Detailed Glossary


A Detailed Glossary of Energy Trading terms for registered users




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nick

Underlier

by Nick Henfrey - Monday, 8 June 2015, 7:37 AM
 

Something physical or tangible that may be referenced by a contract or trade

Detail

Financial derivatives are completely cash-based and usually have no physical underliers

Energy derivatives usually have at least one physical underlier, which may be a commodity,

e.g. coal

or a something related to a commodity

e.g. storage

The underlier acts as a bridge to the physical world - and usually as a set of reference prices for price-setting and valuation

We need to emphasize that nearly all energy trades have at least one physical underlier - few of them actually involve the delivery of energy commodities

 

nick

Delta

by Nick Henfrey - Monday, 8 June 2015, 5:21 PM
 

At its simplest the delta of a trade or position is the ratio of its change in value to the change in value of its underlier 

Detail

More accurately the delta is the ratio or sensitivity of the change in trade trade value to any variable, market value or observable

For example a simple Physical Forward trade has a sensitivity to:

  • The price of the underlier
  • The interest rate
  • The FX rate of the currency it was executed in to our base reporting currency

So the delta is the ratio of the change in value of the trade per unit volume (e.g. €/MWh) to the change in value of a market value or underlier (e.g. the underlier power price quoted in €/MWh) to give a dimensionless ratio

You may come across a use of Delta as the ratio of the change in total value of the trade (e.g. €) to the change in price of the underlier (e.g. €/MWh) to give a value with units of volume, in this case MWh. This definition of delta is usually referred to as the Exposure, and may also be thought of as the delta above multiplied by the volume

The delta of fixed price Forwards and Futures is about one

The delta of options varies between 0 and 1 (or -1 to +1)

Exposures are additive - they can be summed across a set of trades or portfolios

Deltas are not additive - because they are dimensionless ratios

Delta is one of the Greeks - usually the most important Greek for trades with no optionality 

nick

Exchange for Physical

by Nick Henfrey - Monday, 8 June 2015, 5:25 PM
 

Convert an Exchange Futures position to a physical position either with an OTC counterparty, or with the Exchange itself

Detail

Classic Futures contracts are settled physically: if you are long 2,000 pork bellies for delivery in May 2018 then, when the contract expires, the Exchange will arrange for one or more parties that are short those pork bellies to make delivery to you at the location, time and price specified in the Futures contract

we don't usually call this Exchange for Physical, since it is the contracted outcome of the Futures contract. The Exchange usually just calls this "Delivery", it is is also known as "Take to Physical" or "Cascade to physical"

Other Futures contracts do not necessarily contractually go physical, or you may want to exchange your regular Futures position for physical before the expiry date, or under different terms

in these cases you may contact the exchange and request an Exchange for Physical - the Exchange will attempt to match you up with another party who wishes to take their opposite position to physical

alternatively you may arrange off the Exchange to Exchange for Physical with another party, and then both contact the Exchange to  notify them

In general, Exchange for Physical is an expensive process, it is usually simpler to close out the Futures position on the Exchange and open an equivalent OTC position on a broker platform

 

nick

Quark spread

by Nick Henfrey - Monday, 8 June 2015, 5:28 PM
 

Spread between the price of nuclear fuel and power

Detail

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

nick

Megawatt hour

by Nick Henfrey - Monday, 8 February 2016, 7:48 AM
 

A measure of energy - abbreviated to MWh

Equivalent to one Megawatt of power flowing for one hour

Detail

In physics Power = Energy per unit time, e.g. joules per second

this can be thought of as an energy flow rate

it follows that Energy = Power * time

think of energy (MWh) as the equivalent of distance (miles or kilometres), and power (MW) as the equivalent of speed (mph or kph)

Electricity (confusingly also normally called power) and gas trades are often described in terms of a rate of energy, e.g. Megawatts, or therms per hour

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

or

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

nick

Megawatt

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

Detail

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

or

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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