When does Arbitrage stop being Arbitrage?

[Matt]

So... I got slammed with a $600 Electric Bill and it might be like that for the winter. In looking at solutions one option is to press forward with Solar. The issue being that I don't have a lot of roof space at this time, as I plan to build the house up a level in the next year or so, leaving me just with the garage.

Also, living on a lake isn't ideal for solar as lakes create more clouds and i'd have less sunshine....

TL/DR
I wanted to buy a plot of land somewhere cheap and sunny and install solar because I need power. IE I could buy and install a major array in somewhere where land was cheaper towards the mid/west and since I need electricity doing so would create arbitrage...

I know, I am a weirdo.

But anyway, at some point it becomes not arbitrage, but a pure investment opportunity. I'm now wondering what the decisive factor in this equation is - I don't think it is simply geography (we have currency arbitrage opportunities daily, far beyond the DKK..) and I don't think it is simply the transaction fee (IE in this model I would buy from NYSEG electric company, but sell to XYZ Electric company) so where is the line drawn?

Is this purely an investment, or is it arbitrage because the two underlying units are akin in that they are both electric?

 

[AIM]

To me it's reverse arbitrage to defray your costs. You're buying expensive power and attempting to sell enough cheaply generated power to cover that cost (and ideally make money if you sell enough). That assumes that your selling price to XYZ Electric Company is less than what you're paying to NYSEG, but I think that's implied here.

 

[Matt]

To me it's reverse arbitrage to defray your costs. You're buying expensive power and attempting to sell enough cheaply generated power to cover that cost (and ideally make money if you sell enough). That assumes that your selling price to XYZ Electric Company is less than what you're paying to NYSEG, but I think that's implied here.

So it remains a form of arbitrage simply because the underlying commodity is the same? I find it interesting because I could also buy a corn farm in the boonies and use that income to offset my electric bill...

We could say that the correlation aspect is the key - I know that an underlying shift in electric prices should correlate in both directions, so it makes sense to pair in this way....

I'm thinking beyond this into other forms of opportunity and when to apply such close coupling or when it can be looser and have the same effect..

 

[MickiSue]

I am opinionless as to the arbitrage aspect of your current idea.

But lakes are usually known for being breezy places.

What about a power-generating windmill?

 

[Matt]

I am opinionless as to the arbitrage aspect of your current idea.

But lakes are usually known for being breezy places.

What about a power-generating windmill?

I didn't move to Holland!

 

[MickiSue]

I'm serious. There are plenty of windmills, all over the country, that provide the electricity for houses and farms.

 

[Haley]

I don't know what you call it but it sure is a popular way to go in Texas.
Apple has covered the roofs of all their buildings with solar.

Airport parking lots (off airport) all have solar panels up now, generate electricity and shade the cars. With the rapid growth in the area it seems like a pretty good plan. Buy some land. Throw up some solar panels to offset taxes and generate trickle income (ha, ha) maybe the electricity income is enough to hold land long term, or maybe the value of the land goes up enough to make cashing out a better plan.

Interesting idea.

We sure do have plenty of sunshine in Texas. Cheap land and rapid growth too. I'd form a corporation, too much risk. Electric companies don't like people generating electricity. I know I've heard 7 years is the break even point on residential solar, not sure if that remains true.

$600? Electric heat? That is slightly worse than our A/C bill in the summer, but our house is way too big.

 

[AIM]

So it remains a form of arbitrage simply because the underlying commodity is the same? I find it interesting because I could also buy a corn farm in the boonies and use that income to offset my electric bill...

We could say that the correlation aspect is the key - I know that an underlying shift in electric prices should correlate in both directions, so it makes sense to pair in this way....

I'm thinking beyond this into other forms of opportunity and when to apply such close coupling or when it can be looser and have the same effect..

I think the similarity of the commodity is the key for the correlation reasons you describe. However, some may argue that you have to buy and sell the same asset rather than asset class. Otherwise, as you say, you could just buy a corn farm and stick a windmill on top.