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

A Bid is a type of Order; a trader bids to buy a product or commodity at the Bid price

Detail

The trader bids to buy a product at a particular price

Bids are normally submitted to a Broker or an Exchange

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

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

See also Offer

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

A clean spark spread is the spread between the value of power (electricity) on the one hand and the value of the gas needed to generate that power, and any associated carbon costs of generation

Detail

The term clean spark spread may refer to

• the cash value of the spread itself
• a trade executed that has three physical legs
• a trade that has at least one physical leg and up to two financial legs
• a trade that is settled financially based on a fixed ratio of power to gas and carbon

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.)

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

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

Capacity is a type of commodity associated with gas and power, and gives a trading organization the option to "move" gas and power through the respective networks (pipelines and grids)

Detail

Capacity may be bought in short or long-term auctions directly from the Transmission System Operators (TSOs), or may be traded bilaterally

Ownership of capacity entitles the owner to transport gas or power from one part of a network (location) to another

A trading organization does not need to buy capacity to buy and sell a commodity at a location, it does if it wants to transport the commodity to a different location 

For example capacity on the Interconnector France-Angleterre (IFA) entitles the owner to transport power from the UK grid to the French grid or vice versa

As capacity may be used to change the location of a commodity, it is somewhat similar to an option on a (physically settled) location spread and is usually valued as such

An Index is a set of prices that are published for a commodity or product, usually derived from trading data, using an open and independent method

Detail

An index consists of a set of time periods, with an associated price (or set of prices) for a particular commodity or product for each of the time periods:

The time periods are sometimes called grid points (or gridpoints)

A typical index has daily granularity forward from the date it is published for a number of days, then monthly for some months, then quarterly, seasonal and annual

For each time period there may be a bid price, an offer price, and an average (mean) price

Indexes are usually published at the end of each trading day, and represent some sort of average of the prices that Forward and Futures contracts actually traded at on that day (or for a pre-defined period of the day)

Various organizations publish indexes for different commodities and products:

Exchanges publish indexes for the various products they offer

Independent analysts publish indexes for commodities in markets they specialize

Trading organizations use indexes to:

Derive forward (valuation) curves

Fix in floating prices of floating price trades

Agree forward valuation of trade portfolios with counterparties for netting agreements

There is some similarity between indexes and curves since they are both sets of time-series data. The main differences are:

Indexes are published by independent organizations, and are available to any organization that wishes to subscribe to them

Indexes only relate to prices of commodities and products

Curves are usually created by, and proprietary to, the trading organizations that create them

Curves consist of any time-series data, including valuation, volatility, interest rates etc.