Detailed Glossary of Energy Trading terms

A spot trade in general refers to a trade with immediate delivery. In energy trading terms it usually refers to a trade with delivery on the day it is executed (within day) or for the following day (day ahead)

Detail

There is usually high volume trading in spots, particularly for power and gas, as speculative traders try and close out their positions as delivery times approach, and asset-backed traders try to balance, and financially optimize their positions. A large proportion of spots are traded on Exchanges and through Brokers

Spot trades are settled physically, and even if executed on an Exchange are often settled by invoice and payment within a day or two of delivery

A spread is a difference in price, or value, of two similar but different underliers

An Energy Spread trade s a type of trade between two floating prices on similar but not identical energy underliers

Detail

Spread trades are usually financially settled

Different types of Energy Spread are classified by the difference in the underliers:

• Time Spread - The commodity and delivery location are the same, the delivery period is different. Also known as a Calendar Spread
• Location spread - The commodity and delivery period are the same, the delivery location is different
• Commodity spread - The delivery location and periods are the same, the commodity is different

Many commodity spreads are associated with the cost of generating electricity, so they involve electricity as one commodity, the others may be:

• Gas - usually called a Spark Spread
• Coal - usually called a Dark Spread
• Oil - usually called a Slick Spread 

Another group of commodity spreads are associated with the cost of refining, so they involve crude oil as one commodity, the others being refined products such as gasoline. These are known as crack spreads

Spread is also used to describe the difference in prices between locations, times, commodities

 

A type of commodity, which although it may be applied to any physical commodity, usually describes the ability to store natural gas in its gaseous state

Storage facilities usually consist of natural structures (depleted gas fields for example) that are attached to the gas pipeline network

Details

Storage may be bought from the Storage operators in auctions or traded

Storage allows the option to inject gas into storage, or release gas from storage

The commercial use of storage is generally to allow gas to be transferred into Storage (injected) in Summer months when the prices are low, and released (withdrawn) in the peak Winter months when gas prices are high

Storage behaves somewhat like an option on a physically settled time spread

A trade is a legally binding contract between two parties

A physically settled trade requires one party to deliver one or more commodities to the other party at a time and location specified in the trade terms, in return for one or more cash payments

A financially settled trade requires both parties to agree the value of one or more underliers, and make one or more cash payments dependent on those values

In general, trades have the following dimensional attributes

Commodity

Delivery location

Delivery period

Counterparty

Broker

Trades also have the following non-dimensional attributes

Price

Volume

See also Execution

Something that behaves like something else but is not really that thing

Detail

We've all heard of virtual reality - it appears (or tries to appear) real but is not, but it does have many of the characteristics of real

So what does that mean for us?

Well let's take a real(!) example

Virtual Storage - Storage allows organizations to inject gas at one point in time and withdraw it later

An organization (the seller) may sell another organization (the buyer) virtual storage

the buyer of the product sells gas at no cost to the seller

at some point later in time the buyer of the product requests the seller of the product to sell the gas back at no cost

the seller tracks the level of virtual gas, and tracks this against the virtual capacity of the storage product sold

Volume is the measure of how much of something is involved in a trade

Volume = Quantity (but the term Volume is nearly always used in preference)

Hence in energy trading volume may have dimensions of energy, mass, weight or volume

Detail

Volume is one of the important attributes of a trade

Volume may be specified:

As a total for the entire trade

By day, month or some other period for the duration of the trade

Volume has units of quantity according to the commodity:

Mass (often incorrectly called weight) - often used for coal, oil and other non-gaseous commodities

e.g. metric tonne (T), kilogrammes (kg)

Volume - sometimes used for gaseous and liquid commodities

millions cubic feet (mcf), barrels (bbl), gallons

Energy - may be used for any commodity

e.g. therms, Megawatt hours (MWh)

For gas and electricity trades it is generally more convenient to trade in quantities of energy

Other energy commodities are usually measured in volumes of mass or volume since this is more practical to measure at delivery

Volume traded will directly affect the traded position of that commodity

Volume may be constant over the duration of the trade, or may vary over the different delivery periods: the delivery volumes are defined in the Schedule of the trade

 

Term used to describe transferring natural gas from a storage facility into a transmission network

Detail

Withdrawn volumes are nominated in the same way as other physical gas movements

See also Storage for more details

A known future cash flow that has not been invoiced

Detail

This term is a perfectly standard accounting term.

Accruals commence at the time of delivery and continue until an invoice is raised, or an invoice is received

For continuously delivered commodities (gas and power), accruals build up over the delivery month, day by day, and continue until an invoice is generated or received early the next month

Accruals are posted to the General Ledger, and are reversed out when an invoice is posted

Unrealized P&L is not accrued - only delivered (and therefore usually realized) P&L is accrued

Accounts Payable/Accounts Receivable

Anything relating to these two departments, that is:

• receiving, checking and paying invoices (Accounts Payable)
• raising, sending and chasing payment of invoices (Accounts Receivable)

Often used to refer to invoices and invoiced cash flows

Detail

In general the Master Agreement of a trade determines the agreed invoicing cycle and dates

A typical invoicing cycle would be to invoice a month's worth of delivery on the 5th day of the following month

Our organization must raise invoices, and may raise shadow invoices or purchase orders to match against invoices received from our counterparties

Once sent, an invoice cannot be deleted or just ignored, but it can be reversed by issuing a credit note. A credit note reverses part of, or a whole invoice

Equally a debit note may be raised to reverse part of, or all of, a shadow invoice or purchase order. This should match a credit note that our counterparty will send to us

The set of invoices, shadow invoices and purchase orders, credit notes and debit notes, and the cash flows held in them may be collectively referred to as APAR