cost and freight. The price includes the cost of the cargo and the freight/vessel hiring costs, but not the insurance. Also referred to as CAF.
calendar, or time, spreads describe the price differential – or spread – that may arise between differently dated futures contracts. For example, the price difference between contracts for first- and second-month light, sweet crude offered on Nymex. Time spreads can be mitigated by purchasing options on the difference between average annual prices. In effect, such options provide protection against a reshaping of the forward price curve. The term is also used for trading in which the parties buy a certain number of futures contracts for a specific month and simultaneously sell the same number of futures contracts for a different month.
area where the utilities of the north-west US connect to those of California, and an electric power price index point.
an option that gives the buyer (holder) the right, but not the obligation, to buy a futures contract (enter into a long futures position) or physical commodity for a specified price within a specified period of time in exchange for a one-time premium payment. It obligates the seller (writer) of the option to sell the underlying futures contract (enter into a short futures position) or commodity at the designated price, should the option be exercised at that price. see also put option
an options position formed by the purchase of a call option at one level and the sale of a call option at some higher level. The premium received by selling one option reduces the cost of buying the other, but participation is limited if the underlying goes up. H see also bear spread, bull spread, put spread, vertical spread
a swap in which the fixed-rate payer has the right to terminate the swap after a certain time if rates fall. Often done in conjunction with callable debt issues, where an issuer is more concerned with the cost of debt than the maturity. In some definitions of a callable swap, the fixed-rate receiver has the right to terminate the swap. Also known as a cancellable swap.
a measure of the energy released as heat when a fuel is burned. It may be measured wet (with water vapour) or dry (after the water vapour has been removed). It may also be measured gross or net – gross includes the heat produced when the water vapour is condensed into a liquid, and net does not. Generally, CV is measured gross and dry.
see callable swap
a supply contract between a buyer and seller, whereby the buyer is assured that he or she will not have to pay more than a given maximum price. This type of contract and a call option are analogous.
(Electricity) the rated load-carrying capability of electrical equipment such as generators or transmission lines, typically expressed in megawatts or megavoltamperes. (Gas) the rated transportation volume of natural gas pipelines, typically expressed in millions of cubic feet per day.
the amount of transmission transfer capability reserved by load-serving entities to ensure access to generation from interconnected systems to meet generation reliability requirements. Reservation of CBM by a load-serving entity allows that entity to reduce its installed generating capacity below a level that may otherwise have been necessary without interconnections to meet its generation reliability requirements. see also available transfer capability
in gas or electricity markets, a price based on reserved capacity or measured demand and irrespective of energy delivered. Also known as demand charge.
the amount of energy that a power generation plant actually generates compared to its maximum rated output, expressed as a percentage.
the right to access the output of a plant, whose generation is specifically earmarked.
a legal document for transferring transmission capacity for a defined period.
where a gas shipper with spare capacity in a transportation system – e.g., the UK’s national transmission system – sells or leases its rights to transport gas in a pipeline. (US) trading of transportation rights that has been facilitated through the use of electronic bulletin boards or electronic data interchange.
an estimate of the capital required to maintain a business.
a commodity swap in which the floating payments of the swap are capped at a certain level. A floating-rate payer can thereby limit its exposure to rising commodity prices.
one who has no practical means of buying power or gas from a source other than the local utility, even if in theory the customer is based in a competitive energy market.
a gas produced by the burning of fuel. Many scientists believe it to be a major contributor to the greenhouse effect.
capturing carbon dioxide in carbon sinks, thus limiting its presence in the atmosphere.
forests, soils or oceans that store more carbon dioxide than they release, thereby limiting the gas’ contribution to the greenhouse effect. Carbon sinks can be used as part of an emissions trading system.
the accepted measurement unit for greenhouse gases under the Kyoto Protocol.
(Gas) if, in a given contract period (often a year), a buyer has taken more than the annual contact quantity then, if there is no accumulated make-up gas, the buyer can carry forward this excess for future use. The buyer may use the carry-forward to offset the take-or-pay obligation, although there may be a limit to the amount of carry-forward allowed in any given contract period.
the total cost of storing a physical commodity, including storage, insurance, interest and opportunity cost.
the conversion of a forward contract into a series of shorter-term contracts on maturity.
see spot market
a strategy whereby a trader generates a riskless profit by selling a futures contract and buying the underlying to deliver into it. The futures contract must be theoretically expensive relative to the underlying. If the futures are theoretically cheap compared to cash, the trader could sell the underlying and buy the futures – in reverse cash-and-carry arbitrage.
in US accounting terminology, a hedge of a forecasted asset and liability acquisition, for which the gain or loss on the hedging instrument will remain in equity when the asset or liability is acquired. That gain or loss will subsequently be included in net profit or loss in the same period as the asset or liability affects net profit or loss. H See also FAS 133
value-at-risk (VaR) calculated in terms of earnings or cashflow, giving a probability that business targets will be met. A useful VaR tool for non-financial institutions.
catalytic cracking is a refining process that breaks down heavier crude oil fractions into motor spirit and gasoil/heating oil blending components by passing them over a suitable catalyst.
a substance that accelerates or facilitates a chemical reaction without changing the substance itself – e.g., the use of platinum in reformers to convert naphtha into gasoline.
see combined-cycle gas turbine
see Clean Development Mechanism
one of the many ways of expressing the viscosity of fuel oil.
the right to emit 650,000 tonnes of CO2. CER is the technical term for the output of Clean Development Mechanism (CDM) projects, as defined by the Kyoto Protocol. A unit of greenhouse gas reductions that has been generated and certified under the provisions of Article 12 of the Kyoto Protocol, the CDM.
the right to emit 650,000 tonnes of CO2.
see contract for differences
a forward contract for the delivery of a commodity that has been traded many times by several parties, thereby forming a chain between the final buyer and the initial seller.
a contract by which the owner of a vessel (aircraft or ship) leases his craft to or hires a charterer for a fixed period of time or a set number of voyages. Normally, the vessel owner retains rights of possession and control while the charterer has the right to choose the ports of call. It also goes under the name of charter agreement or charter contract.
the shipping rate agreed between the owner of a vessel and the person or firm wanting to use the vessel in a charter party agreement.
A person or firm who enters into a charter party agreement with the owner of a vessel for the transportation of cargo for a set period of time or number or voyages.
a market participant who uses technical analysis to chart the price patterns of commodities, stocks and bonds to make buy and sell decisions based on this analysis. Chartists believe recurring patterns of trading can help them forecast price movements.
Greenhouse gas emissions trading exchange; designed for voluntary emissions reductions and trading for all six greenhouse gases. The CCX administers the first multinational and multisector market for reducing and trading greenhouse gas emissions. CCX is a self-regulatory, rules-based exchange designed and governed by CCX members that have made a voluntary, legally binding commitment to reduce their emissions of greenhouse gases.
established in 1898 as the Chicago Butter and Egg Board, it became incorporated as the CME in 1919. The CME offers futures and options on futures based on indexes of heating degree days (HDDs) and cooling degree days (CDDs) for selected population centres and energy hubs with significant weather-related risks throughout the US. Cities are chosen based on population, the variability in their seasonal temperatures and the activity seen in over-the-counter trade in HDD/CDD derivatives. These are the first exchange-traded, temperature-related weather derivatives. These contracts are designed to help businesses protect their revenues during times of depressed demand or excessive costs because of unexpected or unfavourable weather conditions.
the holder of a chooser option can choose, after a predetermined period, between a put and a call option. Similar to a straddle, but cheaper, because the holder must choose between the put or the call before the instrument expires. see also forward start option
see combined heat and power
see cost, insurance and freight
methods of burning coal with reduced emissions.
refers to the profit realised by a power generator after paying for the cost of coal fuel and carbon allowances.
The Clean Development Mechanism (CDM), defined in Article 12 of the Kyoto Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable Certified Emission Reduction credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets.
the spread equal to the regular (or ‘dirty’) spark spread minus the CO2 emissions cost for gas-fired power plants. This spread then represents the net revenue on power sales after gas costs and emissions allowance costs. An analogous spread for coal-fired generation plants is typically referred to as a clean dark spread or a dark green spread. see also spark spread, dark spark spread
a mechanism by which transactions are settled through an organisation that assures settlement.
members of an exchange who accept responsibility for all trades cleared through them.
an acronym for compressed natural gas – natural gas that has been compressed under high pressure (typically 2,000–3,600psi). see compressed natural gas
Central North Sea.
see Comisión Nacional de Sistema Eléctrico
a measure of the proportion of variance in y which can be explained by x. H See also r2
burning natural gas as well as another fuel type (usually coal) in order to decrease the amount of air pollutants and/or use the most competitively priced fuels available. see also dual-firing
a generating facility that produces electricity and another form of useful thermal energy (such as heat or steam), used for industrial, commercial, heating or cooling purposes.
when a gas or crude oil outside contract specifications has been mixed with another gas in order to bring it within the required quality specifications.
(US) a group organised under law into a utility company that will generate, transmit or distribute supplies of electricity to a specified area not being served by another utility. Typically, a co-operative is a not-for-profit organisation where the customers are also owners.
these are short-term transactions undertaken chiefly to maintain the integrity of an electricity system.
used to express coal transportation cost. Usually listed as dollars/tonne or dollars/tonne-mile.
a process for converting coal partially or completely into combustible gases, for use as fuels or chemical feedstocks.
a supply contract between a buyer and a seller of a commodity, whereby the buyer is assured that he will not have to pay more than some maximum price and whereby the seller is assured of receiving some minimum price.
an obligation or security linked to another obligation or security to secure its performance.
the production of two forms of energy, such as high-temperature heat and electricity, from the same process. For example, the steam produced from boiling water could be used for industrial heating. In the US, the term typically used for this process is co-generation.
an energy-efficient gas turbine system, where the first turbine generates electricity from the gas produced during fuel combustion. The hot gases pass through a boiler and then into the atmosphere. The steam from the boiler drives the second electricity-generating turbine.
An electricity generator that uses a jet engine as the prime mover. Often fuelled by natural gas or petroleum products and used as peaking generation.
a regulatory commission for the Spanish power industry. Attached to the ministry of industry and energy, the Madrid-based CNSE has regulatory and executive powers to regulate operation of the industry and supervise industry practices.
the French regulatory agency for energy. Acts as the guarantor of the right of access to public electricity grids and to natural gas facilities and systems. www.cre.fr
gas produced when a new field starts up, or the gas needed during the start-up of a power station. In both cases, the amount and timing of the requirements are not exact.
1) a physical good, typically produced in agriculture or mining, that can be the object of a commercial transaction. 2) any index, rate, security or physical commodity that is or could be the underlying instrument or price determinant of a futures contract or other financial instrument.
a futures contract on a commodity. Unlike financial futures, the prices of commodity futures are determined by supply and demand rather than the cost-of-carry of the underlying. Commodity futures can, therefore, either be in contango (where futures prices are higher than spot prices) or backwardation (where futures are lower than spot prices).
US legislation designed to re-invigorate the derivatives sector by modernising the law for futures, swaps and other derivatives. The legislation has caused some controversy among US energy exchanges in that it excludes some electronic trading systems from regulatory oversight under the Act.
an independent agency of the US government, that has the authority to regulate the US futures markets. The commission is composed of five commissioners and is responsible for assuring fairness, transparency and well-functioning of the markets.
commodity swaps enable both producers and consumers to hedge commodity prices. The consumer is usually a fixed payer and the producer a floating payer. If the floating-rate price of the commodity is higher than the fixed price, the difference is paid by the floating payer, and vice versa. Usually only the payment streams, not the principal, are exchanged, although physical delivery is becoming increasingly common. Swaps are sometimes done to hedge risks that cannot readily be hedged with futures contracts. This could be a geographical or quality basis risk, or it could arise from the maturity of a transaction.
see third-party access
an approximation to value-at-risk, whereby the calculation is based on the principal components of a portfolio.
an option allowing its holder to buy or sell another option for a fixed price. For example, the purchase of a European-style ‘call on a put’ means that the compound option buyer obtains the right to buy on a specified day (when the overlying option expires) a put option (the underlying option) at the overlying option’s strike price.
a product consisting of natural gas that has been compressed under high pressures, typically between 2,000 and 3,600psi, and is held in a hard container. It is used mainly as an alternative fuel for internal combustion engines (such as automobile engines). It generates low hydrocarbon emissions but a significant quantity of nitrogen-oxide emissions. CNG’s volumetric energy density is about 42% of liquefied natural gas’s and 25% of diesel’s.
gas loses pressure as it travels over long distances. A compressor station – usually a gas turbine engine – is an installation that recompresses the gas to the required pressure.
crude oil and product stocks that an oil company is obliged to hold by the consuming government.
mixtures of liquid hydrocarbons mainly recovered from gas reservoirs. They may include liquified petroleum gases (propane and butane), naphtha and gasoil or only some of the above fractions. Condensates are used both as refinery and petrochemical feedstocks.
a confidence interval for an unknown population parameter is an interval constructed from a given set of sample data in such a way that the probability that the interval contains the true value of the parameter is a specified value.
physical constraints at certain points on electricity transmission networks.
term used to describe an energy market in which the anticipated value of the spot price in the future is higher than the current spot price. When a market is in contango, market participants expect the spot price to go up. The reverse situation is described as backwardation. see also backwardation
an order that becomes effective only upon the fulfilment of a predefined condition.
a term used in theoretical models to refer to derivative contracts, typically options, which entitle a payoff provided some other related market conditions occur.
an option for which the buyer pays no premium unless the option is exercised. As a rule of thumb, the premium eventually paid is equal to the premium payable on a normal option, divided by the option delta. Hence, the price increases dramatically for out-of-the-money options.
a swap that is only activated when rates reach a certain level or a specific event occurs. For example, drop-lock swaps only activate if rates or prices drop to a certain level or if a specified level over a benchmark is achieved.
a gas buyer who negotiates terms with the seller, unlike small, domestic users who pay by fixed tariff.
1) a long-term swap agreed bilaterally, generally between generators and electricity supply companies, and referenced to prices in the relevant pool. 2) a short-dated swap agreement used to minimise the basis risk between the daily published Platt’s quote for dated or physical Brent in a specific time window in the future and the forward price quote for a specific month. Settlement of a CFD is based on the published price difference at a designated time.
see delivery month
electricity transmission path for a generation transaction that is specified by contract but that may not take into account loop flows through neighbouring systems.
(US) a large geographic area within which a utility, or group of utilities, regulates electricity generation in order to maintain scheduled interchanges of power with other control areas and to maintain the required system frequency.
(US) an electricity entity that operates generating capacity to meet area demand, monitors actual interchange (electricity flowing between control areas) and can dispatch generating resources to ensure that actual interchange equals scheduled interchange.
according to the modern theory of term structures in commodity prices, convenience yield describes the yield that accrues to the owner of a physical inventory but not to the owner of a contract for future delivery. It represents the value of having the physical product immediately to hand and offers a theoretical explanation, albeit of limited predictive value, for the strength of backwardation in the commodity markets.
a delta-neutral arbitrage transaction involving a long futures contract, a long put option and a short call option. The put and call options have the same strike price and same expiration date. see also box, reversal
these depend on the specific gravity of the crude oil. As a general guide: l 1 tonne of crude = 7.5 barrelsl 1 barrel of crude = 5,604 cubic feet of natural gas, 0.996 barrels of gasoil or 1.446 barrels of liquefied petroleum gasl 1 US barrel = 42 US gallons = 158.978 litres1 million barrels of crude a day = 50 million tonnes a year1 megajoule = 947.81 British thermal units = 238.85 Kcall 1 cubic foot = 0.0283 cubic metres see also cubic foot
1 therm = 29,307 kWh
see degree day
a measure of the degree to which changes in two variables are related. Correlation ranges between plus one (perfect correlation – the same amount of movement in the same direction) and minus one (perfect negative correlation – the same amount of movement in opposite directions). Like volatility, it can be calculated from historical data, but such calculations are not necessarily good predictors of behaviour. If the correlation between markets is known, an option position in one market can be offset against another with similar direction and volatility. This is advantageous, because it can circumvent difficult hedging environments and can reduce costs. Correlation is also important for the pricing of some options, particularly those offering exposure to more than one market variable. The payout of a spread option or a yield curve option is based on the correlation between two underlyings separated by space, time or asset, while that of a quanto product will depend on the extent of the relationship between movements in the underlying and movements in the exchange rate.
the correlation co-efficient (also referred to as r) provides an index of the degree to which variables co-vary in a linear fashion.
the buyer of a corridor purchases a cap with a lower strike while selling a second cap with a higher strike. The premium earned from the sale of the second cap reduces the total cost of the corridor. The buyer is protected from rates rising above the first cap’s strike, but exposed again if they rise past the second cap’s strike. This liability can be limited by selling a knock-out cap, rather than a conventional cap.
a corridor floater – also known as a range note, fairway note or accrual note – is a structured note paying an above-market rate for each day the underlying spot rate stays within a specified range (the accrual corridor). This higher yield is achieved by effectively selling an embedded corridor option. The corridor may be reset on given dates, either by the buyer or according to the prevailing value of the reference rate. If the underlying trades outside the corridor, the investor receives no interest for that day. Alternatively, the instrument may be knocked out altogether – this is a barrier floater or knock-out range note. The holder will therefore benefit in stable market periods when volatility is low and the underlying is more likely to stay within the corridor.
the holder of a corridor option receives a coupon at maturity, the magnitude of which depends on the behaviour of a specified spot rate during the lifetime of the corridor. For each day on which the spot rate (typically an official fixing rate) remains within the chosen spot range (the accrual corridor), the holder accrues one day’s worth of coupon interest. A variation is the knock-out corridor option. In this structure, the holder ceases to accrue coupon interest as soon as the spot rate leaves the range. Even if the spot rate subsequently re-enters the range, the holder does not continue to accrue coupon interest. A wall option is a special type of corridor option, where the accrual corridor is one-sided. Another relative is the range binary, a digital option that pays a fixed-coupon amount if the rate stays within the range, but pays nothing if the range is breached. see also range binary, trigger condition
(UK) the initial capital and running costs of the national transmission system, used by National Grid Transco in order to work out third-party system transportation charges.
a CIF shipping cost means the cost of cargo, insurance and travel/freight to a named destination are all included in the price.
the cost-of-carry is the difference between the cost of financing an asset and the interest received on that asset. If the financing cost is lower than the interest, the asset is said to have a positive cost-of-carry; if higher, the cost-of-carry is negative.
in a counter-purchase market, the system operator buys excess power from the grid when there is a surplus and sells reserve power to the grid when there is a shortfall. Costs to the system operator are recouped through tariffs charged to users of the system.
a participant in a physical or financial contract.
the risk that a counterparty to a transaction or contract will default (fail to perform) on its obligation under the contract. Counterparty risk is not limited to credit risk (the risk that the counterparty cannot fulfil its contractual obligations for payment) but may also result from other problems associated with a counterparty unwilling to honor the contract.
a measurement of the relationship between two variables. The arithmetic mean of the products of the deviations of corresponding values of two quantitative variables from their respective means.
a square, symmetrical matrix in which the rows and columns are variables, and the entries are covariances. The diagonal elements (the covariance between a variable and itself) will equal the variances.
options that give the holder the choice of delivering power in a variety of forms – e.g., electricity, natural gas or fuel oil.
a covered call option is one whereby the writer owns the underlying asset on which the option is written. Generally, a covered call would only be written if the writer believed volatility to be overpriced in the market – the lower the volatility, the less premium the writer gains in return for giving up their upside in the underlying. A covered put option is one whereby the writer sells the option while holding cash. This technique is used to increase income by receiving option premium. If the market goes down and the option is exercised, the cash can be used to buy the underlying to cover. Covered put writing is often used as a way of target buying. If an investor has a target price at which he wants to buy, he can set the strike price of the option at that level and receive option premium to increase the yield of the asset. Investors also sell covered puts if markets have fallen quickly but seem to have bottomed, because of the high volatility typically received in the option. see also naked option
an option-pricing model developed by John Cox, Stephen Ross and Mark Rubinstein that can be used to address factors not included in the Black-Scholes Model, such as early exercise.
a calculation of the worth of a barrel of crude oil in terms of the value of its refined products, such as gasoline and heating oil. Crack spreads may be based on a variety of refinery models and also depend on the type of crude input. They are usually expressed in dollars and cents per barrel of crude. To calculate the spread, the cents-per-gallon product prices are multiplied by 42 (the number of gallons per barrel) and subtracted from the crude oil price. For example, when heating oil futures cost $0.60 per gallon and Nymex division light, sweet crude oil is priced at $22 a barrel, the heating oil crack spread in dollars per barrel = $0.60 x 42 = $25.20 – $22 = $3.20.
a refining technique that uses high pressures and temperatures to crack heavy hydrocarbons into lighter products. This process is more advanced than the simple distillation of crude oil.
a risk management product that allows the transfer of third-party credit risk from one party to another. In case of default, the insurer must buy the defaulted asset from the insured and must pay the insured the remaining interest and principal on the debt. Also called a credit swap.
credit derivatives’ payouts depend in some way on the creditworthiness of an organisation (which could be a sovereign state, a government body, a financial firm or a corporate). This creditworthiness is gauged by objective financial criteria or a third-party evaluation from a recognised credit rating agency, such as Moody’s Investors Service or Standard & Poor’s. Credit derivatives might not appear to have an underlying in the conventional sense. But it is often argued that they are based on the cost of a credit event or, equivalently, the premium that would have to be paid to transfer the credit risk of a given transaction to a third party. Most importantly, these derivatives unbundle credit risk from other risks. For example, the holder of a floating-rate note issue can separate the credit risk (that the issuer will default) from the interest rate risk (that the coupon will fall). There are two main types of credit derivative. The first, which includes credit default swaps and put options, activates in the event of a credit event, such as a default or downgrade of debt. A second type of credit derivative is the credit spread forward or option. The underlying for these contracts is the spread between two otherwise identical securities, which depends only on the creditworthiness of the issuer. Swaps under which the total rate of return on an index is swapped for some reference rate are sometimes also referred to as credit derivatives.
credit risk, or default risk, is the risk that a financial loss will be incurred if a counterparty to a (derivatives) transaction does not fulfil its financial obligations in a timely manner. It is therefore a function of the following: the value of the position exposed to default (the credit or credit risk exposure); the proportion of this value that would be recovered in the event of a default; and the probability of default. Credit risk is also used loosely to mean the probability of default, regardless of the value that stands to be lost. see also settlement risk
the credit value-at-risk (CVaR) of a portfolio is the worst loss expected to be suffered due to counterparty default over a given period of time with a given probability. The time period is known as the holding period and the probability is known as the confidence interval. CVaR is not an estimate of the worst possible loss, but the largest likely loss. For example, a company might estimate its CVaR over 10 days to be $100 million with a confidence interval of 95%. This would mean there is a one-in-20 (5%) chance of a loss larger than $100 million in the next 10 days. see also value-at-risk
a credit-linked note – also known as a credit default note – is created by the securitisation of a credit default swap.
an option structure used for weather derivative transactions where the option payoff is based on defined critical conditions being met for a specified number of days.
a cross default is a provision within a loan or swap contract stating that any default on another loan or swap will be considered a default on the original contract. It is designed to protect creditors or counterparties from favouring another credit.
Where certain customers or customer groups are subsidised by one party or group that is required to pay a disproportionate share of the service costs. In the UK, a principle whereby utilities are not allowed to use profits or debt from their core regulated business for other non-regulated activities.
a full-ranging hydrocarbon mixture produced from a reservoir after any associated gas has been removed. Among the most commonly traded crudes are the North Sea’s Brent blend, the US’s West Texas Intermediate and UAE’s Dubai.
one of the standards used to measure a volume of gas. see also conversion factors
the sum of heating degree days or cooling degree days over a specified period.
the cumulative distribution function of a random variable is the chance that the random variable is less than or equal to x, as a function of x.
the minimum volume of gas required in an underground storage reservoir to provide the necessary pressure to deliver working gas volumes to customers. Known as ‘pack the line’ or linepack gas when related to pipelines.
a cylinder, also known as a range forward or risk reversal, is the simultaneous purchase of an out-of-the-money put option and sale of an out-of-the-money call option at different strike prices. The buyer can hedge its downside at reduced cost, since the purchase of the put is partly financed by the sale of the call, but at the cost of relinquishing any upside beyond the higher strike.