Detailed Glossary of Energy Trading terms

Netting is the aggregating and offsetting of multiple cash flows between counterparties to arrive at one, or a limited set of physical payments

Detail

There are two distinct sorts of netting:

Settlement Netting - which might also be described as payment netting

All cash flows between two parties are summed (receipts are positive, debits negative) to arrive at one physical payment due

Settlement Netting granularity aggregates cash flows to a single legal entity over one or  more cash flow attributes including:

• Payment Date
• Currency
• Commodity (some times)

The exact terms of Settlement Netting are described in the bilateral Master Agreement that we have in place with the counterparty

Close-out netting - The set of outstanding cash flows that will be netted if our counterparty goes into receivership or liquidation

If we are expecting a payment of £999,999 from our counterparty, and they are expecting £1,000,000 from us, and they go into liquidation - we want to be owing them £1, not £1,000,000.

The liquidator will do his best for all creditors to try and get us to pay the £1,000,000, and have us wait in line with other creditors for the £999,999. Indeed without a legally sound close out netting agreement in place the liquidator would be favouring us as a creditor were they to let us net the outstanding payments

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:

• Power or gas entering a grid or network (e.g. generated power) (e.g. a PN)
• Power or gas expected to be used by customers
• Power or gas bought or sold (e.g. an ECVN)
• Power or gas flowed through an interconnector
• Gas injected or withdrawn from storage
• Gas required from a Supply Contract

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

A generic legal term for transferring existing contracts from one legal entity to another

Detail

A legal entity may agree with another legal entity to transfer all, or a subset of, its contracts to another legal entity

Each company that the original legal entity has contracts is notified, and a novation is agreed:

that is our organization agrees to novate our contracts from the first legal entity to to the other on a particular, mutually agreed, date

amongst the contracts novated will be any long term contracts, master agreements and any trades 

Trade novation has to be reflected in our ETRMs, and the following convention is usually followed:

• Trades that finish delivery before the novation date and time are left as is
• Trades that start delivery after the novation date and time are amended so that the counterparty is changed from the old legal entity to the new
• Trades that are scheduled to deliver through the novation date (that is they start before the date and time, and finish after the date and time) are split:
  • The original trade is amended so that its end date and time is set to the novation date and time
  • A new trade is created that has start date and time set to the novation date and time, end date and time set to the original end date and time of the original trade - all other attributes (price, volume etc) stay the same