What Is the Difference between a “Physical Settlement” and a “Cash Settlement” for Electricity Futures?

Physical settlement means that upon expiration of the futures contract, the seller is obligated to deliver the actual electricity (the physical commodity) to the buyer. Cash settlement means that upon expiration, the difference between the futures price and the current spot price of electricity is exchanged in cash, with no physical delivery of the commodity.

Pool operators typically prefer cash settlement for hedging purposes.