Detailed Glossary of Energy Trading terms

In Energy Trading a Market describes a standardized trading environment for a commodity and a geographic zone

The geographic zone is not necessarily the delivery location, but usually determines the valuation of the traded commodity

For example API#2 is a market based on the published index for coal in the Amsterdam, Rotterdam and Antwerp (ARA) location; a trade may deliver coal to a port in France but still be part of the API#2 market

Detail

A market combines attributes of commodity and location and may have an associated calendar and business rules, which provide defaults for any trade associated with the market

Some delivery locations are also markets, so far example NBP is a gas location and also market

Note the similarity and difference to a Master Agreement which has similar attributes

A market maker quotes prices at which they are prepared to buy or sell a commodity - usually on an Exchange or with a broker

Detail

A price at which a party is prepared to buy is called a Bid (they bid to buy the commodity)

A price at which a party is prepared to sell is called an Offer (they offer to sell the commodity)

By offering continuous bid and offer prices, Exchanges encourage traders to take positions, secure in the knowledge that they can always close them out. This is another way of saying that they improve the liquidity of the market

There are usually benefits to the market makers themselves from offering this service

When two parties execute a trade between themselves they specify the terms of the trade: Price, Volume, Location, timing etc.

But in order to successfully manage the trade's delivery and settlement a lot more information needs to be available than is captured in the trade details, such as when payment is due, who needs to notify a TSO etc.

This additional detail is held in a Master Agreement

Each trade that is executed is regulated by a Master Agreement

Detail

Master Agreements exist to cover various sorts of trade, for example the UK standard gas and power Master Agreements :

GTMA (Grid Trading Master Agreement) covers UK power trading, complete with all the details of notification

NBP97 (Short Term Flat NBP Trading Terms and Conditions Ref. NBP 1997) covers natural gas trading at the NBP complete with details of nomination

Master Agreements may reference other Master Agreements - ISDA for example is an organization that is aiming to offer master agreements that unify trading, for example at the NBP and at TTF

Master Agreements are themselves referenced by bilateral trading agreements, which are agreements set up by pairs of potential trading partners to specify which Master Agreements will be used for different products and instruments, and usually cover other arrangements such as netting, collateral etc.

Master Agreements may have schedules or annexes that define additional terms, or override terms in the main agreement

Bilateral Master Agreements may have additional schedules that define variations to the standardized master agreements

A Confirmation, as well as confirming the trade details, also confirms the master agreements that regulate the trade, and may itself contain exceptions or variations from the general bilateral terms

Generally a financial trading term used sometimes in the commodities trading market to mean the expiry or expiration date - particularly futures contracts

Detail

A classic energy futures contract has a single date that represents:

The last date it may be traded

The date it is cascaded to shorter contracts

The date it is completely settled (if a financial futures contract)

This date is usually called the expiry date, and therefore it is also the maturity date

However it is possible that the contract may continue to be financially settled after the last date it may be traded - in this case the maturity date is usually the completion of financial settlement

Be careful when looking at contract details - the terms are used inconsistently between exchanges and brokers...

A Megawatt is a measure of energy per unit time

• in this case one million joules per second
• one watt being one joule per second

Abbreviation is MW

Not to be confused with MWh

Detail

In energy trading we usually refer to electricity as power

In physics power is energy per unit time

• so a Megawatt is a measure of power
• It is easier though to think of a Megawatt as a flow rate of energy
• that is so much energy flowing per second, or per hour
• think of MW being like the speed of a car (MWh are the distance the car has travelled)

Gas and power trades are often specified in Megawatts because they have a continuous flow rate

However energy trades are priced in terms of energy (e.g. €45.3/MWh) so we need to be able to calculate the number of MWh of the trade or delivery period

This is easy if we use the equation:

1 MWh = 1 MW flowing for one hour

and simply remember this

Megawatt.hours = Megawatts x hours

or

MWh = MW x hours

Just like the speed of a car:

you can't meaningfully add two values in Megawatts at different times  - what does it mean to add two speeds together at different points on the Motorway?

If I drive 60 mph for 10 minutes, then 72 mph for the next 5 minutes, does the number 132 mph mean anything? (No!)

If I flow 10 MW one day and 20 MW the next day, the value 30 MW has no meaning

you can meaningfully add two values in Megawatt hours at different times

If I drive 10 miles in the first ten minutes, then 6 miles in the next five minutes, then I have driven 16 miles in total

If I flow 240 MWh one day and 480 MWh the next day, then I have flowed 720 MWh over the two days

you can't normally price something in Megawatts - a toll road makes you pay per mile, it doesn't matter how fast you went

For clarity:

1 Watt = 1 joule per second; 1 W = 1 j/s

1 kilowatt = 1,000 Watts; 1 kW = 1,000 W

1 Megawatt = 1,000 kilowatts; 1 MW = 1,000 kW

1 Gigawatt = 1,000 Megawatts; 1 GW = 1,000 MW

1 Terawatt = 1,000 Gigawatts; 1 TW = 1,000 GW

A measure of energy - abbreviated to MWh

Equivalent to one Megawatt of power flowing for one hour

Detail

In physics Power = Energy per unit time, e.g. joules per second

this can be thought of as an energy flow rate

it follows that Energy = Power * time

think of energy (MWh) as the equivalent of distance (miles or kilometres), and power (MW) as the equivalent of speed (mph or kph)

Electricity (confusingly also normally called power) and gas trades are often described in terms of a rate of energy, e.g. Megawatts, or therms per hour

However energy trades are priced in terms of energy (e.g. €45.3/MWh) so we need to be able to calculate the number of MWh of the trade or delivery period

This is easy if we use the equation:

1 MWh = 1 MW flowing for one hour

and simply remember this

Megawatt.hours = Megawatts x hours

or

MWh = MW x hours

Just like the speed of a car:

you can't meaningfully add two values in Megawatts at different times  - what does it mean to add two speeds together at different points on the Motorway?

If I drive 60 mph for 10 minutes, then 72 mph for the next 5 minutes, does the number 132 mph mean anything? (No!)

If I flow 10 MW one day and 20 MW the next day, the value 30 MW has no meaning

you can meaningfully add two values in Megawatt hours at different times

If I drive 10 miles in the first ten minutes, then 6 miles in the next five minutes, then I have driven 16 miles in total

If I flow 240 MWh one day and 480 MWh the next day, then I have flowed 720 MWh over the two days

you can't normally price something in Megawatts - a toll road makes you pay per mile, it doesn't matter how fast you went

Netting is the aggregating and offsetting of multiple cash flows between counterparties to arrive at one, or a limited set of physical payments

Detail

There are two distinct sorts of netting:

Settlement Netting - which might also be described as payment netting

All cash flows between two parties are summed (receipts are positive, debits negative) to arrive at one physical payment due

Settlement Netting granularity aggregates cash flows to a single legal entity over one or  more cash flow attributes including:

• Payment Date
• Currency
• Commodity (some times)

The exact terms of Settlement Netting are described in the bilateral Master Agreement that we have in place with the counterparty

Close-out netting - The set of outstanding cash flows that will be netted if our counterparty goes into receivership or liquidation

If we are expecting a payment of £999,999 from our counterparty, and they are expecting £1,000,000 from us, and they go into liquidation - we want to be owing them £1, not £1,000,000.

The liquidator will do his best for all creditors to try and get us to pay the £1,000,000, and have us wait in line with other creditors for the £999,999. Indeed without a legally sound close out netting agreement in place the liquidator would be favouring us as a creditor were they to let us net the outstanding payments

An electronic message sent to a third party detailing a transaction or requirement as part of a pre-existing agreement

Typically gas and power transactions are nominated to system and market operators

Detail

Examples of nominations:

• Power or gas entering a grid or network (e.g. generated power) (e.g. a PN)
• Power or gas expected to be used by customers
• Power or gas bought or sold (e.g. an ECVN)
• Power or gas flowed through an interconnector
• Gas injected or withdrawn from storage
• Gas required from a Supply Contract

Nominations are sent typically some time in advance, and then updated as any changes occur (new trades are executed, new forecasts are made etc.)

For power and gas there are deadlines for the last nominations for a delivery period - if nominations are missed then the trading organization may face large imbalance costs so:

Nominations are one of the most time-critical processes or capabilities of any trading organization 

In the UK nominations are officially known as Notifications - but the general term, nomination, is more usually used

A generic legal term for transferring existing contracts from one legal entity to another

Detail

A legal entity may agree with another legal entity to transfer all, or a subset of, its contracts to another legal entity

Each company that the original legal entity has contracts is notified, and a novation is agreed:

that is our organization agrees to novate our contracts from the first legal entity to to the other on a particular, mutually agreed, date

amongst the contracts novated will be any long term contracts, master agreements and any trades 

Trade novation has to be reflected in our ETRMs, and the following convention is usually followed:

• Trades that finish delivery before the novation date and time are left as is
• Trades that start delivery after the novation date and time are amended so that the counterparty is changed from the old legal entity to the new
• Trades that are scheduled to deliver through the novation date (that is they start before the date and time, and finish after the date and time) are split:
  • The original trade is amended so that its end date and time is set to the novation date and time
  • A new trade is created that has start date and time set to the novation date and time, end date and time set to the original end date and time of the original trade - all other attributes (price, volume etc) stay the same

An Offer is a type of Order; a trader offers to sell a product or commodity at the Offer price

Detail

The trader offers a product for sale at a particular price

Offers are normally submitted to a Broker or an Exchange

If an offer is matched by a subsequent bid by another party, then a trade is executed

If the offer matches an already quoted bid then a match is made and a trade is executed

See also Bid