Detailed Glossary of Energy Trading terms

Often used as a term for the Operational activities involved in gas and power

Detail

Short term position needs to be nominated or notified to the respective system and market operators:

• Expected generation
• Traded position by period with each counterparty at each location
• Expected consumption by retail customers

This set of activities is often collectively referred to as Scheduling

The schedule of a trade describes the delivery profile (that will need to be nominated)

The Business Process or Capability covering the payments relating to trading activities. It includes agreeing payments, making them, and ensuring that payments are received at the correct times

Detail

Settlement includes:

• Invoicing
• Netting
• Making payments
• Receiving payments
• Margining
• Collateral Management
• Clearing

We also referred to the concept of financial and physical settlement of trades

• Physical settlement involves the delivery of a physical commodity, with a cash payment
• Financial settlement does not involve the delivery of a physical commodity, there is just a cash payment

We need to be careful to recognize the legal definition of settlement of a physical trade:

• The physical part of the trade settles on the delivery date(s)
• The cash part of the trade settles on the Due Date

Most other parts of energy trading businesses identify the term settlement with cash settlement (or payment)

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

Speculative trading, also known as proprietary or spec. trading, is the trading of commodities with the intent of making a profit with no intent to make or take delivery of those commodities

Detail

Spec. traders take forward positions, either short or long with the view to closing out those positions at a later date, prior to delivery

Closing out the open position involves trading to flatten the net position, eventually (but before delivery) to zero

A spot trade in general refers to a trade with immediate delivery. In energy trading terms it usually refers to a trade with delivery on the day it is executed (within day) or for the following day (day ahead)

Detail

There is usually high volume trading in spots, particularly for power and gas, as speculative traders try and close out their positions as delivery times approach, and asset-backed traders try to balance, and financially optimize their positions. A large proportion of spots are traded on Exchanges and through Brokers

Spot trades are settled physically, and even if executed on an Exchange are often settled by invoice and payment within a day or two of delivery

A spread is a difference in price, or value, of two similar but different underliers

An Energy Spread trade s a type of trade between two floating prices on similar but not identical energy underliers

Detail

Spread trades are usually financially settled

Different types of Energy Spread are classified by the difference in the underliers:

• Time Spread - The commodity and delivery location are the same, the delivery period is different. Also known as a Calendar Spread
• Location spread - The commodity and delivery period are the same, the delivery location is different
• Commodity spread - The delivery location and periods are the same, the commodity is different

Many commodity spreads are associated with the cost of generating electricity, so they involve electricity as one commodity, the others may be:

• Gas - usually called a Spark Spread
• Coal - usually called a Dark Spread
• Oil - usually called a Slick Spread 

Another group of commodity spreads are associated with the cost of refining, so they involve crude oil as one commodity, the others being refined products such as gasoline. These are known as crack spreads

Spread is also used to describe the difference in prices between locations, times, commodities

A type of commodity, which although it may be applied to any physical commodity, usually describes the ability to store natural gas in its gaseous state

Storage facilities usually consist of natural structures (depleted gas fields for example) that are attached to the gas pipeline network

Details

Storage may be bought from the Storage operators in auctions or traded

Storage allows the option to inject gas into storage, or release gas from storage

The commercial use of storage is generally to allow gas to be transferred into Storage (injected) in Summer months when the prices are low, and released (withdrawn) in the peak Winter months when gas prices are high

Storage behaves somewhat like an option on a physically settled time spread

An Energy Swap is generally a swap of two different prices on an identical, or similar, Energy underlier

Detail

While financial market swaps may involve swapping almost any cash flow for any other cash flow, an Energy Swap involves the swap of two different prices on an identical, or similar energy product or underlier.

The two types of Energy Swap are:

• Fixed for Floating - one price is fixed by agreement in the trade terms, the other price is derived from one or more published indices based on a formula agreed in the trade terms
• Floating for floating - both prices are derived from one or more published indices based on a formula agreed in the trade terms. This type of Swap is also known as a Basis Swap

By definition, Energy Swaps are always financially settled

Energy swaps may be traded OTC or on an Exchange

An Energy Swap is very similar to a a financially settled Futures or Forward Contract

Exchange traded swaps are generally settled through non-daily margining - and therefore have credit risk

Financially settled futures, like all futures, are settled through daily margining - and have minimal credit risk

Also known as a swing option, a swing contract is a type of contract that allows the buyer the option, but not the obligation, to take periodic deliveries of a product at a volume nominated by them between a minimum and a maximum volume at an agreed price

Detail

Swing contracts ate typically used in long term supply contracts of gas, oil and power

They are frequently combined with a take or pay clause, which specifies that a minimum amount of product must be taken over a set of long periods

e.g. A swing contract may specify that a daily volume between 10 and 100 units may be taken each day

A take or pay clause may specify that a minimum of 365 * 15 units may be taken over the entire year

Daily nominations of swing contracts are usually made by a particular time on the previous day, and may be transmitted electronically

Valuation of swing contracts is extremely complex, because of the daily optionality, and particularly if there is a take or pay clause as the overall delivery is constrained

Swing contracts may be short or long term (up to twenty-five years). Typically the price is either renegotiated periodically, or indexed to an index, or a basket of indexes