Detailed Glossary of Energy Trading terms

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 

The difference in cost of achieving the same outcome through different means

Detail

This is easiest explained as an example:

To buy a particular new car in the UK costs £27,000

The identical UK-spec car costs £22,000 in Belgium

It will cost you about £1,000 to have it shipped to the UK, plus another £1,000 costs for delivery, any inspections, your time to manage all this etc.

Cost of buying the car in the UK = £27,000

Total cost of buying the car in Belgium and having it delivered to your home = £24,000

There is an arbitrage opportunity of £3,000

In general, in a liquid market, with minimal market constraints, traders will exploit any arbitrage, and the arbitrage values should all tend to zero

In our example if everyone chose to buy the car in Belgium:

the price would probably go up in Belgium because of the higher demand

the cost of shipping might go up (because of demand and the realization it's valuable)

the price of the car in the UK would probably fall (because they weren't selling any)

When the market acts to reduce arbitrage to insignificant values then we describe this as arbitrage-free

Arbitrage-free is a powerful method in many valuation tools: it implies we can value an Instrument or trade by looking at alternative ways of achieving the same outcome

For example the value of an oil forward contract in six months time, should not be significantly different to the spot price of oil, plus all of the costs of storing that oil for six months

In energy trading terms an asset is something an organization owns that can physically provide, transform or move an energy commodity, such as a gas field, a power station, or a refinery

Detail

In trading terms many assets that transform or help to move a commodity are in effect an option on a spread:

• A gas fired power station acts as an option on a spark spread; if we choose to run it we provide the gas (and the carbon) and in return we get power
• A refinery acts as an option on a crack spread
• A ship acts as an option on a location spread
• A storage facility acts as an option on a time spread
• a pipeline acts as an option on a location spread

Long term supply contracts are also sometimes referred to as an asset

Auto Trade Capture is a capability in most trading organizations (and many have an application called ATC) that allows trades executed on an electronic trading platform (usually exchange or broker) to be automatically downloaded to our organization's ETRM

Detail

ATC usually works by accessing an Instance of Trayport GlobalVision which is a proprietary product.

Trayport provide broker trading platforms to most common Energy Trading Brokers and some Exchanges, and also acts as an interface to many Exchanges running their own trading platforms

Trades executed on compatible platforms may be accessed as XML and mapped into the local ETRM

It is normal for trades to be entered into the ETRM in a status that requires a trader to "validate" or "approve" the trade as having been executed

Trades may also be received from other platforms, often in the form of FIX format messages

Most ATC systems consist of:

• A set of download adapters
• A maze of mapping tables
• A set of ETRM adapters