. This is achieved via training, periodic updates and increased awareness.

www.marketabusecentre.com