There are three major commodity categories: energy (e.g. power, crude oil, natural gas), agriculture, and metals.
There are three major commodity categories: energy (e.g. power, crude oil, natural gas), agriculture, and metals. All commodities have some basic properties in common that set them apart from other asset classes.
Commodities feed into each other in a much more straightforward way. A wellhead drilled into the ground results in some amount of crude oil and some amount of natural gas (mostly methane).[3] Crude oil is great because it can be shipped easily all over the world. Its global market means that prices abroad impact us here in the US, hence the widespread concern around the closure of the Strait of Hormuz. That crude oil has a market price, and refineries buy it to produce distillates: petroleum products like gasoline, diesel, and jet fuel. That's the same gasoline that you buy at the gas pump.
Exports/transmission occurs over a physical power line. When you push power through it, it heats up. That heat means it loses a little bit of power along the way. The metal also expands when it's hot. The more power you push through, the hotter the line gets, and the more it expands. If the power line expands too much, the power line could droop too low and light a tree on fire. As a result, each transmission line comes with a "rating." That's the maximum amount of power that can be pushed through that line.
The power market has a central nonprofit authority called the independent system operator (ISO). They take in all the bids from local utilities (load serving entities) and all the offers from local power plants, and they compute the efficient market price at each location, plus intended generation and flows. Then throughout the day, they tell each generator how much power they need to produce based on how much consumption they anticipate at each location.
In extreme cases, if someone is really consuming too much power, the balancing authority will cut them off. Sometimes, people aren't even trying to screw up the grid, but there just isn't enough supply to meet demand, like if major generators go on outage, or if it's a really cold winter and everyone is consuming a lot of power. To spare the generators, we're forced to resort to brownouts or blackouts, where parts of the grid are cut off.
Whichever generator/unit produces the last MWh required to meet demand is called the "marginal unit." This is often a natural gas generator. In other words, the marginal cost of that natural gas generator ends up setting the local market price, in line with the marginal pricing concept we discussed previously. This pricing mechanism (a uniform clearing price auction[8]), where all units get paid the same price regardless of their cost, ensures that power plants are incentivized to produce power as cheaply as possible.
The basic mechanism behind a natural gas generator is that it compresses some air and then lights some natural gas on fire to produce a high-pressure, hot stream of gas.[14] The gas expands through a turbine, causing the turbine to spin. That process is called the Brayton cycle. The turbine is attached via a shaft to a part of the generator that also rotates, appropriately called a "rotor." The part that stays still is the "stator." That rotation is what generates electricity.
When the gas escapes from the SCGT, it's still hot. In fact, it's hot enough that we're able to use it to generate even more electricity. A heat recovery steam generator (HRSG) can be strapped to the top, which essentially boils water until it turns into steam - which is then run through a turbine again for a second rotation to generate power. That's called the Rankine cycle, and when you combine it with the Brayton cycle above, you get a combined cycle gas turbine[15] (CCGT). Of course, the effective heat rate for a CCGT is going to be lower than that of an SCGT.
Operating a power plant isn't for the faint of heart. We're talking about 9-figures of equipment and complicated operational overhead. But depending on the region, a typical power price can be anywhere from $10-150/MWh, sometimes even more. For a 100 MW unit running at full capacity for 16 hours at $60/MWh, we're talking on the order of $100K of gross revenue per day (16 hours * $60/MWh * 100 MW
For example, if you're doing a natural gas plant, you need to be near a natural gas pipeline, and you might have to build a branch pipeline to feed that gas to your unit.
The interconnection queue is the line of people waiting to construct their generators at various locations. The ISO doesn't let them all construct at once, because they need time to appropriately plan and model the impact of adding that generator to the grid.
Site selection is so constraining that you don't always have tons of options. You decide on the type of plant you want to build, then pick the site, not the other way around.
There are Geographic Information System (GIS) files available for many regions online. You just need to look through the relevant GIS files to eliminate all of these possible conflicts.
If you're in somewhere like Washington state, they have an organization called Energy Facility Site Evaluation Council (EFSEC), which reviews all your materials and gives you an indication as to whether you're cleared of all conflicts. You'll likely engage legal counsel who is experienced in the region you're interested in to produce a third-party report.
Your "anchor tenant," maybe a hyperscaler or AI lab, is going to commit to a particular price per MWh for some number of months - the longer the better. That future stream of cash flows is easier to underwrite against.
Let's say you're not a data center. You can still convert your volatile future stream of payments to a steady stream of consistent payments via what's called a heat rate call option[16] (HRCO). This is an instrument that is designed to mimic the economics of your power plant. If your power plant makes $50K one day, then in theory, exercising the HRCO should pay $50K. If your power plant didn't turn on at all, then the HRCO shouldn't pay anything.
You sell this HRCO to a hedge fund who's pretty much going to exercise it whenever you turn on, so they're going to get all of your revenue. The good news? They pay you a fixed amount every single month (or day, or whatever cadence you're settling). That's the stream of cash flows you'll use to underwrite the construction loan.
When you take on that $300 million loan, the bank is going to scrutinize your "counterparty," a.k.a. whoever is paying you the stream of steady cash flows. If they think your counterparty might suddenly stop paying one day, then they'll charge a higher interest rate to compensate for that risk.
Major turbine manufacturers like GE Vernova, Siemens Energy, and Mitsubishi Power are completely out of stock, with the backlog months to years out. People have been turning to more exotic sources for their parts. Jet turbines are being repurposed as gas turbines. Parts are being imported from China.
Homer City. They're redoing the whole thing to build a 4.4 GW[17] natural gas plant. That is ginormous. A nuclear plant is already considered big at 1 GW. This 4.4 GW plant is intended to cost ~$10 billion to construct, and the plan is to turn it into a big data center campus.
It's a natural gas plant, so they secured EQT Corporation as their natural gas partner. That's been announced.
Homer City has secured the major permits they need. The major one was an air quality permit that the Pennsylvania Department of Environmental Protection (DEP) approved in November 2025. Of course, they also needed a waterway permit.