Dark Energy Consulting
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Detailed Glossary
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Discounting | ||
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Calculation of the present day value of a cash flow that will or might occur at some time in the future Detail Suppose I offered to give you £1,000 right now - you'd be pretty pleased (wouldn't you?! If not imagine it's £10,000,000) Suppose I guarantee to give you £1,000 in one year's time - you'd also be pleased I guess, but less pleased of course... Why? Well, for starters if you got it today you could use right away Even if you wanted to use it in a year's time you'd rather have it now because you could put it in the bank and earn some interest over the next year Conversely, if you really needed some money now, you could borrow it from a bank and then repay it when I paid you in a year's time But if you borrowed £1,000 now you'd have to pay interest over the year, so you'd actually end up owing a bit more than £1,000, let's say £1,050 So if you worked out how much interest you would pay, and borrowed an amount, such that the initial amount plus the interest over the next year came to £1,000, then the £1,000 would exactly pay it off Let's say you did the calculation and it came out that you could borrow £965, the interest on that over the year coming to £35 We could then say that £1,000 in a year's time is equivalent to £965 right now We call that £965 the discounted value of the £1,000 in a year's time You can see that the general principle is the discounted value is worked back from the actual value from the expected payment date to today using the expected interest rates In order to calculate a discounted cash value we need: The payment date - usually available from the contract terms, or the master agreement The interest rate curve (for the payment currency or an alternative hedging currency) | ||
Interconnector | ||
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A gas or power connection between two different locations Usually used to flow gas or power from a lower priced location to a higher priced location Detail Interconnectors consist of either a pipe, or cable connecting two hubs or grids For a trading company the process of flowing gas or power from one location to another goes as follows: Procure capacity on the interconnector This may be through an auction, mainly annual and day ahead, or in some cases through a secondary market (i.e. buying or selling capacity to other organizations) Capacity is usually bought in flow rate units (e.g. Nm3/hour for gas, MW for power) over a period of days, a month, quarter, years etc. Capacity on an interconnector is much like an option on a location spread Capacity gives the right, but not the obligation, to flow gas or power from one location to another Transmission In order to use the capacity the trading organization needs to nominate transmission of gas or power to the TSO Let's say we have a long term capacity contract to flow power from the France to the UK through the IFA Noticing the price of power is less in France than in the UK so we nominate to the TSO that we will flow power (up to the capacity flow rate), using the capacity. We normally book this as a trade in our ETRM, but there is no change of title - this is an internal trade We usually book this trade at a fair market price to keep P&L shifting between locations Obviously we need to hedge this with an appropriate long position in France (we buy the power in France) and a short position in UK (we sell the power in UK) | ||
Weighted Average Price | ||
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Weighted Average Price (WAP) is the average price over a series of individually priced volumes Detail The quickest way to calculate WAP is to calculate the total value over all the individually priced volumes, sum them and then divide by the total volume | ||
Prompt | ||
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Front Month | ||
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The earliest tradable month of a particular contract - normally a Futures contract Detail It's easiest to give an example: A March monthly contract may be tradable up to the 25th of February On 25th February the Front Month would be March On the 26th February the Front Month would be April Contracts beyond the Front Month are sometimes called Back Months | ||
Maturity | ||
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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... | ||
Balance of Month | ||
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A type of contract in which the delivery period is the remainder of the current month Detail Widely used in gas trading a Balance of Month contract (BoM) can vary from 30 days down to a few days depending on the day traded Balance of Month contracts often have separate contract codes and settlement prices for each day of the month that they are traded | ||
Day Ahead | ||
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Trading and pricing for delivery the next day Detail Day Ahead and Within Day trading is responsible for the vast majority of gas and power trades executed The Day Ahead Market (DAM) is used by Operations/logistics teams to balance supply to demand Speculative traders to make money out of the massive liquidity in Day Ahead trading Day Ahead trading may be executed in the normal ways: Bilaterally with a counterparty In addition there are specialist Spot Exchanges that offer a wide range of within day and day ahead products, traded in two main ways: Continuous spot trading much like any other OTC or Exchange trading Day Ahead Auctions - with a fixed close At the close of Day Ahead trading many Spot Exchanges publish Day Ahead Settlement prices based on the auctions and/or a particular trading period in the current day, or provide these prices to a third party who publish a Day Ahead settlement price Day Ahead settlement prices are often used as tradable indexes for indexed or floating forwards. These Day Ahead settlement prices are often referred to as Day Ahead indexes | ||
Baseload | ||
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Term used in power (electricity) trading and operations to describe continuous delivery (24 hours a day, 365 days a year) Detail Baseload is the most basic type of power profile Baseload may refer to generation - nuclear power plants provide excellent baseload generation - but cannot easily be switched on or off so are no use for other profiles Baseload may refer to trading - a contract for delivery in 2024 may usually traded as Baseload, Peak or Offpeak Peak and offpeak are related profiles that (as their names suggest) deliver during the set of hours that are defined as peak (e.g. 07:00 - 19:00) or offpeak (e.g. 19:00 - 07:00 the next day) in general Baseload = Peak + Offpeak which is to say if we sell the same volume Peak and Offpeak for the same period then we have effectively sold Baseload If we buy Baseload and sell Offpeak, then we have effectively bought Peak | ||
Nomination | ||
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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:
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 | ||