Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Nick Henfrey


Linear trade

by Nick Henfrey - Thursday, 4 September 2014, 4:42 PM

A trade with no optionality



The linearity refers to the delta - that is the variation of the value of the trade with the main underlier

Trades with no optionality have a value that is directly proportional to the value of the underlier - if we plot the value against the value of the underlier it will be a straight line - hence linear trade

Trades with optionality do not have a linear relationship between value and underlier. As the value of the underlier becomes less and less favourable the value of the trade becomes nearer and nearer to zero

Unsurprisingly these trades are known as non-linear



by Nick Henfrey - Tuesday, 2 June 2015, 7:39 AM

Liquefied Natural Gas

Natural Gas is difficult to liquefy by compression alone, it is usually liquefied, stored and transported at very low temperature

LNG acts like oil and coal for transportation, like natural gas once it is returned to its gaseous form


Unlike propane gas it is not practical to liquefy natural gas (which is mostly methane gas) by compression alone, and it is normally liquefied by refrigeration to -160 oC and stored and transported at moderate pressures

LNG needs to be transported in specialist ships (LNG vessels) that can maintain the low temperature required, so are quite different to other commodity carriers

On arrival at a destination port the LNG needs to be returned to its gaseous state in a plant which is attached to a gas terminal

Other than the ships themselves the logistics of LNG transport involve the same complexities as oil and coal

 LNG is big business for two main reasons:

A vast quantity of natural gas is already available from oil rich countries - but there are no pipelines to flow it long distances (Russian gas into Europe being the main exception)

The process of extracting natural gas from unconventional sources (typically shale) by hydraulic fracturing ("fracking") is likely to yield even more gas - but usually not where it's needed





by Nick Henfrey - Sunday, 7 October 2012, 5:56 PM

Location is one of the key dimensional attributes of all physically settled, and many financially settled, trades


Location is usually a description of where the delivery a of a trade will take place

Although this sounds fairly straightforward, in practice location means different things for different commodities.

This is because the delivery location simply defines the lowest level of distinguishable information about the delivery, and this lowest level varies with the commodity

So let's look at some commodity locations to see what this means:

Natural Gas

The location of the majority of gas trades in the UK is the NBP

The NBP isn't even a real location, it describes the UK-wide gas pipeline network called the National Balancing Point

On the day of delivery, a seller of gas has an obligation to deliver gas at the NBP

The seller may deliver it from any other location that is physically connected to the NBP, it doesn't matter where that is.

The buyer may take delivery to any other location that is physically connected to the NBP

Gas traded locations such as the NBP are called hubs.

Some hubs require the buyer and seller to identify the physical connection point of delivery - these are physical hubs

Other hubs, like the NBP do not require the buyer and seller to identify the connection point - these are virtual hubs



by Nick Henfrey - Tuesday, 2 June 2015, 5:40 PM

Margining is a form of Settlement, whereby exposure to Credit Risk between two parties is limited by keeping the overall Credit Exposure below a certain threshold by means of Margin payments between the parties whenever the threshold is breached


Let's take a simple example
I buy a delivery of 200 tonnes of coal from you at a fixed price of $60 per tonne, to be delivered in Antwerp in December 2018
Let's also assume the day we do the deal the forward price of coal for that delivery month and location (and quality) is also $60 per tonne (we agree on a daily published price to value the coal, in this case the Argus/McCloskey API 2 INDEX)
At the end of the first day the contract calls for me to pay you $12,000 at the time of delivery, and for you to deliver to me, what we both currently agree is, $12,000 with of coal at about the same time
We are even - we'll call this day one
If either of us goes out of business, or defaults in any way, then the other party will not lose out
Every day up until the delivery takes place we will recalculate the value of the coal and determine if one side would lose out if there were a default
At the end of day two we both note that the API 2 index is now set at $59 for November 2018 delivery
At this point I will still have to pay you the $12,000 cash, but you will only need to deliver to me $11,800 worth of coal
If you go out of business or default on the deal I won't lose out
But if I default then you will lose $200
I need to arrange for that $200 available to you in case I do default 
we'll look at how that is arranged in a moment 
On day three we both note that the price has risen to $62 per tonne - that's good for me, bad for you
Now if I default you won't need to deliver $12,400 worth of coal in exchange for $12,000 cash
But if you default then I'll be $400 worse off
You need to arrange for $400 to be available to me in case of default
Let's say on day eight the price rises to $66 per tonne
You now need to arrange for $1,200 to be available to me in case of default
We talked about making the cash available in case of default - how does that work?
There are actually a few different schemes:
in a clearing arrangement each if us has a margining account with a central clearing house
Before we even start trading we need to deposit some money into the account, and each time we execute a trade we need to make sure there is sufficient in the account to cover a certain amount of loss
Let's say we both deposit $1,500 initially and then an additional $1,000 as a result of doing the single trade - we can see that on typical price movement, for the volume of the trade this, then it would take quite a large movement in the price to change the value of the trade by $1,000
We both now have $2,500 deposited
The initial $1,000 deposit against this specific trade is called the Initial Margin
At the end of day two the clearing house would remove $200 from my account and put it into your account - this is the Daily Variation Margin
I now have $2,300 and you have $2,700
At the end of day three the clearing house would remove $600 from your account and put it into my account - this is the Variation Margin
That's $600 not $400 because it includes a refund of the $200 already taken out (the price swung by $3 per tonne - that's $600) 
I now have $2,900 and you have $2,100
At the end of day eight I would have $3,700 and you have $1,300
At this stage you would need to make a payment into your account to top it back up to a minimum level - this may be $200, or it might be more depending on the agreement
We might agree to post $2,000 collateral with each other to cover any initial movement either way
We agree to margin limits of a minimum of $1,500 and a maximum of $2,500, if the margin falls below $1,500 we will post a minimum of $500 to get the collateral back up to $1,500, and likewise, if the collateral goes above $2,500 we will be able to withdraw cash to bring it below $2,500
At the end of day two my collateral stands at $1,800 - the cash in the collateral account minus the $200 current liability on the deal at that point - we're both OK, I have more than the minimum $1,500
At the end of day three I have $2,400 collateral and you have $1,600 (your original $2,000 less your current liability of $400 on the deal)
At the end of day eight I have $3,200 collateral, and you have just $800 (your original $2,000 less your current liability of $1,200 on the deal) 
you need to transfer $700 into your collateral account held by me, I can withdraw $700 

A requirement to top up a clearing account or collateral account is known as a margin call



Mark to Market

by Nick Henfrey - Thursday, 30 October 2014, 7:39 AM

A way of valuing the unrealized P&L of a simple linear Forward, Futures contract or Swap


Most businesses that own assets or hold inventory routinely value those assets and inventory, the change in value between two points in time is the profit or loss

Some assets, like computers, simply depreciate, and a simple depreciation percentage is used each year

Other assets, like buildings, vary in value with the market conditions, and are generally valued using a mark to market principle (that is we simply look and see what the building is worth at the end of the accounting period)

It's important to realize that each trade is an asset (or a liability) - it's a firm contract and must be valued like any other asset

The current value of a single trade is the difference between the price paid, and the value of the delivered commodity when it is delivered (which may be a cargo, a day of gas delivery, or a half hour of power delivery)

We can find the value of the commodity once it has delivered by looking up the spot trading price on the day of delivery

But to value the deal before delivery we must mark the value of the delivered commodity to the market; that is we set the value of the commodity to the price that is currently being paid for the delivery period

For example:

We have bought 10,000 therms of gas for delivery in March next year at 25p per therm

Each day we can look at the average traded price for that month, and mark the value of the 10,000 therms to that price

After two days we note that March is trading at 27p a therm, so we mark the physical value to the market price of 27p, and subtract the price we will pay, 25p. The unrealized P&L is therefore £200 ((27p - 25p) * 10,000). Each day we will need to repeat this calculation until the delivery is complete



by Nick Henfrey - Friday, 4 July 2014, 7:25 AM

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


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


Market Maker

by Nick Henfrey - Saturday, 7 April 2012, 5:25 PM

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


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


Master Agreement

by Nick Henfrey - Monday, 13 April 2015, 5:30 PM

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


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






by Nick Henfrey - Tuesday, 31 March 2015, 5:24 PM

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


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...



by Nick Henfrey - Monday, 8 February 2016, 7:50 AM

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


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


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

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