Detailed Glossary of Energy Trading terms

A party is an organization, or part of an organization, which is legally involved in a trade

Detail

Every trade has at least two parties: a buyer and a seller

Our organization, or part of organization, is referred to as the first party, the other organization, or part of an organization is the counterparty

There may be a broker who introduces the buyer and seller - the buyer and seller are not known to each other until the trade is executed 

If our organization executes a trade on an Exchange then the Exchange is the counterparty

The attribute, or adjective, physical usually refers to trades and business process that results or involves in the physical delivery of energy or a commodity

Detail

A trade is physically settled when it will result in the delivery of an energy or commodity. This is in contrast to a trade that is financially or cash settled

Physical business process involves the activities around

Scheduling delivery of electricity and gas (Operations)

Logistics of moving and delivering other commodities by ship, barge, train, plane, truck etc. including loading and unloading and inspections

All physically settled derivatives imply either an obligation to deliver, or take delivery of, a commodity at a location at some time in the future

The obligation to deliver a commodity is called a short position of that commodity at that location and time in the future

The obligation to take delivery of a commodity is called a long position of that commodity at that location and time in the future

Detail

Traders sum the position of a set of trades to know their net position across that group of trades - usually called a portfolio, a book or a strategy. This is known as the traded, or trader, position

Traders take a long position if they believe the value of the commodity at the time of delivery will be greater than the contract, or strike, price

Traders take a short position if they believe the value of the commodity at the time of delivery will be less than the contract, or strike, price. Taking a short position is sometimes known as shorting

Each time a trade is executed the trader's net position changes. Most traders update their net position as each trade is executed 

Traders make, and lose, money by taking positions, either short or long at various points in the future

Open positions in the future imply a risk that needs to be managed very carefully as changes in the forward curves affect the value of the net open position

It is therefore critical that traders know their up to date position at all times

This is the purpose of Position Reporting by means of Position Reports

Detail

In Energy Trading terms Power is almost always synonymous with Electricity

In physics terms power is a measure of the rate of energy conversion per unit time

Detail

In SI terms energy is measured in Joules

One watt = one Joule per second

1 kilowatt (kW) = 1,000 joules per second

1 megawatt (MW) = 1,000 kW

1 gigawatt (GW) = 1,000 MW

1 terawatt (TW) = 1,000 TW

Since power is energy per unit time (energy divided by time) it follows that energy is power multiplied by time

Frequently energy is measured in these terms:

1 kWh = 1 kilowatt for an hour = 3,600 * 1,000 joules = 3,600,000 joules

In Energy trading a Product is a standardized type of trade which may be offered by an Exchange, quoted by a Broker, or be the subject of a published Index

Detail

Note the similarity to an Instrument

A typical product has dimensional attributes of:

• Commodity
• Location or market
• Shape for power
• Settlement type (physical or financial)
• Sometimes delivery period granularity (day ahead, month etc.)

A term generally used in gas and power trading for trades that deliver in the near future

Detail

The exact definition is not fixed

Some trading platforms define prompt as completing delivery within a week of the trade date, others within the same month as the trade date

Spread between the price of nuclear fuel and power

Detail

It's fashionable to find a word ending 'ark for fuel to power spreads...

Shape is a term, mainly used in Power Trading to describe a non-continuous delivery over a delivery period

For example a UK power trade may have a delivery period of a month and have peak shape, which specifies that the power will be delivered over a time period of 07:00 - 23:00 each day of the Month

Detail

Typical shapes include

• Peak - peak daytime hours
• Offpeak - non-peak hours
• Extended peak - longer hours than peak
• Blocks - in the UK the day is divided into six four-hour blocks starting at 23:00, Various combinations of these blocks may be traded (note that peak is blocks 3-6)
• Weekday - Weekdays that are not National Holidays
• Weekend - non-weekdays
• Combinations of weekday and weekend and one of the others (e.g. WD345 is blocks 3,4 and 5 on weekdays only)

Shape in Power delivery is usually referred to as Profile

Speculative trading, also known as proprietary or spec. trading, is the trading of commodities with the intent of making a profit with no intent to make or take delivery of those commodities

Detail

Spec. traders take forward positions, either short or long with the view to closing out those positions at a later date, prior to delivery

Closing out the open position involves trading to flatten the net position, eventually (but before delivery) to zero