Energy Risk Glossary

8/8/2019 Energy Risk Glossary

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Incisive Financial Publishing Limited, Haymarket House, 28–29 Haymarket, London SW1Y 4RX

The e ergy risk glossary: the most comprehensive reference source for anyone involved in the global energy markets

Glossary 2010



R i s k M a n a g e M e n t * t R a d i n g * F i n a n c e

e n e R g y R i s k g l o s s a R y * 2 0 1 0

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Published by Incisive Financial Publishing Limited © Incisive Media Investments Limited, 2010. All rights reserved. No part o this publication may be reproduced, storedin or introduced into any retrieval system, or transmitted, in any orm or by any means, electronic, mechanical, photocopying, recording or otherwise, without the priorwritten permission o the copyright owners. Energy Risk and Risk Limited Corp have made every e ort to ensure the accuracy o the text, however, neither they nor anycompany associated with the publication can accept legal or fnancial responsibility or consequences that may arise rom errors, omissions or any opinions given.

Head O ceHaymarket House,28-29 HaymarketLondon SW1Y 4RXUK Tel +44 (0)20 7484 9700Fax +44 (0)20 7930 2238

IntroductionH The Energy Risk Glossary, now in its sixth

edition, is a handy tool intended to guideboth newcomers and old hands throughthe many acronyms and specialised termsused across the energy trading and riskmanagement world.

Energy Risk would like to extend particular thanks to Shannon Burchett of Risk Limitedfor his dedication, hard work and attentionto detail in the updating of this edition.

There are around 50 new words and

revisions this year. They reflect the differentdirections in which energy trading isexpanding. Many of the new words pertainto the liquefied natural gas market, whichis increasing in global signif icance. The

Spanish regulatory commission for power

(Comisión Nacional de Sistema Eléctrico)and the Italian electricity markets operator (Gestore Mercato Elettrico) both gain amention for the first time, reflecting thegrowth of interest in these two markets.

As well as its alphabetical listing, theglossary is extensively cross-referenced,making for easy and thorough searches. Wehope you find it a valuable reference sourcein the months to come. n

Stella Farri gtoEditor, Energy Risk, Environmental Risk





At the heart of globalenergy markets* E.ON Energy Trading SE is the energytrading business of E.ON, one of the world’slargest power and gas companies. As thecommercial link between E.ON and theinternational wholesale energy markets, we

buy and sell electricity, natural gas, oil, coal,biomass, freight and emissions certificates.Through our trading activities, we play avital role in helping to ensure fair prices andsecure long-term energy supplies for mil lionsof customers across Europe.

With around 1,000 dedicated energyprofessionals from more than 45 countries,we’re a young, innovative business with themarket knowledge and industry expertise to

take advantage of the opportunities presentedby the world’s increasingly interconnectedenergy landscape.

We’re continually building on our positionas a leading market participant, backed byEurope’s broadest and most diverse power and gas asset base. In 2009, we traded around1,200 terawatt hours (TWh) of power, about1,500TWh of natural gas, 500 mill ion tonnesof CO 2 certif icates, more than 200 million

tonnes of coal and almost 500 mil lion barrelsof oil.

A si gle, i tegrated view o wholesalee ergy markets

Europe’s wholesale energy marketshave become more dynamic and moreinterconnected in recent years and in 2008E.ON united its trading activities under oneroof. The result was E.ON Energy Trading – a strategically focused business with a single,integrated view of Europe’s fast-movingenergy markets.

Based in our state-of-the-art headquartersin Düsseldorf, Germany, our seasoned,

multinational teams work side by side, sharingknowledge, combining cross-commodity andcross-regional expertise, to find opportunitiesacross the wholesale energy markets. Theycome from diverse backgrounds, but sharea commitment to high performance, bolddecision-making and a willingness toexchange new ideas. Working 24 hours aday, 365 days a year, we are active on over 15exchanges and in more than 40 countries.

A market leader, E.ON Energy Trading optimises and managescommodity risk for Europe’s broadest and most diverse

power and gas asset base, and is committed to supporting thedevelopment of more open, competitive energy markets



Ma agi g risk, optimisi g assetsOur primary responsibilities are to managethe E.ON Group’s commodity risks(including commercial portfolios) andto optimise E.ON’s power and gas asset

base. Within clearly defined limits, andin accordance with the highest standardsof risk management, we also engagein proprietary trading. Our centralisedapproach, which combines our integratedmarket view with our outstanding assetportfolio, enables us to better managecommodity risk, maximise value from our assets and create additional growth.

One key factor affecting trading operations

in 2009 was the global economic crisis, whichresulted in sharp drops in all commodityprices. Although the resulting uncertaintyhad an impact on trading, overall energymarkets remained robust and continuedto offer enough liquidity for efficient riskmanagement. Having an integrated view of risk across different markets and regions iscrucial, especially in volatile markets wherethings move very quickly.

Buildi g trust i ope , i tegrated marketsOver the last few years, Europe’s nationalenergy markets have been steadilyconsolidating into a number of multicountrymarket regions. This ongoing liberalisation,

which helps markets become more liquid,prices more transparent and risks morequantif iable, benefits the European economyand its consumers. Well-functioning marketswil l play an important role in delivering







secure energy supplies at fair prices,while helping to encourage much-neededinvestment in the next generation of climate-friendly technology.

Construction of new infrastructure – interconnector cables and pipelines, cross-border transfer capacity and liquefied naturalgas regasification terminals – is continuallyimproving the physical interconnection

between European markets. By facilitatingcross-border trading, market coupling is alsoan important dr iver for market integration.Market coupling between the German andNordic markets began in December 2009,while in August 2009 the day-ahead power markets of the Czech Republic and Slovakiawere combined, resulting in a quadrupling of liquidity on the first day of trading. In 2010,market coupling is set to link Germany, France,

Belgium, the Netherlands and Luxembourg.The liberalisation process also continues,

primarily through the unbundling of transmission infrastructure. Marketconvergence and liberalisation have created

new opportunities for securing energysupplies, ensuring an optimum price andgrowing our business.

As the world begins to emerge from theeconomic and financial crisis, it’s moreimportant than ever for energy markets tobecome more integrated and more open. Asone of Europe’s leading market participants,we feel it is vital to support increasedmarket integrity and greater transparency

to ensure that governments, regulators,industry and consumers have more trust inthe market and have more confidence in themarket’s ability to help meet the significantenergy challenges that we are now facing.We support this vision by consulting withpolicy-makers and regulators on measuresto ensure that the development of Europeanmarkets continues. This includes playing anactive role in the design of market coupling

arrangements, capacity auctions, allocationsand market balancing.

Supporti g the developme t o moreliquid excha ges a d hubsEnergy exchanges and hubs also play a vitalrole in integrating Europe’s energy markets,



COnTACTE.On E ergy Tradi g SEHolzstrasse 6 40221 Düsseldorf Germanytelephone: +49 211 73275 2300email: [email protected]



supporting eff iciency and increasingliquidity. In 2009, we registered to trade at

several new exchanges and hubs, includingthe Central European Gas Hub (CEGH) inAustria, the UK’s N2EX power exchange,South Pool – a spot power market for Slovenia and Serbia, and Operador doMercado Ibérico de Energia, a power exchange in Portugal for the Iberian market.In addition, we place trading volume or actas market-maker to support the developmentof a number of hubs and exchanges across

Europe, including in France, Italy, Spainand Germany. The development of hubssuch as NetConnect Germany and CEGH,which continue to see increased liquidity, ishelping to connect markets in south-easternEurope with those in the north west.

Built to leadIn the last two years we have built a new,strategically focused international tradingbusiness. Our streamlined approach nowplaces us in an unrivalled position to capitalise

on growth and hedge risk in European, andincreasingly global, energy markets.

The power of technology, coupled withtop-performing industry experts, will helpus to continue toward our vision of being theleading asset-backed energy trader in Europe.As the markets change in shape and directionover time, we are poised to take advantage of new opportunities and to maximise value for our clients and shareholders alike.

As a market leader, we also have theknowledge and expertise to contributeto the development of more competitive,better-functioning markets in Europe andwill continue to support the EuropeanCommission’s objective of ongoingliberalisation, which ultimately will benefitthe European economy and the European

consumer.



R i s k M a n a g e M e n t H t R a d i n g H F i n a n c e

e n e R g y R i s k g l o s s a R y H 2 0 1 0

AAba do me tPermission given to US interstate pipelines bythe Federal Energy Regulatory Commission(Ferc) allowing for the discontinuation of sales,storage or transportation service along anyportion of the pipeline system. The necessity for Ferc permission derives from Section 7 of theNatural Gas Act of 1938 . Permission is soughtwhen utility companies want to replace, updateor sell their facilities.

Absolute prici gPricing an asset using reference only to itsexposure to fundamental sources of risk. Mostcommon in academia.H see also relative pricing

Acid raiForms of precipitation (such as rain, snow or sleet) containing high levels of sulphuric or

nitric acids (with pH levels below 5.5–5.6).Also includes dry deposited gases and particlesthat fall back to earth from the atmosphere.According to the US Environmental ProtectionAgency, approximately two-thirds of all SO 2 andone-quarter of all NO x in the US come fromelectric power generation that burns fossil fuelssuch as coal.H see also sulphur oxides and nitrogen oxides

Accrual accou ti gWhen swaps are used to hedge specificon-balance-sheet exposures, they are oftenaccounted for on an accrual basis. Under theaccrual method, the net payment or receiptin each period is accrued and recorded as anadjustment to income or expense.H see also hedge accounting, mark-to-market

Actual peak dayThe day during which the greatest demandoccurs in a one-year period.

Actuals

The physical commodity underlying a futurescontract. Also referred to as the cash commodityor the physicals.

AGAH see American Gas Association

AggregatorA company that consolidates the energyrequirements of a number of buyers and/or

sellers in order to buy or sell power in bulk.

AICPAAn acronym for the American Institute of Certified Public Accountants, a professionalassociation representing certified publicaccountants in the US.

AlgorithmA defined, finite set of steps, operations or

procedures that will produce a particular outcome (e.g., computer programs,mathematical formulas and recipes).

AlphaA measure of the difference between a fund’sactual returns and its expected returns given itsrisk level as measured by its beta. The alpha is ameasure of risk-adjusted performance. An alphais usually generated by regressing the security,

portfolio or mutual fund’s excess return relativeto a benchmark index. The beta adjusts for thesystemic risk (the slope co-efficient). The alphais the intercept and is also known as the JensenIndex.

Alligator spreadAnother name for butterfly spread.





Allocatio age ts(Gas) independent agents, paid for by shippers,who calculate how much of the gas input at aterminal belongs to each shipper.

America Gas Associatio (AGA)Founded in 1918, the AGA representscompanies involved in all areas of thetransmission and distribution of natural gas inthe US.

America Petroleum I stitute (API)The trade association of the US petroleumindustry. The API publishes weekly informationon US petroleum stock figures, refinery

throughput, imports, exports and stocklevels. This information is divided into fivegeographical areas known as PetroleumAdministration for Defence Districts. The APIestablished the system for grading crude oils byspecific gravity (API gravity).H see also Energy Information Administration (EIA)

America -style optioAn American-style option may be exercised at

any time during its lifetime, up to and includingon the expiration date.H see also European-style option

A cillary servicesServices are designed to maintain the reliabilityof power supply to end-users. Ancillary servicescan include regulation, spinning reserve, non-spinning reserve and replacement reserve.Independent system operators create a market

for buying and selling ancillary services, whichhelp control the flow of electricity and provideenergy ‘reserves’ to maintain reliability.

A ual capIn a gas buyer’s purchase agreement, there isoften a limit higher than the annual contractquantity (ACQ), above which the seller is notliable to sell. This is the annual cap and is usually

stated as a percentage of the ACQ. Also knownas the maximum annual quantity.H see also MAQ

A ual co tract qua tity (ACQ)The amount of gas specified in a buyer’snomination purchase contract for one year.Some rights, such as make-up gas and take-or-pay, may need to be taken into accountdepending on the amount of gas taken versus

the amount contracted for.

A ual delivery programme (ADP)A long-term schedule commonly used in theliquefied natural gas industry for optimisinginventory and delivery planning (may also bereferred to as the annual operating plan).

APIH see American Petroleum Institute

API #2All Publications Index #2: a price index for coalsupply cost insurance and freight Amsterdam-Rotterdam-Antwerp.

API #4All Publications Index #4: a price index for coalshipments free-on-board Richards Bay.

API gravityOne of the main quality indicators for pricingcrude oil – the higher the API gravity, thelighter the crude.API gravity = 141.5/specific gravity of crude at60° Fahrenheit – 131.5





API regio sAlso known as Petroleum Administration for Defence Districts (Padds). The US is dividedinto five Padds for administration purposes:Padd 1, eastern seaboard; Padd 2, Midwest; Padd

3, southern area (Gulf Coast); Padd 4, RockyMountains; and Padd 5, far west.

Applicatio service provider (ASP)A company offering access to its softwareapplications over the internet, rather thanrequiring software to be located on personalcomputers or internal servers. Often a less costlyway of using software and an approach used bysome technology vendors for the energy sector.

APXAPX Group, a European energy exchange,operating markets for electricity and natural gasin the Netherlands, the UK and Belgium. InSeptember 2008 a merger took place betweenAPX and the European Energy DerivativesExchange (Endex), with Endex becoming asubsidiary of APX B.V. and part of the APXGroup.

ARAAmsterdam-Rotterdam-Antwerp area – a portand refining area in the Belgian-Dutch region. Acargo or barge of a refined product traded on acost, insurance and freight ARA basis means thatports within this area are covered in the cost. Acargo traded on a free-on-board basis means theoil can come from any of these ports.

Arbitrage1) A trading strategy to profit from marketinefficiencies in price differences of a givencommodity either in the same location or in different geographical locations. Grade

arbitrage is trading the difference in the priceof a commodity in the same location – e.g., thedifference in the prices of two sweet crudes innorth-west Europe. Geographical arbitrage istrading the difference in the price of the samegrade in different locations. Often grade andgeographical arbitrage are combined – e.g., intransatlantic arbitrage, which is trading the pricedifference between, for example, Brent crude inEurope and West Texas Intermediate in the US.

This calculation will include the cost-of carry aswell as the cost of the alternative crude in the US.2) A term specific to US stock markets, wherea speculative position is built up in shares ina particular company that is thought likely tobecome a takeover candidate.

Arbitrage- ree modelAny theoretical model that does not allowarbitrage on the underlying variable.

ARCHAn acronym for autoregressive conditionalheteroskedasticity.

Area priceThe price of electricity in one particular regionwithin an integrated grid, such as Nord Pool.H see also system price

ArgusAn independent energy news and pricereporting agency. www.argusmediagroup.com

AromaticsCompounds produced by the fractionationof petroleum above 80° Celsius. The mostimportant aromatics are benzene and toluene,which are used as chemical feedstocks and ingasoline production.





ASCCAlaskan Systems Co-ordinating Council – aNorth American Electric ReliabilityCorporation affiliate.

Asia optioAsian (or average) options have payoffsthat depend on an average of prices for theunderlying commodity over a period of time,rather than on the price of the commodityon a single date. The averaging period maycorrespond to the entire life of the option or may be shorter.

Ask

The level at which sellers are willing to sell.H see also bid/ask

Asset sweati gIncreasing the efficiencies of an existingplant in order to avoid the need to buildnew infrastructure. This strategy was pursuedthroughout the 1990s in the UK power sector and the oil refining and producing sector in theWest.

Associated gasNatural gas found in a crude oil reservoir,separate from or in solution with the oil.

Atla tic BasiThe geographical region that can be consideredas comprising all land masses (including islands)that lie adjacent to or within the Atlantic Oceanand adjacent waters, including the Baltic Sea,

North Sea, Black Sea, Davis Strait, DenmarkStrait, part of the Drake Passage, Labrador Sea,Mediterranean Sea, Norwegian Sea, most of theScotia Sea, Baffin Bay, Hudson Bay, Gulf of StLawrence, the Gulf of Mexico, Caribbean Seaand the Weddell Sea. As applied to the energymarket, the Atlantic Basin liquefied natural gas(LNG) market encompasses LNG producers andconsumers in or adjacent to the Atlantic Basingeographical area noted above.

The Atlantic Basin LNG markets can beconsidered to specifically include the LNGproducers (current and projected): Abu Dhabi,Algeria, Angola, Egypt, Equatorial Guinea, Iran,Libya, Nigeria, Norway, Oman, Qatar, Russia,

Trinidad & Tobago, Venezuela and Yemen. Thecurrent and likely future LNG consumingcountries: Argentina, Belgium, Brazil, Canada,Cyprus, Dominican Republic, France, Germany,Greece, Italy, Mexico, the Netherlands, Poland,Portugal, Puerto Rico, South Africa, Spain,Turkey, the UK, the US and possibly theBahamas and Jamaica.

Note that an Atlantic Basin LNG producer might not be physically located in the Atlantic

Basin itself.H see also Pacific Basin

At-the-beach(UK) when gas has been brought ashore toa terminal by producers but is not yet in thenational transmission system, the gas is calledat-the-beach.

At-the-mo ey

1) At-the-money spot – an option whose strikeis the same as the prevailing market price of theunderlying rate or price.2) At-the-money forward – an option whosestrike is at the same level as the prevailingmarket price of the underlying forward contract.H see also in-the-money

Auctio i gAs applied to the energy sector, auctions as a

pricing mechanism have been used or have beenplanned for liquefied natural gas storage capacity,emission allowances and transmission capacity, inorder to manage congestion.

AutocorrelatioThe correlation between a component of astochastic process and itself lagged a certainperiod of time.



Available tra s er capability (ATC)A measure of the transfer capability remainingin the physical transmission network for further commercial activity over and above alreadycommitted uses. ATC is defined as the total

transfer capability, less the transmission reliabilitymargin, less the sum of existing transmissioncommitments (which includes retail customer service) and the capacity benefit margin.H see also capacity benefit margin

Average optio sAverage rate option or average price option – aform of Asian option whose payoff is linked tothe average value of the underlying asset over

a specified period of time. Although somewhatmore complex to price relative to traditionalEuropean or American option structures,average rate options are popular since theyprovide a price hedge that better matches priceexposures that are based on daily averages, suchas purchase/consumption of energy on a dailybasis. Also referred to as an APO.H see Asian option

Aviatio gasoli e (AVGAS)A high-octane aviation fuel used for aircraft andracing cars.

BBack mo thBack-month contracts are those exchange-traded derivatives contracts with the mostdistant delivery dates or expirations. For a suiteof 12 monthly contracts, for example, the lastthree months might be back months. Alsoreferred to as deferred months.

BackwardatioWhen the price of nearer (typically prompt or

spot) crude or another underlying commodityor instrument trades at a premium to thesame commodity or instrument traded further forward. Also known as an inverse.H see also contango

Bala ci g mecha ismIn an electricity grid or natural gas pipelinenetwork, the means of ensuring that supply doesnot outstrip demand, or vice versa.

Baltic Excha geA membership exchange located in London for the maritime bulk freight market.

Ba ki gA procedure by which excess gas that oneshipper cannot use is lent to another shipper tobe returned at a later date.

Bare-boat charterA chartering arrangement whereby a vessel iscontracted for without crew or provisions, andcan have distinctions or implications in termsof legal responsibility relative to other types of charter arrangements.





BargeMotored or motorless vessel used to carry oilproducts, often along a river. Barges vary incapacity, usually from 1,000 to 5,000 tonnes.

BarrelStandard measure of quantity for crude oiland petroleum products. Barrel, US barrel andstandard barrel are all equal to 42 US gallons.

Barrels o oil equivale t (BOE)Volume of natural gas expressed in terms of itsenergy equivalent to oil. About 6,000 cubic feetof gas equals one barrel of oil equivalent.

Barrier optioBarrier options are exotic options thateither come to life (are ‘knocked-in’) or areextinguished (‘knocked-out’) under conditionsstipulated in the option contract. The conditionsare usually defined in terms of a price level(barrier, knock-out or knock-in price) that maybe reached at any time during the lifetime of the option.

There are four major types of barrier options:

up-and-out, up-and-in, down-and-out anddown-and-in. The extinguishing or activatingfeatures of these options mean they are usuallycheaper than ordinary options, making themattractive to buyers looking to avoid highpremiums.

BaseloadThe minimum expected customer power requirements at a given time. Baseload power

is generally supplied from larger plants, whichcannot be ramped up and down as quickly aspeaking generation plants. As baseload demandis generally predictable and steady, it is lessexpensive than peak power.

Baseload ge eratioElectricity-generating equipment normallyoperated to serve loads on an around-the-clock basis.

BasisThe differential that exists at any time betweenthe cash – or spot – price of a given commodityand the price of the nearest futures contract for the same (or related) commodity. The basis may

reflect different time periods, product forms,qualities or locations. The cash price minus thefutures price equals the basis.

Basis risk Basis risk is the risk that the value of a futurescontract (or an over-the-counter hedge) willnot move in line with that of the underlyingexposure. Alternatively, it is the risk that thecash-futures spread will widen or narrow

between the times at which a hedge position isimplemented and liquidated.

There are various types of basis risk. For example, a heating oil wholesaler selling itsproduct in Baltimore will be exposed to basisrisk if it hedges using New York Harbor heatingoil futures contracts listed by Nymex. This is a‘locational’ basis risk.

Other forms of basis risk include ‘product’basis, arising from mismatches in type or quality

of hedge and underlying (e.g., hedging jet fuelwith heating oil); and ‘time’ or ‘calendar’ basis(e.g., hedging an exposure to physical prices inDecember with a January futures contract).

Basis swapBasis swaps are used to hedge exposure to basisrisk, such as locational risk or time-exposurerisk. For example, a natural gas basis swap couldbe used to hedge a locational price risk: the

seller receives from the buyer a Nymex divisionsettlement value (usually the average of the lastthree days’ closing prices) plus a negotiated fixedbasis, and pays the buyer the published indexvalue of gas sold at a specified location.





Basis tradi gA trading strategy whereby trades are placedsimultaneously in a derivative contract, normallya future, and the underlying asset. The purpose iseither to cover derivatives sold or to attempt an

arbitrage strategy. This arbitrage can either takeadvantage of an existing mispricing (in cash-and-carry arbitrage) or be based on speculationthat the basis risk will change.

Basket optioAn option that enables the purchaser to buyor sell a basket of commodities. The valueof a basket option is dependent on both thevolatility of the individual commodities and the

correlation between the prices of commoditiesin the basket.

Basket swapA swap in which the floating leg is based on thereturns on a basket of underlying commodities.

Basra LightA crude oil produced in southern Iraq thatcontains approximately 2% sulphur by weight

with an API gravity of about 34.

BblAbbreviation for barrel.

Bc Billion cubic feet (of gas).

B/d, bd or bpdBarrels per day. Used to express crude oil

production, refinery throughput capacity(i.e., capacity of the crude distillation unit),liftings, forward demand projections and crudeconsumption rates.

Beach gas(UK) gas produced offshore and broughtonshore to the shore/beach gas terminal, butnot yet part of the national transmission system.

Bear marketA market in which the trend is for prices todecline.

Bear spread

An option spread trade that reflects a bearishview on the market, usually the purchase of aput spread.H see also bull spread, call spread, put spread

Be chmark crudeSynonymous with reference crude or marker crude. A crude oil whose price is used as areference against which other crudes are priced.Because of their liquidity, the Nymex West Texas

Intermediate and IntercontinentalExchange/ICE Futures’ Brent crude oil futures contractsare used as global benchmarks. Dubai crude iswidely used as a benchmark for Middle Easterncrudes, especially for sale to Asian markets.H see also marker crudes

BetaThe beta (or beta co-efficient) of a rate or price is the extent to which that rate or price

follows movements in the overall market. If thebeta is greater than one, it is more volatile thanthe market; if the beta is less than one, it is lessvolatile.

BettaBritish Electricity Trading and TransmissionArrangements – arrangements designed todraw Scotland into the British wholesalemarket for trading power and create a single,

integrated British-wide competitive wholesaleelectricity market. Betta was implemented onApril 1, 2005. It gives renewable generatorsin Scotland better access to the Anglo-Frenchinterconnector, making it easier to sell power incontinental Europe.H see also new electricity trading arrangements

BFOH see Brent, Forties, Oseberg





Bid/ask A measure of market liquidity, also known asbid/offer. The bid is the price level at whichbuyers are willing to buy, and the ask is theprice level at which sellers are willing to sell.

The thinner the spread, the higher the liquidity.

Bilateral co tractA contract directly between a consumer and abroker or supplier.

Bilateral etti gAn agreement between two counterparties tooffset the value of all in-the-money contractswith all out-of-the-money contracts, resulting

in a single net exposure amount owed by onecounterparty to the other.H see also netting, multilateral netting

Bill o ladi g (b/l)A shipowner’s receipt for its cargo, whichincludes cargo details, such as loading times.

Bi ary optioH see digital option

Bi omial modelAny model that incorporates a binomialtree, also called a binomial lattice. A binomialmodel describes the evolution of a randomvariable over a series of time steps, assigninggiven probabilities to a rise or fall inthe variable.

After the initial rise or fall, the next twobranches will each have two possible outcomes,

so the process will continue, building a ‘tree’over time. The process is usually specified,so that an upward movement followed by adownward movement results in the same price,so the branches recombine.

Binomial trees are of interest because they canbe used to deal with American-style features; theearly-exercise condition can be tested at eachpoint in the tree.

BiodieselAn alternative fuel generally blended withpetroleum diesel to create a cleaner-burningbiodiesel blend. A typical US blend might be20% biodiesel to 80% petroleum.

Biomass e ergyEnergy produced by the combustion of plants,vegetation or agricultural waste – for example,rice husks.

BlackoutA total loss of power caused by the failure of thegeneration, transmission or distribution system.

Black-Scholes modelAn option-pricing model initially derived byFischer Black and Myron Scholes in 1973 for securities options and later refined by Black in1976 for options on futures.

Ble di g(Gas) mixing gases of different specifications toproduce one within the required gas specification.(Crude) sometimes crudes are blended near

source when the same storage terminal or pipeline is used. An example is Brent blend – ablend of crudes from various fields in the EastShetland Basin. Also used to create componentsfor gasoline.

BloombergAn information service, news and mediacompany that provides business and financialprofessionals with the tools and data on a single,

all-inclusive platform. www.bloomberg.com

BOEH see barrels of oil equivalent

Boil-o Gas vapour that is typically produced duringliquefied natural gas (LNG) ship unloading or LNG transport or storage phases as a result of heat input or pressure variations.





Boili g poi tThe temperature at which a liquid becomes a gas.

Book The total of all forward positions held by a

trader or company.

Book tra s er or booki g outThe transfer of title of a cash commodity tothe buyer without a corresponding physicalmovement.

Bottle eck Caused when the flow of electricity isgreater than the system capacity between two

connected grids. Bottlenecks can lead to anarea becoming isolated. In an exchange, this cancause attendant price imbalances between thearea price and system price.

BoxTo buy/sell mispriced options and hedge themarket risk using only options, unlike theconversion or the reversal, which use futurescontracts. If a certain strike put is underpriced,

the trader buys the put and sells a call at thesame strike, creating a synthetic short futuresposition. To get rid of the market risk, the trader sells another put and buys another call, but atdifferent strike prices.H see also conversion, reversal

Box spreadAn options market arbitrage, in which both abull spread and a bear spread are established for

a riskless profit.

Bre t ble d crude oilUK Brent blend is a blend of crude oil fromvarious fields in the East Shetland Basin betweenScotland and Norway in the North Sea. Thecrude is landed at the Sullom Voe terminal andis used as a benchmark for the pricing of muchof the world’s crude oil production.H see also dated Brent

Bre t, Forties, Oseberg (BFO)Information provider Platts’ replacement for thetraditional Brent price index, intended to widenthe number of crude oil grades used todetermine the price of the key North Sea

benchmark. It was launched in 2002 – asliquidity in Brent markets reduced, Platt’sintroduced the changes to limit potentialmanipulation of the index.

British thermal u it (Btu)The amount of heat required to raise thetemperature of 1lb of water by 1° Fahrenheit(technically from 60°F to 61°F). It is used tocompare the heat-producing value of different

fuels.

BrokerAn intermediary between traders for physical,futures and over-the-counter deals. Brokersreceive a fixed commission, predeterminedbetween the broker and his/her client.

Brow ieldAbandoned or unused industrial and commercial

sites that may be used for redevelopmentor expansion. Such use, however, may becomplicated by environmental contamination.

Brow outA partial loss of power caused by unexpectedlyhigh demand or problems with the physicaldelivery of electricity. A brownout may result inlights dimming or electrical machineryslowing down.

BtuH see British thermal unit

Bulk power supplyThe infrastructure and generating plant thatgenerates power for a region’s wholesalepower supply.





Bull marketA market in which the trend is for prices toincrease.

Bull spread

An option spread trade that reflects a bullishview on the market, usually the purchase of acall spread.H see also bear spread, call spread

Bu des etzage tur (B etzA)The German Federal Network Agency for electricity, gas, telecommunications, post andrailway, headquartered in Bonn, provides for the further development of the electricity, gas,

telecommunications and postal markets and,since 2006, also of the railway infrastructuremarket. In order to implement effectiveregulations, the agency has the authority toobtain information and conduct investigations,as well as the right to impose graded sanctions:www.bundesnetzagentur.de

Bu deskartellamtThe German Federal Cartel Office. Enforcing

the ban on cartels is one of the prime functionsof the Bundeskartellamt, including combatingsuch practices as agreements between companieson the setting of prices or sales quotas andmarket sharing. www.bundeskartellamt.de

Bu dled derivativeA derivative contract that combines two or more commodities to manage a number of related risks. For example, coal for power

linked to pollution credits, where the contractcompensates the coal user for any extra chargesarising from the coal containing more than acertain level of sulphur. The counterparties toa deal agree to settle any differences betweenthe delivered sulphur content of the coal andan agreed benchmark in emission allowances.The coal user is paid when the sulphur contentis above the benchmark and pays out when itis below.

Bu dled rateA combined charge for the provision of twoor more services – e.g., gas transportationand storage, or electricity generation andtransmission.

Bu dled servicesTwo or more electricity or gas services providedat a combined charge – e.g., gas transportationand storage; electricity generation andtransmission.

Bu ker CA heavy fuel oil used to power ships, for electricity generation and for large-scale

industrial use. It is often the residue fromvacuum distillation blended with lighter components.

Busi ess day(US) for electricity utilities, as determinedby the North American Electric ReliabilityCorporation (Nerc), the business day typicallybegins at 6:00am for a 24-hour period. Holidaysare also determined by Nerc and may be

separate from US-designated holidays.

Butter ly spreadThe simultaneous purchase of an out-of-the-money strangle and sale of an at-the-moneystraddle. The buyer profits if the underlyingremains stable, and has limited risk in the eventof a large move in either direction.

Buyer’s omi atio co tract

A gas contract where the buyer has the optionto nominate the delivery requirements up to thepredefined delivery capacity. The seller is obliged,under this type of contract, to deliver as requested,although limits are often built into the contract.





CC a d FCost and freight. The price includes the cost of the cargo and the freight/vessel hiring costs, butnot the insurance. Also referred to as CAF.

Cale dar spreadCalendar, or time, spreads describe the pricedifferential – or spread – that may arise betweendifferently dated futures contracts. For example,the price difference between contracts for first-

and second-month light, sweet crude offered onNymex.

Time spreads can be mitigated by purchasingoptions on the difference between average annualprices. In effect, such options provide protectionagainst a reshaping of the forward price curve.

The term is also used for trading in which theparties buy a certain number of futures contractsfor a specific month and simultaneously sell thesame number of futures contracts for a different

month.

Cali or ia-Orego border (COB)Area where the utilities of the north-west USconnect to those of California, and an electricpower price index point.

Call optioAn option that gives the buyer (holder) theright, but not the obligation, to buy a futures

contract (enter into a long futures position) or physical commodity for a specified price withina specified period of time in exchange for aone-time premium payment.

It obligates the seller (writer) of the option tosell the underlying futures contract (enter intoa short futures position) or commodity at thedesignated price, should the option be exercisedat that price.H see also put option

Call spreadAn options position formed by the purchaseof a call option at one level and the sale of acall option at some higher level. The premiumreceived by selling one option reduces the cost

of buying the other, but participation is limitedif the underlying goes up.H see also bear spread, bull spread, put spread, vertical

spread

Callable swapA swap in which the fixed-rate payer has theright to terminate the swap after a certain timeif rates fall. Often done in conjunction withcallable debt issues, where an issuer is more

concerned with the cost of debt than thematurity. In some definitions of a callable swap,the fixed-rate receiver has the right to terminatethe swap. Also known as a cancellable swap.

Calori ic value (CV)A measure of the energy released as heat whena fuel is burned. It may be measured wet (withwater vapour) or dry (after the water vapour hasbeen removed). It may also be measured gross

or net – gross includes the heat produced whenthe water vapour is condensed into a liquid, andnet does not. Generally, CV is measured grossand dry.

Ca cellable swapH see callable swap

CapA supply contract between a buyer and seller,

whereby the buyer is assured that he or she willnot have to pay more than a given maximumprice. This type of contract and a call option areanalogous.

Capacity(Electricity) the rated load-carrying capabilityof electrical equipment such as generatorsor transmission lines, typically expressed inmegawatts or megavoltamperes.





(Gas) the rated transportation volume of naturalgas pipelines, typically expressed in millions of cubic feet per day.

Capacity be e it margi (CBM)

The amount of transmission transfer capability reserved by load-serving entities toensure access to generation from interconnectedsystems to meet generation reliabilityrequirements.

Reservation of CBM by a load-servingentity allows that entity to reduce its installedgenerating capacity below a level that mayotherwise have been necessary withoutinterconnections to meet its generation

reliability requirements.H see also available transfer capability

Capacity chargeIn gas or electricity markets, a price based onreserved capacity or measured demand andirrespective of energy delivered. Also known asdemand charge.

Capacity actor

The amount of energy that a power generationplant actually generates compared to itsmaximum rated output, expressed as a percentage.

Capacity optio sThe right to access the output of a plant, whosegeneration is specifically earmarked.

Capacity purchase agreeme t (CPA)A legal document for transferring transmission

capacity for a defined period.

Capacity tradi gWhere a gas shipper with spare capacity in atransportation system – e.g., the UK’s nationaltransmission system – sells or leases its rights totransport gas in a pipeline.(US) trading of transportation rights that hasbeen facilitated through the use of electronicbulletin boards or electronic data interchange.

Capital adequacyAn estimate of the capital required to maintaina business.

Capped swap

A commodity swap in which the floatingpayments of the swap are capped at a certainlevel. A floating-rate payer can thereby limit itsexposure to rising commodity prices.

Captive customerOne who has no practical means of buyingpower or gas from a source other than the localutility, even if in theory the customer is based ina competitive energy market.

Carbo dioxide (CO 2)A gas produced by the burning of fuel. Manyscientists believe it to be a major contributor tothe greenhouse effect.

Carbo -dioxide equivale tThe accepted measurement unit for greenhousegases under the Kyoto Protocol.

Carbo sequestratioCapturing carbon dioxide in carbon sinks, thuslimiting its presence in the atmosphere.

Carbo si ksForests, soils or oceans that store more carbondioxide than they release, thereby limiting thegas’ contribution to the greenhouse effect.Carbon sinks can be used as part of an emissionstrading system.

Carry orward(Gas) if, in a given contract period (often a year),a buyer has taken more than the annual contactquantity 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-forwardto offset the take-or-pay obligation, althoughthere may be a limit to the amount of carry-forward allowed in any given contract period.





Carryi g chargeThe total cost of storing a physical commodity,including storage, insurance, interest andopportunity cost.

Cascadi gThe conversion of a forward contract into aseries of shorter-term contracts on maturity.

Cash-a d-carry arbitrageA strategy whereby a trader generates a risklessprofit by selling a futures contract and buyingthe underlying to deliver into it. The futurescontract must be theoretically expensive relativeto the underlying. If the futures are theoretically

cheap compared to cash, the trader could sellthe underlying and buy the futures – in reversecash-and-carry arbitrage.

Cash low hedgesIn US accounting terminology, a hedge of aforecasted asset and liability acquisition, for whichthe gain or loss on the hedging instrument willremain in equity when the asset or liability isacquired. That gain or loss will subsequently be

included in net profit or loss in the same periodas the asset or liability affects net profit or loss.H See also FAS 133

Cash low-at-risk Value-at-risk (VaR) calculated in terms of earnings or cashflow, giving a probability thatbusiness targets will be met. A useful VaR toolfor non-financial institutions.

Cash marketH see spot market

CatalystA substance that accelerates or facilitatesa chemical reaction without changing thesubstance itself – e.g., the use of platinum inreformers to convert naphtha into gasoline.

Cat cracki gCatalytic cracking is a refining process thatbreaks down heavier crude oil fractions intomotor spirit and gasoil/heating oil blendingcomponents by passing them over a suitable

catalyst.

Certi ied Emissio Reductio (CER)The right to emit 650,000 tonnes of CO 2.CER is the technical term for the outputof Clean Development Mechanism (CDM)projects, as defined by the Kyoto Protocol. Aunit of greenhouse gas reductions that has beengenerated and certified under the provisions of Article 12 of the Kyoto Protocol, the CDM.

CCGTH see combined-cycle gas turbine

CDMH see Clean Development Mechanism

Ce tistokeOne of the many ways of expressing theviscosity of fuel oil.

Certi ied Emissio Rights (CER)The right to emit 650,000 tonnes of CO 2.

CFDH see contract for differences

ChaiA forward contract for the delivery of acommodity that has been traded many times by

several parties, thereby forming a chain betweenthe final buyer and the initial seller.





Charter partyA contract by which the owner of a vessel(aircraft or ship) leases his craft to or hires acharterer for a fixed period of time or a setnumber of voyages. Normally, the vessel owner

retains rights of possession and control whilethe charterer has the right to choose the portsof call. It also goes under the name of charter agreement or charter contract.

Charter rateThe shipping rate agreed between the owner of a vessel and the person or firm wanting to usethe vessel in a charter party agreement.

ChartistA market participant who uses technical analysisto chart the price patterns of commodities,stocks and bonds to make buy and sell decisionsbased on this analysis. Chartists believe recurringpatterns of trading can help them forecast pricemovements.

ChartererA 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.

Chicago Climate Excha ge (CCX)Greenhouse gas emissions trading exchange;designed for voluntary emissions reductionsand trading for all six greenhouse gases. TheCCX administers the first multinational andmultisector market for reducing and trading

greenhouse gas emissions. CCX is a self-regulatory, rules-based exchange designed andgoverned by CCX members that have madea voluntary, legally binding commitment toreduce their emissions of greenhouse gases.

Chicago Merca tile Excha ge (CME)Established in 1898 as the Chicago Butter andEgg Board, it became incorporated as theCME in 1919. The CME offers futures and

options on futures based on indexes of heating degree days (HDDs) and cooling degreedays (CDDs) for selected population centres andenergy hubs with significant weather-relatedrisks throughout the US. Cities are chosen based

on population, the variability in their seasonaltemperatures 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 businessesprotect their revenues during times of depressed demand or excessive costs because of unexpected or unfavourable weather conditions.

Chooser optioThe holder of a chooser option can choose,after a predetermined period, between a put anda call option. Similar to a straddle, but cheaper,because the holder must choose between theput or the call before the instrument expires.H see also forward start option

CHPH see combined heat and power

CIFH see cost, insurance and freight

Clea coal tech ologyMethods of burning coal withreduced emissions.

Clea dark spreadRefers to the profit realised by a power

generator after paying for the cost of coal fueland carbon allowances.





Clea Developme t Mecha ism (CDM)The Clean Development Mechanism (CDM),defined in Article 12 of the Kyoto Protocol,allows a country with an emission-reductionor emission-limitation commitment under the

Kyoto Protocol (Annex B Party) to implementan emission-reduction project in developingcountries. Such projects can earn saleableCertified Emission Reduction credits, eachequivalent to one tonne of CO 2, which can becounted towards meeting Kyoto targets.

Clea spark spreadThe spread equal to the regular (or ‘dirty’) sparkspread minus the CO 2 emissions cost for gas-

fired power plants. This spread then representsthe net revenue on power sales after gas costs andemissions allowance costs. An analogous spread for coal-fired generation plants is typically referred toas a clean dark spread or a dark green spread.H see also spark spread, dark spark spread

Cleari gA mechanism by which transactions are settledthrough an organisation that assures settlement.

Cleari g membersMembers of an exchange who acceptresponsibility for all trades cleared through them.

CnGAn acronym for compressed natural gas – natural gas that has been compressed under highpressure (typically 2,000–3,600psi).H see compressed natural gas

CnSCentral North Sea.

CnSEH see Comisión Nacional de Sistema Eléctrico

Coal reight ratesUsed to express coal transportation cost. Usuallylisted as dollars/tonne or dollars/tonne-mile.

Coal gasi icatioA process for converting coal partially or completely into combustible gases, for use asfuels or chemical feedstocks.

Co-e icie t o determi atioA measure of the proportion of variance in y which can be explained by x.H See also r 2

Co- iri gBurning natural gas as well as another fuel type(usually coal) in order to decrease the amount of air pollutants and/or use the most competitivelypriced fuels available.H see also dual-firing

Co-ge eratioH see combined heat and power

Co-ge eratorA generating facility that produces electricityand another form of useful thermal energy(such as heat or steam), used for industrial,commercial, heating or cooling purposes.

CollarA supply contract between a buyer and a seller of a commodity, whereby the buyer is assuredthat he will not have to pay more than somemaximum price and whereby the seller isassured of receiving some minimum price.

CollateralAn obligation or security linked to another

obligation or security to secure its performance.

Combi ed-cycle gas turbi e (CCGT)An energy-efficient gas turbine system, wherethe first turbine generates electricity from thegas produced during fuel combustion. The hotgases pass through a boiler and then intothe atmosphere. The steam from the boiler drives the second electricity-generating turbine.





Combi ed heat a d power (CHP)The production of two forms of energy, such ashigh-temperature heat and electricity, fromthe same process. For example, the steamproduced from boiling water could be used for

industrial heating. In the US, the term typicallyused for this process is co-generation.

Combustio turbi eAn electricity generator that uses a jet engineas the prime mover. Often fuelled by naturalgas or petroleum products and used as peakinggeneration.

Co-mi gled

When a gas or crude oil outside contractspecifications has been mixed with another gasin order to bring it within the required qualityspecifications.

Comisió nacio al de Sistema Eléctrico(CnSE)A regulatory commission for the Spanishpower industry. Attached to the ministryof industry and energy, the Madrid-based

CNSE has regulatory and executive powersto regulate operation of the industry andsupervise industry practices.

Commissio de Régulatio de l’E ergie (CRE)The French regulatory agency for energy. Actsas the guarantor of the right of access to publicelectricity grids and to natural gas facilities andsystems. www.cre.fr

Commissio i g gasGas 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.

Commodity1) a physical good, typically produced inagriculture or mining, that can be the object of a commercial transaction.

2) any index, rate, security or physicalcommodity that is or could be the underlyinginstrument or price determinant of a futurescontract or other financial instrument.

Commodity utureA futures contract on a commodity. Unlikefinancial futures, the prices of commodityfutures are determined by supply and demandrather than the cost-of-carry of the underlying.Commodity futures can, therefore, either be incontango (where futures prices are higher thanspot prices) or backwardation (where futures arelower than spot prices).

Commodity Futures Moder isatio ActUS legislation designed to re-invigorate thederivatives sector by modernising the lawfor futures, swaps and other derivatives. Thelegislation has caused some controversy amongUS energy exchanges in that it excludes someelectronic trading systems from regulatoryoversight under the Act.

Commodity Futures Tradi g Commissio

(CFTC)An independent agency of the US government,that has the authority to regulate the US futuresmarkets. The commission is composed of fivecommissioners and is responsible for assuringfairness, transparency and well-functioning of the markets.

Commodity swapCommodity swaps enable both producers

and consumers to hedge commodity prices.The consumer is usually a fixed payer and theproducer a floating payer. If the floating-rateprice of the commodity is higher than thefixed price, the difference is paid by the floatingpayer, and vice versa. Usually only the paymentstreams, not the principal, are exchanged,although physical delivery is becomingincreasingly common.





Swaps are sometimes done to hedge risks thatcannot readily be hedged with futures contracts.This could be a geographical or quality basisrisk, or it could arise from the maturity of atransaction.

Commo carriageH see third-party access

Compo e t value-at-risk An approximation to value-at-risk, whereby thecalculation is based on the principal componentsof a portfolio.

Compou d optio

An option allowing its holder to buy or sellanother option for a fixed price. For example, thepurchase of a European-style ‘call on a put’ meansthat the compound option buyer obtains the rightto buy on a specified day (when the overlyingoption expires) a put option (the underlyingoption) at the overlying option’s strike price.

Compressed atural gas (CnG)A product consisting of natural gas that has

been compressed under high pressures, typicallybetween 2,000 and 3,600psi, and is heldin a hard container. It is used mainly as analternative fuel for internal combustion engines(such as automobile engines). It generates lowhydrocarbon emissions but a significant quantityof nitrogen-oxide emissions. CNG’s volumetricenergy density is about 42% of liquefied naturalgas’s and 25% of diesel’s.

Compressor statioGas loses pressure as it travels over longdistances. A compressor station – usuallya gas turbine engine – is an installation thatrecompresses the gas to the required pressure.

Compulsory stocksCrude oil and product stocks that an oilcompany is obliged to hold by the consuminggovernment.

Co de satesMixtures of liquid hydrocarbons mainlyrecovered from gas reservoirs. They may includeliquified petroleum gases (propane and butane),naphtha and gasoil or only some of the above

fractions. Condensates are used both as refineryand petrochemical feedstocks.

Co ide ce i tervalA confidence interval for an unknownpopulation parameter is an interval constructedfrom a given set of sample data in such a waythat the probability that the interval contains thetrue value of the parameter is a specified value.

Co gestioPhysical constraints at certain points onelectricity transmission networks.

Co ta goTerm used to describe an energy market inwhich the anticipated value of the spot pricein the future is higher than the current spotprice. When a market is in contango, marketparticipants expect the spot price to go up. The

reverse situation is described as backwardation.H see also backwardation

Co ti ge cy orderAn order that becomes effective only upon thefulfilment of a predefined condition.

Co ti ge t claimA term used in theoretical models to refer toderivative contracts, typically options, which

entitle a payoff provided some other relatedmarket conditions occur.

Co ti ge t premium optioAn option for which the buyer pays no premiumunless the option is exercised. As a rule of thumb,the premium eventually paid is equal to thepremium payable on a normal option, dividedby the option delta. Hence, the price increasesdramatically for out-of-the-money options.





Co ti ge t swapA swap that is only activated when rates reacha certain level or a specific event occurs. For example, drop-lock swaps only activate if ratesor prices drop to a certain level or if a specified

level over a benchmark is achieved.

Co tract customerA gas buyer who negotiates terms with theseller, unlike small, domestic users who pay byfixed tariff.

Co tract or di ere ces (CFD)1) a long-term swap agreed bilaterally, generallybetween generators and electricity supply

companies, and referenced to prices in therelevant pool.2) a short-dated swap agreement used tominimise the basis risk between the dailypublished Platt’s quote for dated or physicalBrent in a specific time window in the futureand the forward price quote for a specificmonth. Settlement of a CFD is based on thepublished price difference at a designated time.

Co tract mo thH see delivery month

Co tract pathElectricity transmission path for a generationtransaction that is specified by contract but thatmay not take into account loop flows throughneighbouring systems.

Co trol area

(US) a large geographic area within which autility, or group of utilities, regulates electricitygeneration in order to maintain scheduledinterchanges of power with other control areasand to maintain the required system frequency.

Co trol area operator(US) an electricity entity that operatesgenerating capacity to meet area demand,monitors actual interchange (electricity flowingbetween control areas) and can dispatch

generating resources to ensure that actualinterchange equals scheduled interchange.

Co ve ie ce yieldAccording to the modern theory of termstructures in commodity prices,convenience yield describes the yield thataccrues to the owner of a physicalinventory but not to the owner of a contractfor future delivery. It represents the value of

having the physical product immediately tohand and offers a theoretical explanation,albeit of limited predictive value, for thestrength of backwardation in the commoditymarkets.

Co versioA delta-neutral arbitrage transaction involvinga long futures contract, a long put option and ashort call option. The put and call options have

the same strike price and same expiration date.H see also box, reversal

Co versio actorsThese depend on the specific gravity of thecrude oil. As a general guide:● 1 tonne of crude = 7.5 barrels● 1 barrel of crude = 5,604 cubic feet of ● natural gas, 0.996 barrels of gasoil or 1.446

barrels of liquefied petroleum gas●

1 US barrel = 42 US gallons = 158.978 litres● 1 million barrels of crude a day = 50 million

tonnes a year ● 1 megajoule = 947.81 British thermal units =

238.85 Kcal● 1 cubic foot = 0.0283 cubic metresH see also cubic foot

Co versio rate1 therm = 29,307 kWh





Cooli g degree dayH see degree day

Co-operative(US) a group organised under law into a

utility company that will generate, transmit or distribute supplies of electricity to a specifiedarea not being served by another utility. Typically,a co-operative is a not-for-profit organisationwhere the customers are also owners.

Co-ordi atio tra sactio sThese are short-term transactions undertakenchiefly to maintain the integrity of anelectricity system.

CorrelatioA measure of the degree to which changes intwo variables are related. Correlation rangesbetween plus one (perfect correlation – thesame amount of movement in the samedirection) and minus one (perfect negativecorrelation – the same amount of movement inopposite directions). Like volatility, it can becalculated from historical data, but such

calculations are not necessarily good predictorsof behaviour.

If the correlation between markets is known,an option position in one market can be offsetagainst another with similar direction andvolatility. This is advantageous, because it cancircumvent difficult hedging environments andcan reduce costs.

Correlation is also important for the pricingof some options, particularly those offering

exposure to more than one market variable.The payout of a spread option or a yield curveoption is based on the correlation between twounderlyings separated by space, time or asset,while that of a quanto product will dependon the extent of the relationship betweenmovements in the underlying and movements inthe exchange rate.

Correlatio co-e icie tThe correlation co-efficient (also referred toas r ) provides an index of the degree to whichvariables co-vary in a linear fashion.

CorridorThe buyer of a corridor purchases a cap with alower strike while selling a second cap with ahigher strike. The premium earned from the saleof the second cap reduces the total cost of thecorridor. The buyer is protected from rates risingabove the first cap’s strike, but exposed againif they rise past the second cap’s strike. Thisliability can be limited by selling a knock-outcap, rather than a conventional cap.

Corridor loaterA corridor floater – also known as a range note,fairway note or accrual note – is a structurednote paying an above-market rate for each daythe underlying spot rate stays within a specifiedrange (the accrual corridor). This higher yieldis achieved by effectively selling an embeddedcorridor option. The corridor may be reset ongiven 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 knockedout altogether – this is a barrier floater or knock-out range note. The holder will thereforebenefit in stable market periods when volatilityis low and the underlying is more likely to staywithin the corridor.





Corridor optioThe holder of a corridor option receives acoupon at maturity, the magnitude of whichdepends on the behaviour of a specified spotrate during the lifetime of the corridor. For

each day on which the spot rate (typically anofficial fixing rate) remains within the chosenspot 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 accruecoupon interest as soon as the spot rate leavesthe range. Even if the spot rate subsequentlyre-enters the range, the holder does notcontinue 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 digitaloption that pays a fixed-coupon amount if therate stays within the range, but pays nothing if the range is breached.H see also range binary, trigger condition

Cost base(UK) the initial capital and running costs of the

national transmission system, used by NationalGrid Transco in order to work out third-partysystem transportation charges.

Cost, i sura ce a d reight (CIF)A CIF shipping cost means the cost of cargo,insurance and travel/freight to a nameddestination are all included in the price.

Cost-o -carry

The cost-of-carry is the difference betweenthe cost of financing an asset and the interestreceived on that asset. If the financing cost islower than the interest, the asset is said to have apositive cost-of-carry; if higher, the cost-of-carryis negative.

Cou terpartyA participant in a physical or financial contract.

Cou terparty risk The risk that a counterparty to a transactionor contract will default (fail to perform) on itsobligation under the contract. Counterpartyrisk is not limited to credit risk (the risk that

the counterparty cannot fulfil its contractualobligations for payment) but may also resultfrom other problems associated with acounterparty unwilling to honor the contract.

Cou ter-purchase marketIn a counter-purchase market, the systemoperator buys excess power from the grid whenthere is a surplus and sells reserve power tothe grid when there is a shortfall. Costs to the

system operator are recouped through tariffscharged to users of the system.

Covaria ceA measurement of the relationship between twovariables. The arithmetic mean of the productsof the deviations of corresponding values of two quantitative variables from their respectivemeans.

Covaria ce matrixA square, symmetrical matrix in which therows and columns are variables, and the entriesare covariances. The diagonal elements (thecovariance between a variable and itself) willequal the variances.

Covaria t optio sOptions that give the holder the choice of delivering power in a variety of forms – e.g.,

electricity, natural gas or fuel oil.

Covered optioA covered call option is one whereby the writer owns the underlying asset on which the optionis written. Generally, a covered call would onlybe written if the writer believed volatility to beoverpriced 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 thewriter sells the option while holding cash.This technique is used to increase income byreceiving option premium. If the market goesdown 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 priceat which he wants to buy, he can set the strikeprice of the option at that level and receiveoption premium to increase the yield of theasset. Investors also sell covered puts if marketshave fallen quickly but seem to have bottomed,because of the high volatility typically receivedin the option.H see also naked option

Cox-Ross-Rube stei modelAn option-pricing model developed by JohnCox, Stephen Ross and Mark Rubinstein thatcan be used to address factors not included inthe Black-Scholes Model, such as early exercise.

Cracki gA refining technique that uses high pressures and

temperatures to crack heavy hydrocarbons intolighter products. This process is more advancedthan the simple distillation of crude oil.

Crack spreadA calculation of the worth of a barrel of crudeoil in terms of the value of its refined products,such as gasoline and heating oil. Crack spreadsmay be based on a variety of refinery modelsand also depend on the type of crude input.

They are usually expressed in dollars and centsper 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 thecrude oil price. For example, when heatingoil futures cost $0.60 per gallon and Nymexdivision light, sweet crude oil is priced at $22 abarrel, the heating oil crack spread in dollars per barrel = $0.60 x 42 = $25.20 – $22 = $3.20.

Credit de ault swapA risk management product that allows thetransfer of third-party credit risk from one partyto another. In case of default, the insurer mustbuy the defaulted asset from the insured and

must pay the insured the remaining interest andprincipal on the debt. Also called a credit swap.

Credit derivativeCredit derivatives’ payouts depend in someway on the creditworthiness of an organisation(which could be a sovereign state, a governmentbody, a financial firm or a corporate). Thiscreditworthiness is gauged by objective financialcriteria or a third-party evaluation from a

recognised credit rating agency, such as Moody’sInvestors Service or Standard & Poor’s.

Credit derivatives might not appear to have anunderlying in the conventional sense. But it isoften argued that they are based on thecost of a credit event or, equivalently, the premiumthat would have to be paid to transfer the creditrisk of a given transaction to a third party. Mostimportantly, these derivatives unbundle credit riskfrom 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 raterisk (that the coupon will fall).

There are two main types of credit derivative.The first, which includes credit default swapsand put options, activates in the event of acredit event, such as a default or downgrade of debt. A second type of credit derivative is thecredit spread forward or option. The underlyingfor these contracts is the spread between two

otherwise identical securities, which dependsonly on the creditworthiness of the issuer. Swapsunder which the total rate of return on an indexis swapped for some reference rate are sometimesalso referred to as credit derivatives.

Credit-li ked oteA credit-linked note – also known as a creditdefault note – is created by the securitisation of a credit default swap.





Credit risk Credit risk, or default risk, is the risk that afinancial loss will be incurred if a counterpartyto a (derivatives) transaction does not fulfil itsfinancial obligations in a timely manner. It is

therefore a function of the following: the valueof the position exposed to default (the creditor credit risk exposure); the proportion of thisvalue that would be recovered in the event of adefault; and the probability of default.Credit risk is also used loosely to mean theprobability of default, regardless of the value thatstands to be lost.H see also settlement risk

Credit value-at-risk The credit value-at-risk (CVaR) of a portfoliois the worst loss expected to be suffered dueto counterparty default over a given period of time with a given probability. The time period isknown as the holding period and the probabilityis known as the confidence interval. CVaR isnot an estimate of the worst possible loss, butthe largest likely loss.

For example, a company might estimate its

CVaR over 10 days to be $100 million with aconfidence interval of 95%. This would meanthere is a one-in-20 (5%) chance of a loss larger than $100 million in the next 10 days.H see also value-at-risk

Critical day optioAn option structure used for weather derivativetransactions where the option payoff is basedon defined critical conditions being met for a

specified number of days.

Cross de aultA 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 onthe original contract. It is designed to protectcreditors or counterparties from favouringanother credit.

Cross subsidisatioWhere certain customers or customer groups aresubsidised by one party or group that is requiredto pay a disproportionate share of the servicecosts. In the UK, a principle whereby utilities are

not allowed to use profits or debt from their coreregulated business for other non-regulated activities.

Crude oilA full-ranging hydrocarbon mixture producedfrom a reservoir after any associated gas has beenremoved. Among the most commonly tradedcrudes are the North Sea’s Brent blend, the US’sWest Texas Intermediate and UAE’s Dubai.

Cubic ootOne of the standards used to measure a volumeof gas.H see also conversion factors

Cumulative degree daysThe sum of heating degree days or coolingdegree days over a specified period.

Cumulative probability distributio u ctio

The cumulative distribution function of a randomvariable is the chance that the random variable isless than or equal to x, as a function of x.

Cushio gasThe minimum volume of gas required inan underground storage reservoir to providethe necessary pressure to deliver working gasvolumes to customers. Known as ‘pack the line’or linepack gas when related to pipelines.

Cyli derA cylinder, also known as a range forward or risk reversal, is the simultaneous purchase of anout-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 reducedcost, since the purchase of the put is partlyfinanced by the sale of the call, but at the cost of relinquishing any upside beyond the higher strike.





DDaily bala ci gBalancing, on a day-by-day basis, the amount of gas a shipper puts into a pipeline system.

Daily call optioAllows a buyer of natural gas to take additionalvolumes on one day’s notice.

Daily co tract qua tity (DCQ)In a buyer’s nomination contract, this is the

average amount the buyer can have in its dailynominations. The maximum rate at whichthe buyer can ask the seller to deliver ( see delivery capacity) is a function of the DCQ andthe swing. A similar rule exists in a seller’snomination contract, where it is called theestimated daily contract quantity.

Daily ear i gs-at-risk A one-day value-at-risk calculation, typically with

a 95% confidence level over a 24-hour period.

Daily metered sitesSupply points/sites with meters that read naturalgas volume either on a continuous or daily basis.Indicate the daily volume consumption neededfor daily balancing. The sites are at large inputand offtake points on a gas system, typically for large industrial gas end-users.

Daisy chaiTerm sometimes used for the paper chainformed by the passing of a 15-day Brent cargo – that is, 15 working days ahead of its loading date

– from the equity holder through a sequence of deals.H see also dated Brent, five o’clocking

Dark spreadThe spread between the fuel and power pricefor a generator. The term spark spread is usedfor gas-fired, and, similarly, dark spread is usedfor coal-fired generation. Like a spark spread, the

measure of the fuel efficiency of the conversionprocess in generation.

DashboardIn risk management, trading and financialapplications, a consolidated report and/or graphical display highlighting key financialresults and control metrics, such as current andtrending level of value-at-risk, current tradingpositions against established limits and daily

mark-to-market gains and losses.

Dated Bre tA term for a physical cargo of Brent blendcrude that has received its loading date range.This occurs 15 days ahead of loading (notincluding weekends and bank holidays).H see also daisy chain, Brent blend crude oil

Day-ahead market

The market trading for the day before theoperating day.

DCQH see daily contract quantity

Deepwater portAn offshore terminal for liquefied natural gas(LNG) or energy product loading/unloading, or alternatively used to describe a seaport that can

accommodate a fully loaded Panamax-class ship.For LNG operations, a deepwater port is essentiallya connection to an ocean floor natural gas pipelineusing a turret-loading buoy, which serves as theLNG tanker’s mooring. Deepwater ports may alsobe considered to be offshore structures that areused as a port or terminal for loading or unloadingother energy products, such as the LouisianaOffshore Oil Port (Loop) in the US.H See also Loop





Debt triggerAn event such as a credit rating downgrade thattriggers further guarantee requirements on aloan or swap contract.

De ault risk H see credit risk

De erred swapA swap under which the payments are deferredfor a specified period, usually for tax or accounting reasons. Not to be confused with aforward swap, where the entire swap is delayed.H see also forward swap

Degree dayA measure of the variation of one day’stemperature against a standard referencetemperature, typically 65° Fahrenheit (18°Celsius). Degree days are used as a basis for temperature-related weather derivative deals.There are both cooling degree days (CDDs)and heating degree days (HDDs). For example,a firm takes out a 30-day CDD swap with areference temperature of 65°F, and the average

temperature on each day is 70°F. The companyis then due 150 (30 x 5) degree days multipliedby the sum of money agreed for each degreeday. If the firm had taken out an HDD swap, itwould have owed the same amount of money.

DeliverabilityThe rate at which gas can be supplied froma reservoir – such as salt cavity storage – in agiven period. In a salt cavity storage facility, for

example, the rate would depend on a number of factors, including reservoir pressure, reservoir rock characteristics and withdrawal facilitiessuch as pipeline capacity. The term is also usedfor the volume of gas that a field, pipeline, well,storage or distribution system can supply in asingle 24-hour period.

Delivery capacityThe maximum rate at which a natural gasbuyer can request the seller to deliver gas(other than excess gas) into the pipeline andwhich the seller has a firm obligation to

deliver. In peak-supply contracts, there maybe a charge payable in respect of the availabledelivery capacity.

Delivery acility operators(UK) companies that operate the natural gasprocessing facilities at gas terminals before thegas is passed on either into storage or to thenational transmission system.

Delivery mo thThe month in which a futures contract maturesand can be settled by physical delivery. Alsoknown as the contract month.

DeltaOption risk parameter that measures thesensitivity of an option price to changes in theprice of its underlying instrument.

Delta hedgi gAn option is delta hedged when a positionhas been taken in the underlying that matchesits delta. Such a hedge is only effectiveinstantaneously, because the option’s delta isitself altered by changes in the price of theunderlying, interest rates, the option’s volatilityand time to expiry. A delta hedge must thus berebalanced continuously to be effective.H see also dynamic replication

Delta eutralA position for an options portfolio such that theoverall delta of the portfolio is zero.

Dema d chargeH see capacity charge

Dema d dayThe level of demand over a 24-hour period.





Dema d-side ma ageme tActivities carried out to control the level andtype of demand for electricity.

Demurrage

The cost, or the delay period resulting in thecost, charged when a vessel fails to unload or load within the allotted time period, or laytime,provided by contract. Essentially a liquidatingdamages charge for contract breach for detention of the ship.

DeregulatioThe halting or reduction of governmentregulations.

DerivativeA financial instrument derived from a cashmarket commodity, futures contract or other financial instrument. Derivatives canbe traded on regulated exchange markets or over-the-counter. For example, energy futurescontracts are derivatives of physical commodities,and options on futures are derivatives of futurescontracts.

DieselA middle distillate fuel used in diesel engines.

Di ere ce optioAn option that pays the price differencebetween two assets. The strike price provides theinitial reference point for valuing the option. Abuyer’s profit or loss will depend on how thecurrent price differential between the two assets

compares with the differential when the optionwas launched.

Di ere tial SwapA quanto swap.

DIGAn acronym for the Financial AccountingStandards Board’s (FASB’s) DerivativesImplementation Group, which is a task

force that was created by the FASB in 1998concurrent with their issuance of FASBStatement No. 133, Accounting for Derivative Instruments and Hedging Activities, to assist theFASB in providing guidance on questions

that companies would face when they beganimplementing FAS 133.

Digital optioDigital – or binary – options pay either a fixedsum or zero depending on whether the payoff condition is satisfied – e.g., cash-or-nothingoptions and asset-or-nothing options.H see also digital swap

Digital swapThe fixed leg of a digital swap is only paid oneach settlement date if the underlying has fulfilledcertain conditions over the period since theprevious settlement date. The premium for such aswap is paid in instalments at each payment date.H see also digital option

Direct curre tThe unidirectional flow of electric charge.

High-voltage DC is a technique often used for undersea cables connecting different countries.Power transmitted in this way suffers less reactivepower loss than an alternating current line. Italso allows connection of two asynchronousalternating current networks.

Dispatchable ge eratioGeneration available physically or contractuallyto respond to changes in system demand or to

respond to transmission security constraints.

DispersioThe distribution pattern of measurements.The Standard Deviation is the most commonmeasure of dispersion.





Displaceme tWhere natural gas is input into a pipeline systemat one end and the same amount of gas isdelivered at another point, although the gas maynot have been transported between the

two points.

Distillate oilAny distilled product of crude oil. A lightpetroleum product used for home heating andmost machinery.

DistillatesOil products obtained by distillation, includinggases, gasoline, naphthas, jet fuel, gasoil and waxy

distillates. Atmospheric distillates boil at around370° Celsius, and vacuum distillates at between370° and 525°C.

DistillatioThe simple refining of oil by boiling.

Distributed ge eratioA distributed generation system is characterisedby a number of smaller, interlinked generators,

rather than one central generator.

Distributio1) the probability distribution of a variabledescribes the probability of the variableattaining a certain value. The distr ibutionassumed by an option pricing model iscrucial to that model’s predictions, since itdetermines the likelihood of the optionbeing exercised.

2) the delivery of electricity to the retailcustomer’s home or business from the main gridthrough low-voltage distribution lines. Lowvoltages range from 2,300 to 69,000 volts.H see also transmission facility

Diur al matchi gThe daily balancing of the difference betweena shipper’s gas input volume and its customers’offtake.

Diur al storageStorage located close to all gas demand centresthat is used to meet the daily peaks in demand.Such storage is provided in the form of gasholders and line-packing.

DiversioIn the context of energy markets, generallyrefers to the diversion of cargoes from theoriginal intended destination as may be allowedunder contract provisions, in order to maximiseprice arbitrage opportunities.

DivestitureThe process of requiring monopolistic utilities

to spin off one segment of their business. Doneto ensure that uncompetitive advantages createdby former government actions are removed,so that competition can develop. A utilitywith generation, transmission and distributionfacilities, for example, might be forced tosell off its generation. Also known as verticaldisaggregation.

DoE

(US) Department of Energy.

Domestic marketThe section of the energy market that coversenergy requirements for domestic premises.

Do eTerm used to indicate that a deal has beencompleted. For example, a broker mighttell a trader that he is ‘done’, meaning his buy/

sell requirements have been matched precisely.

Double-dowA swap with an embedded option that permitsthe writer of the swap to halve the agreedvolume once, and once only, at or before anagreed date. In return, the buyer of the swapobtains a more favourable price.





Double-upThe exact reverse of double-down, with thewriter of the swap having the option to doublethe agreed volume.

Dow Jo esA leading provider of global business news andinformation services. Among other publications,its consumer media group publishes The Wall Street Journal and Barron’s. www.dowjones.com

Dow side risk H see upside/downside risk

Dow stream

Activities in the oil and natural gas industryfrom a refinery onwards – e.g., the distributionand marketing of hydrocarbon products.H see also upstream

Dry dock A large dock in the form of a basin, which canbe flooded to float in vessels and then drained tocreate a dry area around the vessel. It is used for building or repairing a ship below its water line.

Dry gasGas with a low liquid content, usually belowtwo gallons per 1,000 cubic feet. This mayhappen naturally, as in most of the fields inthe southern North Sea, or the water contentmay be reduced by a dehydration process. Alsoknown as lean gas.H see also wet gas

DTI(UK) Department of Trade and Industry.

Dual- iri gWhere two different fuels – say, gas and oil – can be used to generate energy in one piece of equipment.H see also co-firing

DubaiA benchmark crude produced in Dubai, one of the United Arab Emirates. Dubai is commonlyused as a reference price for the Asia-Pacificregion.

Dy amic hedgi gH see delta-hedging

Dy amic replicatioReplication of an option payout by buying or selling the underlying (or futures, wherecheaper) in proportion to an option’s delta.Dynamic replicators are exposed to increases involatility, which may increase the costs of the

necessary hedge.H see also delta-hedging, static replication

EECCH see European Commodity Clearing

ECXEuropean Climate Exchange

E&PExploration and production.

EDCQ(Gas) estimated daily contract quantity.

Ediso Electric I stitute (EEI)The Washington, DC-based EEI is an associationof US shareholder-owned electricity companies,international affiliates and industry associatesworldwide. In 2008, its US members servedmore than 95% of customers in the shareholder-owned segment of the industry and generatedalmost 70% of the electricity produced by USpower utilities in total. It was formed in 1993.





EEXH see European Energy Exchange

EFPH see exchange of futures for physicals

EFSH see exchange of futures for swaps

EFET Master Agreeme tA standardised master agreement developedby the European Federation of Energy Tradersfor the delivery and acceptance of electricity,providing a similar structure to the InternationalSwaps and Derivatives Association by containing

a General Agreement and Election Sheet for agreed revisions to the General Agreement.www.efet.org

EITFAn acronym for the Emerging Issues Task Force,a unit of the Financial Accounting Foundationthat addresses accounting issues not yetaddressed by a published Financial AccountingStandards Board Statement of Financial Accounting

Standards.

EIAH see Energy Information Administration

El niñoA periodic warming of the tropical PacificOcean that affects weather around the world.Typical consequences of El Niño includeincreased rainfall in the southern US and

drought in the western Pacific. Winter temperatures in the north-central states of the US are typically warmer than normal inEl Niño years and cooler than normal in thesoutheast and southwest of the country.

However, its effects outside the tropical Pacificare unpredictable and almost any definitionwould be disputed by meteorologists. Thewarmest and coldest winters in the north-eastUS since 1950 have both occurred during El

Niño periods. The name of the phenomenonderives from the fact that it tends to appear around Christmas – El Niño means ‘little boy’in Spanish, the name commonly given to theinfant Christ.

A 1997/1998 El Niño winter gave a boost tothe weather derivatives market by promptingenergy companies to hedge against mild winter weather that would decrease energy demand.

Electric power tradi g dayFor trading purposes in designating hourstraded, the 24-hour period beginning atmidnight and ending at the following midnight.

Electric Utilities I dustry LawA law that was amended in 1995 to open the

Japanese electricity market to competition.Implementation of the March 2000 stage,opened up the country’s high-voltage sector –

30% of the electricity market – to competition.

Electricity orward marketA brokered over-the-counter market in the UKfor short- to medium-term electricity derivativeinstruments, of which the most widely used isthe electricity forward agreement.

Electricity utilityAn enterprise engaged in the generation,

transmission and/or distribution of electricityprimarily for use by the public, which is themajor power supplier within a designatedservice area. Electricity utilities include investor-owned, publicly owned, co-operatively-ownedand government-owned entities.H see also power marketer





Electro ic bulleti boardA system whereby US gas industry participants,such as pipeline companies, advise on their transport, storage and delivery capacityavailability. Under Federal Energy Regulatory

Commission rules, all pipelines are obliged topost information on electronic bulletin boards inorder to allow open access.

Electro ic tradi gInternet-based trading on a real-time basis.

Embedded costsThe cost of all the facilities in an electricity or natural gas supply system.

Embedded derivativesWithin a US accounting context of FAS 133,portions of contracts that meet the definitionof a derivative when the entire non-derivativecontract cannot be considered a financialinstruments derivative.H see also FAS 133

Embedded optio

An option, often an interest rate option,embedded in a debt instrument that affects itsredemption. Embedded options are usually, butnot always, interest rate options; some are linkedto the price of an equity index (e.g., Nikkei225 puts embedded in Nikkei-linked bonds)or a commodity (usually gold, but sometimesoil). Embedded options may be embedded inphysical commodity contracts or commodityderivatives such as extendible swaps.

Emissio s creditsThe instruments created by regulations inthe US market to encourage market-drivenreductions of pollution.

Emissio reductio u its (ERUs)Represents one tonne of CO 2 equivalentreduction of greenhouse gas emissions,particularly as achieved through a jointimplementation project. ERUs can be used as

the unit of trade in greenhouse gas emissionstrading systems, or to meet an Annex B Party’semission commitment.

Emissio s tradi gEmissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that haveemission units to spare - emissions permittedthem but not ‘used’ - to sell this excess capacityto countries that are over their targets.

Thus, a new commodity was created in theform of emission reductions or removals. Sincecarbon dioxide is the principal greenhousegas, people speak simply of trading in carbon.Carbon is now tracked and traded like anyother commodity. This is known as the ‘carbonmarket.’

E ergimark adsi pektio e /E ergy Markets I spectorate (EI)

The Swedish regulatory authority that worksfor efficient energy markets through supervisionand monitoring of markets. www.ei.se

E ergy Brokers AssociatioA Washington, DC-based initiative launchedin 2002 with the aim of more clearly definingthe role of over-the-counter brokers in energymarkets and of recommending and introducingbest processes throughout the industry.

E ergy I ormatio Admi istratio (EIA)A US government agency that produces reportson US energy supply and demand, most notablya weekly report detailing crude and productinventories in various areas of the US. The reportcovers US refinery throughput, as well as crudeand product imports and exports. Information isalso provided on natural gas and electricity.H see also American Petroleum Institute





E dexEuropean Energy Derivatives Exchange

E terprise-wide risk ma ageme tAn integrated approach to risk management.

For example, defining a framework to identifyand anticipate all kinds of risk that can affect anorganisation.

E try cost(UK gas) tariff for using the UK’s nationaltransmission system.

EPAThe US Environmental Protection Agency.

ErcotElectric Reliability Council of Texas – a NorthAmerican Electric Reliability Council for theTexas Interconnection.

Etha olEthyl alcohol (CH 3CH 2OH), often derivedfrom corn, that can be blended with gasolineto make the fuel burn more cleanly. Several

US states are phasing-in the use of ethanol ingasoline to replace methyl tertiary butyl ether,which has been blamed for water pollutionincidents. Ethanol may also be referred to asgrain alcohol.

EUAEuropean Union Allowances (EUAs)

– nationally secured rights to emit a certainamount of grehouse gases. 1 EUA = 1 tonne

CO 2

EurelectricIs the association of the electricity industryin Europe, including electricity producers,suppliers, traders and distributors. The currentassociation was created in December 1999 asa result of a merger in December 1999 of thesister sector bodies Unipede and Eurelectric.www.eurelectric.org

Europea Commodity Cleari g AGEuropean Commodity Clearing AG (ECC)operates a clearing house for energy-relatedcommodities and their derivatives. Currently,ECC provides clearing services for contracts

traded on the European Energy Exchange, theEuropean Energy Derivatives Exchange andthe Powernext SA, as well as for over-the-counter trades registered via these exchanges.ECC is supervised by the German FederalFinancial Supervisory Authority. Founded in2006, ECC currently offers clearing services for the following commodities: German, French,Austrian, Swiss, Belgian and Dutch power,emissions allowances, coal and natural gas.

Europea E ergy Excha ge (EEX)The EEX was founded in August 2000 andmerged with its rival, the Leipzig Power Exchange, in early 2002. Today, with more than200 trading participants from 19 countries,the energy exchange has become the mostimportant energy exchange in continentalEurope. EEX offers futures and spot markets inelectricity and, in March 2005, began trading

and settlement of CO 2 emissions allowances. In2008 the merger of EEX and Powernext createda common spot and futures market in power.H see also Powernext

Europea Emissio s Allowa ces (EUA)Represents a permit to emit one tonne of carbon under the European Union EmissionsTrading System. Since one EU Allowance Unitof one tonne of CO 2, or ‘EUA’, is equivalent

to one ‘assigned amount unit’ of CO 2 definedunder Kyoto, it is possible to trade EAUs andUnited Nations Framework Convention onClimate Change-validated CERs on a one-to-one basis within the same system.





Europea Federatio o E ergy Traders(EFET)EFET is a group of more than 90 energytrading companies from 23 European countriesdedicated to improving conditions for energy

trading in Europe and providing an exchangefor non-commercially sensitive informationbetween organisations and members of thedeveloping pan-European energy industry.EFET is complementary to existing industryorganisations in European organisations as it issolely dedicated to energy trading issues.www.efet.org

Europea Regulators’ Group or Electricity

a d Gas (ERGEG)ERGEG is an advisory group of independentnational regulatory authorities. ERGEG wasestablished on 11 November, 2003, pursuantto Directive 2003/796/EC, to assist theCommission in consolidating the internalmarket for electricity and gas. Its members arethe heads of the national energy regulatoryauthorities in the 27 EU Member States.www.energy-regulators.eu

Europea -style optioAn option that may only be exercised on itsexpiration date.H see American-style option

Europea Tra smissio System Operators(ETSO)Was created following the development of theInternal Electricity Market for the EU, as an

association to support EU-wide harmonisationof network access and conditions for usage,especially for cross-border electricity trading.The networks represented by ETSO supplymore than 490 million people with electricenergy. The consumption of electric energyamounts to approx. 3,200TWh per year. Thelength of HV (400 and 220kV) lines covered byETSO exceeds 290,000km.www.etso-net.org

Europea U io (EU)The EU is an organisation of 27 Member States designed to promote economic andsocial progress. Through its executive body, theEuropean Commission, the EU makes policy

that is legally binding in its Member States.

Europea U io Electricity DirectiveThe European parliament and council directive96/92/EC concerning common rules for theinternal market in electricity. Its aim is to ensurethe free movement of electricity by definingcommon rules for production, transmission anddistribution across EU Member States.

Under the terms of the directive, which came

into effect in 1999, customers using 40GWhof electricity a year – about 25% of the market

– were able to choose their supplier. From July2007, at the latest, consumers in all Member States will be able to freely choose their gas andelectricity suppliers.

Europea U io natural Gas DirectiveThe European parliament and council directive98/30/EC concerning common rules for the

internal market in natural gas. Its aim is to createa single Europe-wide gas market by reducingbarriers to trade and encouraging new entrantsinto the market.

Under the terms of the directive, which cameinto force in August 2000, customers using 25million cubic metres a year (cm/y) – about25% of the market – are able to choose their supplier. The threshold fell to 15 million cm/y

– covering 28% of the market – in 2003.

EXAAAn acronym for Energy Exchange Austria, theAustrian energy exchange that operates anelectronic platform for trading the Austrian spotmarket for electricity. EXAA plans to add over-the-counter clearing for electricity contracts andfutures trading.





Excess cargoAs used in the liquefied natural gas (LNG)market, the cargoes in excess of long-termcontracted quantities of LNG, which aretypically either offered to existing long-term

buyers or alternatively auctioned in the spotmarket.

Excess gasA natural gas buyer may ask the seller to deliver above the delivery capacity rate. The seller doesnot have to do so but, if it does, the buyer willpay a premium over the main contract price.

Excha ge

Any trading arena where commodities and/or securities are bought and sold – for example,Nymex or the International PetroleumExchange.

Excha ge o utures or physicalsThe conversion of a futures position into aphysical position via simultaneous buy/selltransactions. Also referred to as exchange of futures for product.

Excha ge o utures or swaps (EFS)The conversion of a futures position intoa swaps position via simultaneous buy/selltransactions.

Excha ge optioAn option giving the buyer the right to exchangeone asset for another. For example, the purchaser of a euro-oil exchange option would have the

right to exchange a certain amount of euros for acertain number of barrels of oil.H see also integrated hedge

Excha ge rate agreeme tA synthetic agreement for forward exchange,whereby the two counterparties agree a ratebased on forward foreign exchange rates. Unlikea forward exchange agreement, it is settledwithout reference to the spot rate.

Excha ge-traded optioAn option traded and cleared on an organisedsecurities or derivatives exchange. Such optionsare usually, but not always, standardised by strike,maturity and underlying.

ExerciseThe process of converting an options contractinto a futures or physical position.

Exercise priceH see strike price

Exit charge(UK) tariff for exiting the national transmission

system at a specified exit point and for a certainvolume of gas.

Exotic optioAny option whose payout structure is morecomplicated than a plain-vanilla put or calloption. Examples of exotic options includeAsian options, barrier options, digital optionsand spread options.H see also option, vanilla options

Expiratio dateThe last day on which an option may beexercised.

Ex-shipA shipping delivery provision whereby cargoresponsibility and risk resides with the shipper until the ship has arrived at designated port andcargo is available for delivery.

Exte dible swapA swap with an embedded option constructedon a similar principle to a double-up swap. Anextendible swap allows the provider to extendthe swap, at the end of the agreed period, for afurther predetermined period.







Extri sic valueThe amount of money the buyer of an optionis willing to pay in anticipation that a changein the underlying futures price will cause theoption to increase in value. Also known as time

value.

FFair valueIn the pricing of financial instruments, the valuedetermined by mathematical modelling of the

instruments value.Also used as a defined term in US accounting

standards as ‘fair-value accounting’ and ‘fair-valuehedges’ as in Financial Accounting StandardsBoard Statement FAS 133. A fair-value hedgeis a hedge of the exposure to changes in thefair value of a recognised asset or liability, or of an unrecognised firm commitment, which areattributable to a particular risk.

FAS 133H see Financial Accounting Standards Board Statement

133

Fat tailsOn a distribution curve, a fat-tailed distributionhas a greater-than-normal chance of a bigpositive or negative realisation.

Federal E ergy Regulatory Commissio

(Ferc)The US government body that regulates USinterstate energy markets.

FEED co tractsAn acronym for front-end engineering anddesign typically referring to planning and design(with defined groups of activities or segments)in the early stage of a project, especially for theprocess industry.

FeedstocksCrude products, natural gas, chemicals or rawmaterial used in a refinery, liquefied natural gasliquefaction plant, or petrochemical plant for processing into a finished output product or

products.

FercH see Federal Energy Regulatory Commission

Ferc order 636A Federal Energy Regulatory Commissionorder issued in 1992 to restructure the US gaspipeline industry. It relaxed service requirementson pipeline firms and gave customers greater

flexibility as to whom they could buy from byseparating gas sales from transportation. This‘unbundling’ of sales and transportation alsoinvolved the extension of transportation toinclude storage and allowed end-users with firmtransport contracts to sell unused capacity.

Ferc order 888A Federal Energy Regulatory Commissionorder issued in 1996 to restructure the US

wholesale electricity industry. It required allutilities that owned transmission lines to provideopen-access, non-discriminatory service for all wholesale transactions (including their ownwholesale transactions) and allowed utilities toseek recovery of the stranded costs associatedwith providing open access.

Ferc order 2000A Federal Energy Regulatory Commission

order issued in February 2000, which clears theway for the formation of regional transmissionorganisations.

FCMFutures Commission Merchant – an individualor organisation accepting orders to buy or sell futures or futures options. A person or organisation in this role needs to be certified bythe Commodities Futures Trading Commission.



Fi a cial Accou ti g Sta dards Board(FASB)Private-sector organisation responsible for establishing standards of accounting and financialreporting in the US.

Fi a cial Accou ti g Sta dards BoardStateme t 133 (FAS 133)FAS 133 obliges US firms to put all financialderivative instruments that are not used tohedge exposure on the balance sheet at marketvalue. Companies, therefore, disclose unrealisedgains and losses on derivatives, rather thanaccounting for them only at maturity.

Fi a cial products mark-up la guage(FPML)FPML is a standardised language designed for sharing information on, and dealing in, swaps,derivatives and structured products acrosssoftware and hardware systems.

Firm capacityAn amount of natural gas in a buyer’s contractthat is guaranteed not to be interrupted, or a

liquefied natural gas (LNG) terminal accesscapacity contractually guaranteed by theterminal operator or guaranteed capacity byLNG shippers or sellers.

Firm e ergyElectricity transmission service offered tocustomers under a filed rate schedule thatanticipates no planned interruption.

Firm serviceGas or electricity sales that are guaranteed notto be interrupted.H see also non-firm service, interruptible service

Firm (u i terrupted)Natural gas for which the full price has beenpaid on the understanding it will be deliveredcontinually through the contract period.H see also interruptible service

Five o’clocki gTwenty-one days before a cargo of Brent blendcrude oil loads at the Sullom Voe terminal, thedetails of the cargo are passed through the paper chains. If the cargo has not been kept by 17:00

hours local UK time, then the last participantto receive a call with the cargo details ownsthe physical cargo and has been ‘five o’clocked’.Normally this is seen as a bearish sign, as itusually happens in a market with low crudedemand.H see also daisy chain

Flexibility bidIn the gas market, where the system needs to

buy or sell gas to keep it in balance, a shipper may put in a flexibility bid. The shipper specifieswhether it is a buy or sell, the date or dates towhich it applies, the amount of gas, the calorificvalue of the input gas, how quickly it couldbe implemented, how and where it would beimplemented and the price.

Floati g lique actioTechnology used for new types of liquefied

natural gas facilities and vessels that have on-board liquefaction plants. Such technologyprovides an alternative for developing otherwisestranded natural gas reserves.

Floor1) the main trading area of an exchange.2) a supply contract between a buyer and seller of a commodity, whereby the seller is assuredthat it will receive at least some minimum price.

This type of contract is analogous to a putoption, which gives the holder the right to sellthe underlying at a predetermined price.

FOBH see free-on-board

FODH see fuel oil domestique





Force majeureA contract clause that allows the supplier toforego his obligation to supply in extremecircumstances, such as a political crisis, war or strikes that disturb production. It also applies to

a buyer that is unable to take delivery of product – for example, a refiner whose refinery is shutdown following a fire or disaster.

Forward co tractA supply contract between a buyer andseller, whereby the buyer is obligated to takedelivery and the seller is obligated to providedelivery of a fixed amount of a commodity ata predetermined price on a specified future

date. Payment in full is due at the time of, or following, delivery. This differs from a futurescontract, where settlement is made daily.

Forward reight agreeme t (FFA)FFAs are derivatives instruments used to hedgerisk in the tanker freight sector.

Forward price curveA list or graph of the future value of a

commodity or financial instrument over time.

Forward rate agreeme tAn agreement between two parties to exchangea rate differential during a predetermined timeperiod, based on an agreed future rate duringthat period.

Forward start optioAn option that gives the purchaser the right to

receive, after a specified time, a standard put or call option. The option’s strike price is set at thetime the option is activated rather than whenit is purchased and is usually set with referenceto the prevailing spot rate when the option isactivated.H see also chooser option

Forward swapA swap in which payments are fixed beforethe start date – used when one party expectsmarket rates to rise soon, but will not needfunds until later.H see also deferred swap

Fossil uelsBuried deposits of organic materials that havebeen compressed over millions of years intocrude oil, coal or natural gas.

FRCCFlorida Reliability Co-ordinating Council – aNorth American Electric Reliability Council

within the Eastern Interconnection.

Free-o -board (FOB)Under an FOB contract, the seller provides thecrude oil, oil product or liquefied natural gasat a lifting installation, so that all loading coststo put the commodity on board a carrier havebeen paid, but the buyer takes responsibility for shipping and freight insurance.H see also CIF

Freight derivativesDerivatives instruments used to hedge riskin the tanker freight markets. Tankers are oneof the most common means of transportingcommodities such as oil and coal. Freightderivatives, such as swaps or forward freightagreements, can be used to protect ship ownersagainst changes in freight rates.

Freque cyThe number of cycles per second of electromagnetic waves, as measured in hertz.

Fro t mo thH see prompt month

Fro t quarterQuarterly contract that begins at the start of thefollowing quarter.





Fro t yearTypically refers to the first year of a long-term,such as that for liquefied natural gas or other energy products contract (for example CAL 09).

Fuel cellA device that converts fuel energy to electricalenergy by means of an electrochemical process.Fuel cells chemically combine the moleculesof a fuel (most commonly hydrogen) andan oxidiser (e.g., air) to create heat withoutburning, thereby reducing the thermalinefficiencies and pollution that characterisetraditional means of combustion.

Fuel gasVarious gases that may be burned to producethermal energy, including natural gas, propane,butane, liquefied natural gas or hydrogen.

Fuel oilHeavy refined distillates. Used to fuel power stations and in ships and industry. The differentfuel oil grades are classified according to their viscosity and sulphur content.

Fuel oil domestiqueGasoil of a particular specification used for end-user central heating in France.

Fu dame tal a alysisAnalysis of supply and demand factors thatcould influence the direction of price of acommodity.

For example, electricity traders, using

fundamental analysis, consider weather patterns,transmission constraints and unexpected power plant outages to calculate the demand for power and the amount of generation available in theregion.H see also technical analysis

Fu gibilityA product is fungible if it can be exchanged.Futures contracts for the same commodity anddelivery month are said to be fungible due totheir standardised specifications.

Futures co tractAn exchange-traded supply contract betweena buyer and a seller, whereby the buyer isobligated to take delivery and the seller isobligated to provide delivery of a fixed amountof a commodity at a predetermined price at aspecified location. Futures contracts are tradedexclusively on regulated exchanges and aresettled daily based on their current value in the

market.

Futures optioAn option on a futures contract.

GGammaThe sensitivity of an option’s delta to changes inthe price of the underlying futures contract.

GarchGeneral autoregressive conditionalheteroscedasticity. A statistically advancedmethod for measuring time-varying volatility.

Gas

1) Natural gas covers a range of gases that occur naturally and are composed mainly of methane(CH 4) and ethane. In the UK gas supplyindustry, it refers to the gas supplied throughthe mains system (mainly CH 4). North Sea gasusually has a declared heating value of 1,035British thermal units per cubic foot.2) North American abbreviation for gasoline.





Gas I dustry Sta dards BoardA US industry forum that aims to develop andpromote standards that will lead to a seamlessmarket for natural gas.

Gas omi atio sIn the US, nomination deadlines are where eachpipeline has a scheduled deadline before whichshippers must book gas for the following month.

GasoilA middle distillate and form of heating oilused primarily in heating and air-conditioningsystems. One of the most actively traded oilproducts, gasoil is the underlying in a key

International Petroleum Exchange futurescontract. In refining terms, gasoil comesbetween fuel oil and the lighter products such asnaphtha and gasoline. In its broader definition,it covers the oil products used for dieselautomotive fuel and jet fuel.

Gasoli eA light-end hydrocarbon distillate used for internal combustion engines, actively traded as

futures and options contracts on Nymex. Alsoknown as petrol.

Gas yearIn the UK, the gas year begins at 0600 onOctober 1. This is also known as the contract

year, as it is when purchase contracts begin.

GCC(UK) Gas Consumers Council, known as

Energywatch.(Middle East) Gulf Co-operation Council.

GCVGross calorific value.H see also calorific value

Geari gThe gearing of a derivative is the priceof the underlying divided by the price of the derivative. This can be used for crudeassessments of leverage and option pricing. A

more sophisticated measure is effective gearing(or lambda), which is the traditional gearingmultiplied by the derivative’s delta.H see also leverage

Ge erati g availability databaseThe generating availability database (Gads)collects, records and retrieves operatinginformation about the performance of electricity-generating equipment. More than

180 generating facility operators in the US andCanada voluntarily participate in Gads.

Ge eratioThe process of producing electrical energy bytransforming other forms of energy. The amountof energy produced is expressed in watt hours.

Geometric returLog return.

Geometric Brow ia motioH see stochastic process

Geothermal e ergyEnergy derived from the heat of the earth’score. Geothermal energy sources include steam,hot water or hot rocks lying close to the earth’ssurface.

Germa Power I dexAn electricity price index for the wholeof Germany, launched by Dow Jones in

January 2001. Created through the merger of the Central European Price Index and theElectricity Index South.





Gestore del Mercato Elettrico (GME)The Italian electricity market operator thatwas set up by the independent transmissionsystem operator (GRTN) and operates theItalian wholesale electricity market. GME is

responsible for issuing the electricity marketrules, subject to input from the electricity andgas regulator (AEEG) and approval by theMinister of Industry. GME is also responsiblefor managing the Italian electricity market topromote competition between producers, toensure an adequate availability of power reserves,enforcing merit-order economic dispatch andmanaging the Italian power exchange. It becameoperational in 2004 and it is owned by the

Italian Ministry of Finance and the economy.

Gielda E ergiiH see Polish Power Exchange

Gigajoule1 billion joules, approximately equal to 948,000British thermal units.

Gigawatt (GW)

1 billion watts

Gigawatt hours (GWh)1 billion watt hours

Global warmi gGlobal warming is the progressive gradual riseof the earth’s surface temperature, thought bymany scientists to be caused by the greenhouseeffect and responsible for changes in global

climate patterns.

GMEH See Gestore del Mercato Electrico

Good till the close (GTC)An order given to a futures broker that stays liveuntil fulfilled, or until the close of the market,whichever is sooner.

Gra d ather clauseIn the US, a clause in a contract that allowsa prior law to take precedence over newlyintroduced legislation.

GreeksA measure of the sensitivity of an option’s valueto changes in the parameters used to value it.Greek measures include delta, gamma, rho, thetaand vega.

Gree house e ectAn increase in global temperature caused whenthe earth’s atmosphere traps solar radiation.It occurs due to the presence in the

atmosphere of gases such as carbon dioxide,water vapour and methane, which allowincoming sunlight to pass through, but trapheat radiated back from the earth’s surface.The burning of fossil fuels is thought by manyscientists to be a major contributory cause of the greenhouse effect.

Gree ieldPreviously undeveloped site considered suitable

for commercial development or industrialprojects, but currently in its natural state or usedfor agriculture.

GridAn electricity transmission system.

Grid operatorH see system operator

GTCH see good till the close





HHead a d shouldersA three-peak pattern resembling the ‘head andshoulders’ outline of a person, which is used tochart stock and commodity price trends. Thepattern indicates the reversal of a trend.As prices move down to the right shoulder,a head and shoulders top is formed, meaningprices should be falling. A reverse head andshoulders pattern has the head at the bottom of the chart, meaning prices should be rising.

Heat rateA measure of how efficiently an electricitygenerator converts thermal energy intoelectricity, and a key determinant of the sparkspread. More precisely, the heat rate is theratio of British thermal units of fuel consumedto kilowatt hours of electricity produced.Hence, the lower the heat rate, the higher theconversion efficiency.

Heati g degree dayH see degree day

HeavyTypically crude oil with an API gravity of lessthan 28 degrees.

Heavy uel oilA heavy refined distillate consisting largely of

residues from crude oil refining that are blendedwith gasoil fractions. The heaviest grade fuel oilstend to be used in ships’ boilers, while lighter fuel oil grades are used in industry, such as insteel manufacture.

Heavy-tailed distributio(fat-tailed) – a distribution in which the extremeportion of the distribution (the part furthestfrom the median) spreads out further relativeto the width of the centre (middle 50%) of

the distribution than is the case for the normaldistribution. For a symmetric heavy-taileddistribution, the probability of observing a value far from the median in either direction is greater thanit would be for the normal distribution. Heavy-tailed describes a distribution with excess kurtosis.

HedgeThe initiation of a position in a futures or options market that is intended as a temporary

substitute for the sale or purchase of the actualcommodity. For example, the sale of futurescontracts in anticipation of future sales of cashcommodities as a protection against possibleprice declines, or the purchase of futurescontracts in anticipation of future purchases of cash commodities as a protection against thepossibility of increasing costs.

Hedge accou ti g

Hedge accounting is the practice of deferr inggains and losses on financial market hedges untilthe corresponding gain or loss in the underlyingexposure is recognised. It allows companies toincorporate the cost of hedging into the costof the exposure. Gains are thereby offset againstlosses. This reduces the volatility of earnings.H see also accrual accounting, mark-to-market

Hedge e ective ess

In US accounting terminology, a criteria thatmust be met in order to use hedge accountingfor US financial reporting. This provision hasat times proven problematic in the energyindustry where partial hedges for such exposurecomponents as basis risk are widely used. Under the rules of FAS 133 when testing for hedgeeffectiveness, only interest rate exposures can bebroken down into their component parts.H see also FAS 133





Hedge u dA private pool of assets, which is often managedaggressively. Hedge funds have long been activein speculative trading on crude oil markets.

Hedge ratioThe ratio, determined by the option’s delta, of futures to options required to establish a positioninvolving no price risk.

HeelThe small amount of liquefied natural gas(LNG) remaining on board a vessel (or storage)after discharge of the regular LNG cargo, andis used to insulate the LNG storage tanks and

is also available as fuel for carrier ship. The heelis considered to exist both before and after discharge, as the minimum quantity of LNGnecessary to be retained in holding tanks, andalso includes LNG that is consumed en route tothe discharge destination as fuel.

He ry HubThe delivery point for the largest Nymexnatural gas contract by volume. Henry Hub is in

Erath, Louisiana, and is a large system of pipelineinterconnects.

HereICIS Heren is a world-leading publisher of gas,power and carbon market information. In 2008,ICIS, part of Reed Business Information UK,acquired Heren Energy (now ICIS Heren).www.heren.com

HertzA unit of frequency equal to one cycle per second and measured by changes in cycles or state.

Historical simulatioA method of calculating value-at-risk (VaR)that uses historical data to assess the impactof market moves on a portfolio. A currentportfolio is subjected to historically recorded

market movements; this is used to generate adistribution of returns on the portfolio. Thisdistribution can then be used to calculate themaximum loss with a given likelihood – that is,the VaR.

Because historical simulation uses real data, itcan capture unexpected events and correlationsthat would not necessarily be predicted by atheoretical model.

Historical volatilityThe annualised standard deviation of percentagechanges in futures prices over a specific period.An indication of past market volatility.

Hot LnGLiquefied natural gas with a British thermal unitcontent that is higher than the standard on USand Canadian pipelines, since it contains smallamounts of natural gas liquids (NGLs), and may

also be referred to as Rich LNG. The NGLs,which are typically ethane, propane and butane,can be extracted following regasification andused as petrochemical feedstocks.H see also lean LNG

Housto ship cha elA major US oil refinery centre in Texas on theUS Gulf Coast. It is also a pricing and major market point for natural gas in the US.

HSFOHigh-sulphur fuel oil.

Hydrocarbo sOrganic compounds consisting of hydrogen andcarbon. They may exist as solids, liquids or gases.





HydropowerElectrical energy produced by flowing water. Ahydroelectric power plant uses the movement of water to spin a turbine generator that produceselectricity.

IIAS 39An accounting standard, titled Financial Instruments: Recognition and Measurement , issuedby the International Accounting Standards

Committee. IAS 39 is similar, but much lesscomplex, than the US Financial AccountingStandards Board FAS 133.

ICEH see IntercontinentalExchange

IEAH see International Energy Agency

Imbala ce e ergyThe difference between hourly scheduledelectricity deliveries and hourly metereddeliveries. Typically, energy imbalances areeliminated during a future period by returningenergy in kind under conditions similar tothose when the initial energy was delivered.When energy imbalances exceed a prespecifiedthreshold (for example, +/–1.5% of thescheduled transaction), imbalances are resolved

through monetary payments.

Implied volatilityThe volatility level that, assuming a certainpricing model, equates the calculated value of the option to its current market price.H see also volatility skew, volatility smile, volatility term

structure

I adverte t e ergyThe imbalance of routine energy flows back andforth between a power generator and the centresof demand. These imbalances are typically settledthrough exchanges of physical product.

I depe de t power producerA non-utility power generating company.

I depe de t system operator (ISO)(US) entity responsible for ensuring the efficientuse and reliable operation of the transmissiongrid and, in some cases, generation facilities.Individual ISOs cover either a single state(e.g., the California ISO) or a region (e.g.,

the Midwest ISO). ISO responsibilities varyby jurisdiction, but can include co-ordinatingscheduling for transmission transactions;overseeing the instantaneous balancing of generation and load; managing and redispatchinggeneration in system emergencies; managingoperating reserves; ensuring new transmissionfacilities are built when and where needed; andco-ordinating transmission payments. In somecases, ISOs are also responsible for managing

power exchange activities.

I dexA numerical value assigned to a group of commodities, stocks or prices in order to givean indication of market trends.

I jectioThe process of placing natural gas inunderground storage or the producing reservoir

in order to maintain pressure.

I side FercA weekly newsletter produced by publishingcompany Platt’s that covers the activities of theFederal Energy Regulatory Commission.





I stalled capacity obligatioA US term that refers to the amount of generation that meets load plus a certainpercentage or margin set using a probabilisticmodel. The extra margin ensures reliability

during a maximum emergency.

I tegrated hedgeA hedge combining more than one distinctprice risk. For example, crude oil is usuallypriced in US dollars. A producer of crudeoil whose home currency is, say, the poundsterling would be exposed to both US dollar currency risk and crude oil price risk. A possibleintegrated hedge would be a quanto product,

which would hedge the price of crude oil inpounds sterling.H see also exchange option

I terco ectorA gas pipeline running from Bacton in Norfolk,England, to Zeebrugge in Belgium. It opened inOctober 1998 and allows Britain to export gasto, or import gas from, continental Europe for the first time.

I terco ti e talExcha ge (ICE)Atlanta, Georgia-based Intercontinental-Exchange is an internet-based market placefor the trading of over-the-counter (OTC)energy, metals and other commodity products.It represents a partnership of the leading energycompanies and financial institutions and waslaunched in August 2000. It also now offersclearing-house services for clearing of OTC

trades through the London Clearing HouseLimited. The exchange is also referredto by its acronym ICE.

I terdelivery spreadFutures or options trading techniques thatentail buying one month of a contract andselling another month of the same contract. For example, buying a June electricity contract and

simultaneously selling a September electricitycontract. A market participant can profit (or lose out) as the price difference between thecontracts widens or narrows.

I termediate ge eratio(cycli g ge eratio )Power-generating equipment that can varyits level of output in response to changes inelectricity demand. Normally operated on a

daily cycle to serve on-peak loads duringthe day but not off-peak loads during nights andweekends.

I ter atio al E ergy Age cy (IEA)The International Energy Agency (IEA), basedin Paris, is an intergovernmental organisationthat acts as energy policy adviser to 28member countries. Founded during the oilcrisis of 1973-74, the IEA’s initial role was to

co-ordinate measures in times of oil supplyemergencies. Its mandate has broadened toincorporate the ‘three Es’ of balanced energypolicy making: energy security, economicdevelopment and environmental protection.Current work focuses on climate changepolicies, market reform, energy technologycollaboration and energy research.

I ter atio al Petroleum Excha ge (IPE)

Formerly an independent London energyexchange, in June 2001 the IPE became a whollyowned subsidiary of IntercontinentalExchange.In 2005 its name was changed to ICE Futuresand trading was shifted onto an electronictrading platform. This exchange has futures andoptions contracts for energy products includingBrent blend crude oil, gasoil natural gas,electricity (baseload and peakload), coal contractsand carbon emission allowances.





I terruptible serviceGas or electricity sales that are subject tointerruption for a specified number of days or hours during times of peak demand or in theevent of system emergencies. In exchange for

interruptibility, buyers pay lower prices.H see also firm service, firm (uninterrupted),

non-firm service

I -the-mo eyAn option that can be exercised andimmediately closed out against the underlyingmarket for a cash credit. The option is in-the-money if the underlying futures price is above acall option’s strike price or below a put option’s

strike price.H see also at-the-money, out-of-the-money

I tri sic valueThe difference between the underlying priceand the strike price of an option.

I vestme t Services Directive (2 d)A European Union proposal in 2002 to upgradethe 1993 Investment Services Directive, which

covers investment services and regulatedmarkets. The updated proposal would requireenergy firms wishing to trade financial productsand certain cash-settled commodity derivativesinstruments to be authorised as investment firms.

I vestor-ow ed utilityAn electricity utility owned by a group of investors, the shares of which are traded onpublic stock markets.

IPEH see International Petroleum Exchange

IPPH see independent power producer

Isda master agreeme tThe International Swaps and DerivativesAssociation (Isda) over-the-counter derivatives

master agreement was drawn up by the New York-based trade association in 1987 andrevised in 1992 and 2002. The agreement iscommonly used for contracts in variousenergy derivatives markets, especially the US gas

market.

ISOH see independent system operator

JJapa ese Crude Cocktail (JCC)A commonly used reference price index for long-term liquefied natural gas contracts in

Japan, as well as Taiwan and South Korea, and ispublished monthly by the Japanese governmentrepresenting the average crude oil import priceinto Japan.

Jet

Jet fuel available in various grades as Jet-A, JetA-1 and Jet B.H see kerosene

Joi t impleme tatioA mechanism defined in Article 6 of the KyotoProtocol, allows a country with an emissionreduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earnemission reduction units (ERUs) from an

emission reduction or emission removal projectin another Annex B Party, each equivalent toone tonne of CO 2, which can be countedtowards meeting its Kyoto target. Jointimplementation is intended to offer parties aflexible and cost-efficient means of fulfilling apart of their Kyoto commitments, while thehost party benefits from foreign investment andtechnology transfer.







JouleA metric unit of energy equal to one watt-second.

Jump-di usio model

A method of pricing contracts that includesoccasional moves larger than traditional randomprocesses would generate.

K Ka sas City Board o Trade

Kansas City, Missouri-based exchangethat lists natural gas futures and options contractsbased on delivery in the Permian Basin, Texas.

KappaA value representing the expected change in theprice of an option. Also known as Lambda.

Kerose eMedium-light distillate used as fuel for jet

engines, with a boiling range of 150°–260°Celsius. Also called jet kerosene.

Kholod yi modelA valuation model developed by themathematician Valery Kholodnyi for use invaluing and hedging electric power price risksin environments of extreme price spikes.

Kilowatt (KW)

1,000 watts.

Kilowatt hour (KWh)Unit of electricity equivalent to the power of one kilowatt operating for one hour. For example, 10 100-watt light bulbs burning for one hour would consume one kilowatt hour of electricity.

KurtosisA parameter describing the peakedness andtails of a probability distribution relative to thebenchmark log normal distribution.

Kyoto Protocol o Climate Cha geAn agreement made in Kyoto, Japan, inDecember 1997 under which industrialisedcountries agreed to adopt specific goalsand timelines for nationwide reductions of greenhouse gas emissions between 2008 and2012. The two major mechanisms for achievingthis established under the protocol are emissionstrading and the Clean Development Mechanism.

The EU and its Member States ratified the

Kyoto Protocol in May 2002. The EU has atarget goal of 8% reduction in greenhouse gasesand Japan’s goal is a 6% reduction. The Protocolcame into effect for all signatory countries onFebruary 16, 2005.

As of December 2008, the US had not ratifiedthe Kyoto Protocol.

L La niñaThe name given to the periodic cooling of thetropical Pacific Ocean, hence the name: it means‘little girl’ in Spanish, the opposite of El Niño.La Niña occurs after some, but not all, El Niños.During a La Niña year, US winter temperaturesare warmer than normal in the southeast and

cooler than normal in the northwest.

LambdaH see gearing

LaytimeThe amount of time specified as allowable ina shipping charter contract for loading andunloading of cargo. Demurrage is incurred if thelaytime is exceeded.



LCHH see London Clearing House

LDCH see local distribution company

LDZH see local distribution zones

Lea LnGLiquefied natural gas (LNG) that is of aspecification with very low high heatingvalue (HHV). Lean LNG liquid stream ispredominately methane with some minor quantities of ethane. Lean LNG may be required

to meet fuel quality specifications and standardsrequired by LNG-powered vehicles and other LNG-fuelled equipment. Leaner LNG can beproduced through the extraction of the heaviestcomponents, namely the LPGs, propane andbutane. Rich LNG, or Hot LNG, with highHHV also produced for some market segments.H See also Hot LNG

Legal risk

The risk that a counterparty to a transactionwill not be liable to meet its obligations under law. Such difficulties may arise from a number of causes, one of the most common being that thetransaction was not sufficiently well documentedto be legally enforceable.

LeptokurtosisThe property of a statistical distribution to havemore occurrences far away from the mean than

would be predicted by a normal distribution.Also referred to as ‘fat tails’.

Letter o creditInstrument or document issued by a bankguaranteeing the payment of a customer’s draftsup to a stated amount for a specified period. Itsubstitutes the bank’s credit for the buyer’s andeliminates the seller’s risk.H see also performance letter of credit

LeverageThe ability to control large amounts of anunderlying variable for a small initial investment.Futures and options are leveraged products,because the initial premium paid is usually

much smaller than the nominal amount of theunderlying. Leverage is usually measured as theeffective gearing.H see also gearing

LFH see load factor

LiborThe London Interbank Offered Rate. The rate

of interest at which banks borrow funds fromother banks, in marketable size, in the Londoninterbank market.

Li ti gThe loading of crude oil or oil products on toa vessel.

LightTypically crude oil with an API gravity of more

than 28 degrees.

Light e dsVolatile hydrocarbon products, such as propane,butane, gasoline and naphtha.

Li ear least squaresThe principle or method by which the fitof a function to data is such that the sum of the squared residuals is minimised. In linear

regression, the function is a line.The sum of the squares of the residuals isused instead of the absolute values because thisallows the residuals to be treated as a continuousdifferentiable quantity. However, because squaresof the residuals are used, outlying points canhave a disproportionate effect on the fit, aproperty that may or may not be desirabledepending on the particular problem beingconsidered.





Li e lossesThe difference between the quantity of electricity generated and the quantity deliveredat some point in the electricity system. Lossesvary depending on temperature, voltage level

and load levels.

Li e packi g/ illi gRaising the pressure within a gas pipelinesystem in order to increase the system’sstorage capability – important for systemoperation.

Liquidated damage clauseThis clause allows a counterparty that is owed

power to charge the defaulting counterpartyfor the price of having to buy elsewhere. Thehigher the price, the higher the charge when acompany defaults on its supply obligations.

LiquidityA market is liquid when it has a high level of trading activity.

Liquidity risk

The risk that a firm unwinding a portfolio of illiquid instruments may have to sell them atless than their fair value. An illiquid marketmay be defined as one characterised by widebid/ask spreads, lack of transparency and largemovements in price after any sizeable deal.

Lique ied atural gas (LnG)LNG is compressed natural gas (mainly methaneand ethane), which (unlike liquefied petroleum

gas) is reduced to a liquid form by cooling it to-258° Farenheit. The volume of LNG is 1/600thof its volume as gas vapour. It is odourless,colourless, non-toxic and non-corrosive. LNGis much easier and more cost-effective to storeand to transport, especially where pipelines donot exist.

Lique ied petroleum gas (LPG)A light hydrocarbon composed mainly of propane and butane, occurring naturallyin crude or from refining processes suchas crude distillation, catalytic reforming or

hydrocracking. Gaseous at atmospheric pressureand temperature, LPGs are liquefied by reducingtemperature or increasing pressure for ease of transportation and storage.

Lique actio pla tA facility that converts natural gas from itsnatural gaseous state to a liquid state. The gas isfirst cleaned of all traces of CO 2, water, mercuryand sulphur. It is then cooled to -160°C in cold

boxes until it becomes liquid. In this form, it isstored in tanks.

LLSH See Louisiana light sweet

LnGH see liquefied natural gas

LnG chai

The components in the liquefied natural gasprocess for transporting from producing areas toconsuming regions, typically comprising stagesfor liquefaction, transportation and regasification.

LnGRVAn acronym for a liquefied natural gasregasification vessel.

Load

The amount of power carried by a utilitysystem or sub-system, or the amount of power consumed by an electrical device, at a specifiedtime. Load is also referred to as demand.

Load actorThe ratio between average and peak usage for electricity or gas customers. The higher theload factor, the smaller the difference betweenaverage and peak demand.





Load ollowi gContinuous balancing of generation and loadaccomplished by committing online generationwhose output is raised or lowered as necessaryto follow moment-by-moment changes in load.

Load shapeA combination of electricity contracts coveringa period of weeks or months, which reflectsthe profile of the daily power requirements of acustomer or distribution of energy requirementsover time.H see also load shape 44

Load shape 44

A benchmark load shape traded on the UKelectricity forward market. It comprises 5megawatts (MW) of baseload power and 5MWof additional power between 0700 hours and1900 hours UK time on week days.H see also load shape

Load sheddi gThe process of removing certain sections of customer demand from the supply system in

response to a shortfall.

Local distributio compa yA company that operates or controls the retaildistribution system for the delivery of naturalgas or electricity.

Local distributio zo esThe zones into which National Grid Transcohas divided the UK for the purpose of

calculating shippers’ charges for transporting gaswithin the national transmission system.

LocalsMembers of a futures exchange who tradeexclusively on their own account.

Locatio spreadThe differential between the prices quoted for the same commodity at two locations.

Locatio al margi al prici g (LMP)A method of pricing the cost of congestioninto electricity prices. The Federal EnergyRegulatory Commission is introducing LMPunder its standard market design proposals.

LMP aims to encourage the efficient use of thetransmission system by assigning costs to usersbased on the way energy is actually delivered.

Log ormal distributioA probability distribution such that the naturallogarithm of the variable is normally distributed.

Lo do Cleari g House (LCH)A member-owned clearing house that merged

with Clearnet.SA to form the LCH.ClearnetGroup. In October 2008, LCH.Clearnet signeda new clearing arrangement with LIFFE, theinternational derivatives market of NYSEEuronext (NYX).

Lo gThe buyer of a financial contract.

Lo g positio

A position that appreciates in value if the valueof the underlying instrument or market priceincreases.

Lookback optioA lookback call (put) option grants the rightto buy (sell) the underlying energy commodityat the lowest (highest) price reached duringthe life of the option. Effectively, the best pricefrom the point of view of the holder becomes

the strike price.

LoopLouisiana Offshore Oil Port. A US deepwater port that can accommodate vessels as big asultra-large crude carriers with a loaded weightof over 200,000 deadweight tons.





Loop lowsUnintended flows on electricity transmissionsystems that occur as a by-product of thedispatch of electricity down an intended path.

LotThe unit size for transactions on a given futuresexchange.

Louisia a light sweet (LLS)A low viscosity (‘light’), low sulphur (‘sweet’)crude oil produced in the Gulf of Mexico.

LPGH see liquefied petroleum gas

MMSymbol in the energy market denoting onethousand – e.g., mbbl = 1,000 barrels.

MAMoving average.

McCloskey (Coal)A premier source of news, analysis and data onthe international coal industry.www.mccloskeycoal.com

MmSymbol in the energy market denoting one

million – e.g., mmBtu = million British thermalunits.

Make-up gasIn a gas buyer’s contract there are often terms thatallow the buyer to take make-up gas in contractperiods after it has been paid for but not taken.There may be a limit to the amount of make-upthe buyer can recover in any given period.H see also take-or-pay

MAQ(Gas) maximum annual quantity.H see annual cap

Margi

Cash deposits required for a futures contract thatserve as a good-faith deposit guaranteeing thatboth parties to the agreement will perform thetransaction at some point in the future.

Margi callA call from a clearing house to a clearingmember or from a broker or firm to a customer,to bring margin deposits up to a requiredminimum level.

Margi risk The risk that a company will fail to make amargin call.

Margi al costThe change in cost resulting from production of a single additional unit of production.

Mark-to-market

To mark-to-market is to calculate the valueof a financial instrument (or portfolio of suchinstruments) at current market rates or prices of the underlying. Marking-to-market on a daily(or more frequent) basis is often recommendedin risk management guidelines.H see also accrual accounting, hedge accounting

Mark-to-modelA means of calculating the value of a financial

instrument by using standard models to valueboth the price of the underlying commoditiesand also the risk metrics of the financialinstruments themselves. Mark-to-model isgenerally used when the underlying price is noteasily observed in the market and/or where thefinancial instrument is a complex combinationof standard products.





Marker crudesCrudes against which other crudes are priced.Widely used marker crudes include West TexasIntermediate (for US destinations), Brentblend (for European destinations) and Dubai

(for Far Eastern destinations).H see also benchmark crude

Market-makerAn energy trader or energy trading firm thatis prepared to buy and sell in the derivativesmarket to provide a two-sided (bid/ask) marketand greater liquidity.

Market-o -close

An order to buy or sell a specified amount of futures contracts at the price when themarket closes.

Market risk Market risk is the risk that value will be lostdue to a change in some market variable, suchas commodity or equity prices, interest ratesor foreign exchange rates. The market risk of a derivatives position may arise from a change

in the value of the underlying or from other sources such as implied volatility or time decay(theta).

Market valueH see replacement cost

Master agreeme tThe model master power purchase and saleagreement is an attempt to standardise the

core terms and conditions needed to establishtrading relationships in the US power marketsby providing standard documentation for alltrading agreements. The master agreement wasdeveloped by Washington, DC-based EdisonElectric Institute, an association of US electricitycompanies, and implemented in spring 2000.H see also model master power

Material adverse cha geAny negative event affecting a company thatis deemed to be material by a creditor. Suchevents can either be defined or undefined in thecontract between the company and its creditors.

Mc Thousand cubic feet.

MDQMaximum daily quantity. The upper limit for the amount of gas a buyer may take in a single24-hour period.

Mea

Often considered as the simple arithmeticaverage of the sum of the observed valuesdivided by the number of observations. It iscustomary to represent the mean by µ .

Mea reversioA tendency for a stochastic process to revertover time to an equilibrium level, such as theaverage (the mean) of historical prices, or someother variable. Interest rates, stock returns, price-

earning ratios, and implied volatilities tend toexhibit mean reversion. The concept of meanreversion has been much discussed in energymarkets with reference to how to best modelforward prices in markets such as deregulatedpower.

Megajoule (MJ)1 million joules (sometimes MMJ).

Megawatt (MW)1 million watts (sometimes MMW).

Megawatt hour (MWh)1 million watt hours. The multiple of the power in megawatts times the time in hours and is themeasurement unit commonly used in electricpower trading and supply markets.





MetersEquipment used to measure the movement of gas or electricity flowing across various points inthe system. Where meters giving daily volumeconsumption are used, the sites are known as

daily metered (DM) sites. At smaller supplypoints, readings are taken at longer intervals andare called non-DM sites.

Methyl tertiary butyl ether (MTBE)A substance that can be added to gasoline toincrease its oxygen content and thereby makeit burn more cleanly. MTBE has been used insome areas of the US since 1990, from whichtime the Clean Air Act required the use of

gasoline with a 2% oxygen content in areas of high pollution. More recently, MTBE has beenlinked to water pollution incidents and is beingphased out in favour of ethanol in many areas.

Metric to (to e)A metric ton is 2,204.62 pounds.

MibelAn acronym for Mercado Iberico de

Electricidad, the joint Spanish-Portugueseelectricity market that came into effect in 2005and allows participants to buy and sell power on either side of the Spain/Portugal border tocreate a pan-Iberian market with more than 28million business and domestic customers.

Middle distillatesOil products in the boiling range of between160° and 360° Celsius – i.e., between gasoline

and heavy fuel oil. These include gasoil, dieseland jet fuel (kerosene).

Mi eapolis Grai Excha geEstablished in 1881 as the Minneapolis Chamber of Commerce. Became the Minneapolis GrainExchange (MGE) in 1947. in addition totrading wheat and shrimp futures contracts, on

September 14, 1998, MGE launched its twin-cities generation region electricity futures andoptions contracts. It is the first futures exchangeto list electricity futures with an upper USMidwest delivery point. It is also the first to listoff-peak electricity futures and options contracts.

MmBtuMillions of British thermal units.

Mmsc pdMillions of cubic feet of gas per day.

Model master powerPurchase and sale agreement.H see also master agreement

Mome ts [o a statistical distributio ]The shape of any distribution can be describedby its various ’moments’. The first four moments

are:● The mean [see Mean], which indicates the

central tendency of a distribution.● The second moment is the variance, which

indicates the width or deviation.● The third moment is the skewness, which

indicates any asymmetric ‘leaning’ to either leftor right.

● The fourth moment is the Kurtosis, whichindicates the degree of central ‘peakedness’ or,

equivalently, the ‘fatness’ of the outer tails.





Mo te Carlo simulatioA method of pricing derivatives by simulatingthe evolution of the underlying variable(or variables) many times over. The averageoutcome of the simulation is an approximation

of the derivative’s value. Monte Carlo is usefulin the valuation of complex derivatives for which exact analytical solutions have not beenfound, but it can be very computationallyintensive. Monte Carlo simulation can also beapplied to a portfolio of instruments, rather thana single instrument, to estimate the value-at-riskof that portfolio.

Most- avoured atio clause

Originally a provision of international treatiesproviding that one or both of the parties tothe treaty would be granted the same termsas that of the most favourable terms providedany other country, currently or in the future,for some stipulated aspect such as tariffs. Nowalso a feature used in commercial contractsguaranteeing the recipient the best price or terms offered to any other counterparty.

Movi g averageThe average of commodity prices constructedfor a period as short as a few days or as long asseveral years, which shows trends for the latestinterval. For example, a 30-day moving averageincludes yesterday’s figures; tomorrow, the sameaverage will include today’s figures and will nolonger show those for the earliest date includedin yesterday’s average. Every day it recordsfigures for the latest day and drops those for the

earliest day.

Movi g strike optioAny option whose strike is reset over time.

MTBEH see methyl tertiary butyl ether

MtpaAn acronym for metric tonnes per annum,which is a typical measurement unit in liquefiednatural gas markets for production and facilitycapacity.

Multi- actor modelAny model in which there are two or moreuncertain parameters in the option price (one-factor models incorporate only one cause of uncertainty: the future price).

Such models can be more realistic than one-factor models, particularly in modelling complexvariables, such as interest rates. Other problems,such as modelling spread options, automatically

require a multi-factor model.

Multi- actor optioAny option, such as a spread option, whosepayout is linked to the performance of morethan one asset. Its value is usually stronglydependent on the correlation betweenunderlying assets.

Multilateral etti g

An arrangement between a number of parties,in which each pays into a clearing house for net obligations due to other parties. Multilateralnetting is a way of reducing credit risk.H see also bilateral netting, netting

Mutual o set systemA margining system for derivatives exchanges, inwhich positions on different exchanges can beoffset with each other. If a participant has a long

position on one exchange but a short positionon another in a fungible (compatible) contract,he can reduce (or eliminate) margin payments onone exchange because overall exposure has beenreduced by netting over the two exchanges.

MWMegawatt (1,000 kilowatts).





Nnaked optioAn option bought or sold without an offsettingposition in the underlying.H see also covered option

naked swapA swap position without a corresponding assetor liability.

naphtha

A refined product, between jet and gasolinein specific gravity, which is used as a feedstockfor the petrochemicals industry – such as for ethylene manufacture or aromatics production

– and as a refinery feedstock for reforming.Comprises material in the 30°–210° Celsiusdistillation range or part of this range.

natio al allocatio pla (nAP)A plan to establish the emissions target for the

covered sectors, as well as deciding how thistarget is divided among the various installationscovered by the system. Article 9 of the EmissionsTrading Directive established that each member state periodically has to develop such a nationalallocation plan.

natio al bala ci g poi t (nBP)The national balancing point, commonly referredto as the NBP, is a virtual trading location for

the sale and purchase of UK natural gas. It is themost liquid gas trading point in Europe. Gas atthe NBP trades in pence per therm.

natio al Electricity CodeThe National Electricity Code contains therules for the running of the Australian wholesalenational electricity market. It sets out theobjectives of the market and the rights andresponsibilities of market participants.

natio al Electricity Code Admi istratorMade up of the five participating jurisdictionsof the Australian national electricity market(NEM). The aim of the organisation is to promotethe effectiveness, efficiency and equity of the NEM

to push the market towards more competition andmarket-orientated outcomes in order to deliver aviable market that benefits customers.

natio al electricity marketThe market for the wholesale supply andpurchase of electricity in the Australian statesand territories of Australian Capital Territory,New South Wales, Queensland, SouthAustralia and Victoria, together with the

transmission and distribution networks in thosestates and territories.

natio al Electricity Market Ma ageme tCompa y (nemmco)In Australia, the organisation responsible for theadministration and operation of the wholesalenational electricity market in accordance withthe National Electricity Code. Nemmco’s aimis to provide an effective infrastructure for the

efficient operation of the Australian wholesalenational electricity market.

natio al Grid Tra scoAn international energy delivery business, whoseprincipal activities are in the regulated electricityand gas industries. It owns and operates thehigh-voltage electricity transmission networkin England and Wales and the UK’s natural gastransportation system. In July 2005 its shareholders

agreed to change its name to National Grid plc.

natio al tra smissio system (nTS)The UK high-pressure pipeline system, ownedby National Grid Transco, used to transportgas between terminals, storage facilities, largeconsumers and regional sites. When the gasleaves the NTS at an offtake, it goes through aseries of pressure-reducing tiers before it reachesthe consumer.





natural gasGas consisting mainly of methane and ethanethat occurs naturally in the earth’s crust. It isoften found in association with crude oil, whenit is called associated gas. Futures and options

contracts are traded on Nymex, InternationalPetroleum Exchange and Kansas City Board of Trade.

natural gas liquids (nGLs)Liquids produced along with natural gas. Theyconsist mainly of propane, butane, naturalgasoline and condensate.

natural hedge

A natural hedge is the reduction in risk thatcan arise from an institution’s normal operatingprocedures. A company with significant salesin one country holds a natural hedge on itscurrency risk if it also generates expenses inthat currency. For example, an oil producer with refining operations in the US is (partially)naturally hedged against the cost of dollar-denominated crude oil. While a company canalter its operational behaviour to take advantage

of a natural hedge, such hedges are less flexiblethan financial hedges.

nBPH see national balancing point

nemmcoH see National Electricity Market Management Company

nercH

see North American Electric Reliability Corporation

netCo ect Germa yNetConnect Germany is a joint companyestablished 2008 by bayernets GmbH and E.ONGastransport for the merged H-gas market areain Germany. The company’s business activities,

which include balancing group management,operation of the virtual trading point and theonline provision of information including billingand control energy data, are geared towardsserving network operators and shippers alike.www.net-connect-germany.de

net positioThe difference between the entity’s open longcontracts and open short positions in any one

commodity.

net prese t valueA technique for assessing the worth of futurepayments by looking at the present value of those future cash flows discounted at today’s costof capital.

netaH see new electricity trading arrangements

netback A provision in a physical power contract thatallows the bearer to net a debt position withone counterparty by offsetting it with a creditposition with another counterparty.

netback priceA pricing assessment or pricing formula basedon the effective price to the producer or seller

at a specific location or defined point. For example, liquefied natural gas netback prices maybe determined by the market natural gas priceat market destinations less the cost of pipelinetransportation, regasification, waterborne shippingand liquefaction. Crude oil may be priced on themarket value of its refined products, or naturalgas priced based on the natural gas market priceless the cost for delivering from the definedpoint to the market location.





netti gAn agreement that offsets the value of contractsby creating a single net exposure betweencounterparties.H see also bilateral netting, multilateral netting

network code(UK) the rules governing relations betweenNational Grid Transco, as operator of thenational transmission system, and shippers whouse the system.

newcastle coalTypically, Newcastle thermal coal prices astraded for Australia’s Newcastle port in New

South Wales, which is the world’s largest coalexport harbour.

new electricity tradi g arra geme ts (neta)Neta is a system of bilateral trading betweengenerators, suppliers and consumers on the UKmarket, the aim of which is to reduce wholesaleelectricity prices.H see also Betta

new gas tradi g arra geme ts (nGTA)The new gas trading arrangements wereintroduced in the UK in October 1999 inan attempt to improve the efficiency of thebalancing system. The arrangements consist of the on-the-day commodity market, auctionsof entry capacity and improved incentives for shippers to balance their own positions.

new York Merca tile Excha ge (nymex)US futures exchange, consisting of two divisions:the Nymex division and the Comex division.Along with metals futures and options, theexchange offers trading for energy futures

and options in crude oil, heating oil, gasoline,natural gas and electricity, as well as propanefutures and options on the crude oil/gasolineand crude oil/heating oil crack spreads. InAugust 2008, Nymex Holdings, the parentcompany of Nymex was acquired by CMEGroup. The exchange also operates the NymexClearPort ® Services for clearing trades, as wellas the Nymex ACCESS ® system for after-hourstrading when the open-outcry trading floor is

not open.www.nymex.com

nGTAH see new gas trading arrangements

nitroge oxides (nO x)A gas produced by burning fossil fuels in power plants or automobile engines. Nitrogen oxidesare pollutants that contribute to the formation

of smog. A nitrogen oxide allowance tradingmarket exists across 11 US states under the US Clean Air Act .H see also sulphur oxides

nomi atioThe notification to put into effect a contractor part of a contract. For example, a gas flownomination from a shipper to advise thepipeline owner of the amount of gas it wishes to

transport or hold in storage on a given day.

nomi atio deadli es(US) the deadline for nominations for gassupply, transportation and storage volumesgiven to the pipeline owner for a full monthin the last week of the previous month. Thishappens around the time of the expiry of thefutures contract on Nymex; the actual day variesbetween pipelines.





no -attai me t areaA US geographic area in which air quality isworse than that allowed by the US federal air pollution standards.

no - irm serviceElectricity transmission service offered tocustomers that anticipates possible interruptionof deliveries.H see firm service, interruptible service

no -jurisdictio al gas operatio s(US) gas sales and transportation outside FederalEnergy Regulatory Commission regulations.

nOPRH see notice of proposed rulemaking

nord PoolNordic electric power exchange that providesmarket places for trading in physical and financialcontracts in the Nordic countries (Finland,Sweden, Denmark, Iceland and Norway), whichlisted the world’s first exchange-traded electricityfutures contract in October 1995. It now operates

the world’s largest power derivatives exchange andalso provides a carbon market for trading contractson emission allowances and carbon credits. In2002, Nord Pool’s physical market was organisedinto a separate company, Nord Pool Spot AS.

normal DistributioA continuous probability distribution whoseprobability density function has a ‘bell’ shape.A normal distribution is symmetric, and has

zero skewness. A normal distribution is fullydescribed with two parameters: its mean andstandard deviation.

north America Electric ReliabilityCorporatio (nerc)A group formed in 1968 by US utilities, after blackouts struck the east coast, to promote thereliability and adequacy of bulk power supply inthe electricity utility systems of North America.

northeast PowerCo-ordi ati g Cou cil (nPCC)A North American Electric Reliability Councilwithin the Eastern Interconnection.

notice o proposed rulemaki g (nOPR)A Federal Energy Regulatory Commissiondocument outlining proposed rules andsoliciting comments from affected parties.

notio alThe underlying principal value of either an exchange-traded or over-the-counter transaction, referred to as the notional value.

notio al path(Gas) usually the shortest route along which gaswould travel from entry point to exit point.

novatioThe substitution of a new contract for anold one or the substitution of one party in acontract with another party.

nO x

H see nitrogen oxide

nTSH see national transmission system

nymexH see New York Mercantile Exchange





OOasis(US) open-access same-time information system.Electronic information system that the FederalEnergy Regulatory Commission requires alltransmission operators to create or participatein to provide transmission customers withnon-discriminatory information about availablecapacity, prices and other information.

OCMH see on-the-day commodity market

OcoH see one cancels the other

Octa eAn octane number or octane rating is a valueused to indicate the resistance of a motor fuelto knock (ping). Octane numbers are basedon a scale on which isooctane is 100 (minimal

knock) and heptane is 0 (bad knock). For example, a gasoline with an octane number of 92 has the same knock as a mixture of 92%isooctane and 8% heptane.

Odds (betti g)As typically used in wagering outcomes, theodds of success/winning are expressed inthe form ‘r:s’ (‘r to s’) and correspond to theprobability of succeeding/winning [P=s/(r+s)].

Therefore, given a probability P, the odds of succeeding/winning are (1/P)-1: 1.

Odora t(Gas) mercaptan added to natural gas to give itsmell so that gas escapes (leaks) can be detected.

O -peak Times of relatively low energy demand, typicallynights and weekends.

O -speci icatioOil product or gas that does not meetspecification. Refers either to contractspecification or those benchmark specificationsgenerally used in the physical market.

O setti gMatching two financial transactions on aregulated exchange with the same delivery,time and volume against one another to reducefinancial obligations.

O take(UK) gas removed from the nationaltransmission system at reduced pressure.

Oil productsH see refined products

Oil ta ker reight derivativesOil tanker freight derivatives are over-the-counter trades bought and sold in terms of worldscale prices and settled against 11 keytanker routes listed on the London-based BalticExchange. The worldscale system (worldwide

tanker nominal freight scale) is a system of pricing tanker freight as a percentage of expected freight rates as published by the non-profit WorldScale Association in a table listingthe price in dollars per tonne of oil for standardroutes, and there is a flat rate for each route.Rates listed – flat rates – are termed WS100,which is the amount needed for a standardvessel to make a profit. Similarly, WS175 means175% of the published rate.

OmelCompañía Operadora del Mercado Español deElectricidad (Omel) has been responsible for the organisation and regulation of the Spanishwholesale electricity pool since its launchin 1998.





O -board regasi icatioTechnologies and capabilities on liquefied naturalgas (LNG) vessels for vaporisation of LNG after transport to its destination, in order to directlydeliver natural gas to downstream markets.

O -the-day commodity market (OCM)Part of the new gas trading arrangementsintroduced in the UK in October 1999, theOCM is a screen-based, within-day gas marketthat allows shippers to fine-tune their daily gaspositions.

O e ca cels the otherWhere a broker is given two alternative orders.

As soon as one is executed, the other order iscancelled.

O e day i 10 yearsReliability standard often applied to electricitygeneration systems. Under this standard, acombination of forced and planned outageswould leave the system without enoughgeneration to meet load on a probabilistic basison only one day in every 10 years.

O e- actor modelA model or description of a system wherethe model incorporates only one variable, or uncertainty – the future price.

O e i twe ty (1 i 20)Peak-day demand – the highest gas demandexpected on any given day over a 20-year period. The UK gas network is designed to cope

with this calculated level of demand.

O e i i ty (1 i 50)The highest gas demand expected in a single

year out of 50 years. The UK gas pipelinesystem is designed to cope with this calculatedlevel of demand.

O e-touch optioH see digital option

O -peak Refers to hours of the business day whendemand is at its peak. In the US, physicalmarket, on-peak definitions vary by NorthAmerican Electric Reliability Councils.

OpecVienna-based Organisation of PetroleumExporting Countries. Opec members are:Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,Nigeria, Qatar, Saudi Arabia, Venezuela andUnited Arab Emirates.

Opec member states have two regular meetingsa year, but may call further meetings if crude oilprices are significantly outside of Opec’s targeted

levels. At the meetings, they may review bothindividual and group production quotas. AlthoughOpec is a dominant force in international oilmarkets, growth in world demand for oil has attimes pushed production to near-capacity limits,seemingly reducing Opec’s ability to contain oilprices below the cartel’s announced target range,which is intended to sustain world economicgrowth and limit development of substituteenergy sources. This has been evident with the

surge in crude oil prices in 2008, before pricescollapsed due to the global economic downturn.

Ope -access tra smissioThe provision of electricity transmission to thirdparties on a non-discriminatory basis.

Ope -access tra sportatioThe transportation of gas or electricity for thirdparties on a non-discriminatory basis.

Ope i terestThe volume of contracts, long or short, open onan exchange-traded contract.

Ope outcryTrading by means of shouting bids and offersacross a trading floor. This traditional methodof trading is increasingly being replaced byelectronic trading.





Operatio al risk The risk that a firm’s internal practices, policiesand systems are not adequate to prevent aloss being incurred, either because of marketconditions or operational difficulties. Such

deficiencies may arise from failure to measure or report risk correctly, or from a lack of controlsover trading staff. Although operational risk isharder to define precisely than market or creditrisk, it is considered by many to have been acontributor to some of the highly publicisedlosses of recent years.

OptioA contract that gives the purchaser the right, but

not the obligation, to buy or sell the underlyingcommodity at a certain price (the exercise, or strike, price) on or before an agreed date.H see also exotic option, vanilla option

Optio o utureH see futures option

Optio replicatioH see replication

Optio premiumThe amount that an option buyer pays to theseller.

OTCH see over-the-counter

OutagesA planned outage is the shutdown of a

generating unit, transmission line, or other facility for inspection and maintenance, inaccordance with an advance schedule.

A forced outage is the unplanned loss of service of a generating unit, transmission line or other facility for purposes other than inspectionand maintenance.

Out-o -the-mo eyAn option with no intrinsic value. For calls, anoption with an exercise price above the marketprice of the underlying future. For puts, anoption with an exercise price below the futures

price.H see also in-the-money

OutliersProbabilistically remote events that are oftenviewed as statistically independent as well.Various techniques can test if actual data differsin a statistically significant manner from thebenchmark or normal distribution.

Over-the-cou ter (OTC)An over-the-counter deal is a customisedderivatives contract usually arranged withan intermediary such as a major bank or thetrading wing of an energy major, as opposed toa standardised derivatives contract traded on anexchange. Swaps are the commonest form of OTC instrument.

Ow -use gas

The gas taken from a pipeline to drivecompressors or to preheat gas.

Oxyge ateA gasoline fuel additive containing hydrogen,carbon and oxygen. The oxygen contentpromotes more complete combustion of gasoline, which reduces exhaust emissions of carbon monoxide.





PPaci ic BasiThe geographical region of the land mass,including islands, bordering the Pacific Ocean.As applied typically in liquefied natural gas(LNG) trading, the Pacific Basin LNG marketconsists of present and future producers:Abu Dhabi, Australia, Brunei, Indonesia, Iran,Malaysia, Oman, Papua New Guinea, Peru,Qatar, Russia, the US and Yemen; and currentand future LNG consumers: China, India,

Indonesia, Japan, Pakistan, Mexico’s West Coast,Singapore, South Korea, Taiwan, Thailand andthe US West Coast.

Note that a Pacific Basin LNG producer might not be physically located in the PacificBasin itself.H see also Atlantic Basin

PaddH see API regions

Palo VerdeSite of the high-voltage switchyard in Arizonalinking the utilities of the southwest US withthose of California.

Paper marketA market for contracts where delivery is settledin cash, rather than by delivery of the physicalproduct on which the contract is based.

ParametricA term used to classify curves for which thepath is described by a mathematical functionrather than a set of co-ordinates.

Path-depe de t optioA path-dependent option has a payoutdependent on the price history of theunderlying over all or part of the life of theoption. The most common form of option

in over-the-counter energy risk management(the Asian option) is a path-dependent option,as are lookback and barrier options.

Payo diagramA graph of a transaction’s payoff as a function of the value of the underlying at expiration.

Pay-later optioAny option for which a premium is not paid

at the time the option is purchased. Paymentof the premium may be deferred until expiry,when it may be deducted from any payout.

Peak loadPeriods during the day when energyconsumption is highest. The introduction of additional gas or electricity to cover this demandis known as peak shaving.

Peak shavi gDuring times of peak demand, supplies fromsources other than normal suppliers are used toreduce demand on the system – for example,storage from a salt cavern.

Peaki g ge eratioElectricity-generating equipment normallyoperated to serve loads only during annualpeak loads or during system emergencies. Often

combustion turbines.

PEG (Fra ce)An acronym for points d’échange de gaz, whichare trading hubs for the wholesale natural gasmarkets and are virtual points in each balancingzone.





Per orma ce letter o creditLetter of credit used to guarantee performanceunder a contract.H see also letter of credit

PetrochemicalsChemicals produced from hydrocarbons used,for example, in the manufacturing of productssuch as plastics.

PhelixThe Phelix or Physical Electricity Index is thereference price for power in Germany and largeparts of central Europe. It is calculated daily as theaverage price for base load (Phelix Day Base) and

peak load (Phelix Day Peak) electricity traded onthe European Energy Exchange Spot Market.

Phelix baseHourly weighted average index price per dayfor the hours 1–24

Phelix peak Hourly weighted average index price for thehours 9–20 (8:00am–8:00pm)

PhysicalSynonymous with wet. Crude oil or oil productwith a precise loading window attached to it.For crude, the loading window is normally threeto five days.

Pipeli e imbala ceCompanies that transport and use storagefacilities in a pipeline system are obliged by the

pipeline operator to keep their input and offtakevolumes in balance (within tolerance limits). If there is a positive or negative pipeline imbalance,the transporting firms are heavily financiallypenalised by the pipeline.

Pipeli e i terco ectWhere large pipelines meet and gas can beswitched from one pipeline to another, such asHenry Hub in the US.

PJMThe PJM Interconnection electricity marketfor Delaware, Illinois, Indiana, Kentucky,Maryland, Michigan, New Jersey, Ohio,Pennsylvania, Tennessee, Virginia, West Virginia,

and Washington, DC. The Nymex trades a PJMElectricity Futures – Monthly Contract.

Platt’sEnergy price information provider, specialisingin news, prices, data, analysis, analytical tools,research and consultancy services.

Polish Power Excha geWarsaw-based electricity exchange operating a

day-ahead spot market for companies tradingon the Polish power market. The Polish Power Exchange was launched in July 2000.

Pollutio creditsMonitored by the US Environmental ProtectionAgency, US-based companies have a limit onthe various types of pollution they can produce.If the actual pollution they produce is belowthis level, they have pollution credits they can

trade. This process is known as emissions trading.An example of a US-based emissions market isSO 2 allowances trading.

Pooli g poi tA switching and interconnection facility in aphysical location through which counterpartiesconnect.

Port olio

The collective term for an owner’s holdings of assets, liabilities, transactions and/or trades.

Port olio optimisatioUse of a linear or quadratic model to structurea portfolio to maximise or minimise yield andlong-term rate sensitivity, or to increase or reduce exposure to certain industries, marketsectors or macro-economic factors, subject topre-specified constraints.





Postage stamp rateRate structure in which each customer in agiven class is charged the same rate for acommodity as every other customer, regardlessof the cost of serving different customers in the

same class. Also refers to rates set for allcustomers in a given territory, regardless of their distance from the point where the given serviceor commodity is supplied.

PowerAnother word for electricity.

Power excha geAn entity set up to provide an efficient,

competitive trading arena, open on a non-discriminatory basis to all electricity suppliers,which meets the loads of all exchange customersat efficient prices.

Power marketer(US) wholesale power entity that hasregistered with the Federal Energy RegulatoryCommission to trade wholesale power withother power marketers and public entities at

market-based prices. Power marketing companiesinclude investor-owned, utility-affiliatedcompanies; natural gas marketing companies;financial intermediaries; independent power producers; and entrepreneurs. Typically power marketers do not own generating facilities.H see also electricity utility

Power extA Paris-based company operating a European

energy exchange that provides an electronicmarket for the trading of energy contractsin Europe. It was created in 2001 with theopening of the European electricity market, andencompasses a network of over 75 Europeanmembers, including energy producers suchas RWE, EDF, Gaz de France, Electrabel andEndesa, as well as end-users, banks, brokers,traders and retailers.www.powernext.fr

Power poolA system of trading wholesale electricity thatdetermines which generating sets or plantsare called to meet demand for power at anyparticular time and sets the price of power for

that period. Pools are deemed necessary by their proponents because electricity generally cannotbe stored easily and demand has to be metthrough simultaneous production.

Precipitatio swapsInstruments linked to the degree of rainfall or snowfall. The party taking out a precipitationswap would receive payment for precipitationabove a certain level.

Pre-FEED co tractsReferring to pre-Front End Engineering andDesign, for pre-project planning.

PremiumH see option

Premium-reductio deviceA strategy that aims to reduce the cost of an

option or other derivative. There are three mainways to achieve this: selling a second derivativeto reduce the overall cost of a strategy; limitingthe payout profile of the derivative; or acceptingpayments below market rates.

Pre-scheduleTo schedule for delivery of physical power on aday-ahead basis.

Price capPrice control over electricity or gas prices.

Price risk Potential fluctuations in the price of theunderlying energy commodity.

Primary marketA market where new securities are traded.







Pri tThe last traded price at any given time for agiven futures contract.

Pro it-at-risk (PaR)

Designed to help energy companies developstrategies to protect their earnings. PaR extendsquantitative market risk management beyondspeculative trading operations, to cover allphysical energy activities.

Project i a ci gInvolves a corporate sponsor investing in andowning a single-purpose industrial asset – usually with a limited life – through a legally

independent entity financed withnon-recourse debt.

Prompt barrelPhysical crude for immediate delivery.

Prompt mo thThe first month forward for which a futurescontract is being traded. Also knownas the front month.

Proprietary tradi gEntering into a standardised contract to take aview, capture market price changes or put capitalat risk. Prop trading is conducted through tradesin a bank or energy firm’s own account rather than with customer capital.

Public Utilities Commissio (PUC)Regulates intrastate electricity transactions and

retail electricity service. Although the variousPUCs work independently of the FederalEnergy Regulatory Commission (Ferc),they must still abide by Ferc guidelines, asestablished by various federal statutes. Theyare also commonly known as Public ServiceCommissions or PSCs.

Public Utility Holdi g Compa y Act (PUHCA)US federal act of 1935 that grants the Securitiesand Exchange Commission, a US financialregulator, the power to prevent electricpublic utility holding companies from having

generation assets in two areas of the US that arenot geographically adjoining.

In August 2005, the Energy Policy Act of 2005 repealed PUHCA, effective in February 2006.It was replaced by a much weaker set of lawscalled the Public Utility Holding Company Act of 2005 .

Public Utility Regulatory Policies Act (Purpa)US federal act passed in 1978 that requires

electricity utilities to buy wholesale power fromcertain types of independent power producersthat produce electricity with renewableresources. Although still important, open accessto electric power transportation has reduced thesignificance of Purpa.

PUHCAH see Public Utility Holding Company Act

Purchased capacityThe amount of electricity and capacity availablefor purchase from outside a utility system.

PurpaH see Public Utility Regulatory Policies Act

Put-call parityPut-call parity states that the payout profile of aportfolio containing an asset plus a put option

is identical to that of a portfolio containing acall option of the same strike on that same asset(with the remainder of the money earning therisk-free rate of return). This can be used toarbitrage a position.



Put optioAn option giving the buyer, or holder, the right,but not the obligation, to sell a futures contractat a specific price within a specific periodof time in exchange for a one-off premium

payment. It obligates the seller, or writer, of theoption to buy the underlying futures contractat the designated price, should the option beexercised at that price.H see also call option

Put spreadAn options position comprised of the purchaseof a put option at one level and the sale of aput option at some lower level. The premium

received by selling one option reduces the costof buying the other, but participation is limitedif the underlying goes down.H see also bear spread, bull spread, call spread, vertical

spread

QQuali yi g acility (QF)(US) a generator or small power producer that meets certain ownership, operating, andefficiency criteria established by the FederalEnergy Regulatory Commission (Ferc) and thathas filed with Ferc for QF status or has self-certified. QFs are physical generating facilities.

Qua tA quantitative analyst who applies mathematical

and statistical techniques.

Qua tileA notion from probability. Generally, the specificvalue of a variable that divides the distributioninto two parts, those values greater than thequantile value and those values that are less. For instance, p percent of the values are less than the

pth quantile.

Qua to productAn asset or liability denominated in a currencyother than that in which it is usually traded. Sincethe combined exposure to the asset and to theforeign exchange rate will change continuously,the structures must be dynamically hedged.H see also delta hedging, guaranteed exchange rate

option, integrated hedge

Quartile

Of the three quartiles, the first or lower quartile of a list is a number (not necessarily a number in thelist) such that at least one-quarter of the numbersin the list are no larger than it, and at least three-quarters of the numbers in the list are no smaller than it. The second quartile is the median. Thethird or upper quartile is a number such that atleast three-quarters of the entries in the list areno larger than it, and at least one-quarter of thenumbers in the list are no smaller than it.





R rThe correlation co-efficient, which provides anindex of the degree to which paired measuresco-vary in a linear fashion. It is the square rootof the co-efficient of determination, describedbelow. The correlation co-efficient can range invalue between -1 and 1.

r2

The co-efficient of determination, which varies

between 0 and 1. It is loosely interpreted as‘the proportion of variance in y which can beexplained by x’.

It is the percentage of the total sum of squaresof the dependent variable that the independentvariable explains, after one optimises theintercept and the slope co-efficient of theindependent variable. In other words, r 2 isthe percentage by which volatility of a linear combination of the dependent and independent

variables and a constant declines after choosingthe optimal intercept and slope co-efficient.

Rai bow optioAn option in which the underlying factorsare referred to as colours. Hence, a two-factor option, such as a spread option, would be a two-colour rainbow option.

Ra ge bi ary

A range binary pays out if a specified spot ratetrades within a given range over a specifiedperiod of time, in exchange for payment of apremium. The lower the volatility of the spotrate, the more likely the buyer is to benefit.H see corridor option, trigger condition

Ra ge orwardH see cylinder

RarocH see risk-adjusted returns on capital

Rati g triggerAny number of contractual clauses that call for

some change in the counterparty relationship,given a change in the debt rating.

Rati gs cli The point at which a company may be spirallingtowards further rating downgrades once a ratingtrigger has been initiated.

Ratio spreadA ratio spread involves buying different

amounts of similar options with differing strikeprices. The purchase of an in-the-moneyoption is financed by the selling of out-of-the-money options. Conversely, the out-of-the-money options are financed by selling in-the-money options.

Real optioA non-traded asset or liability whose profit-and-loss sensitivity to a commodity price or

other market variable mimics that of an optioncontract. Extracting oil from an oilfield is aclassic example of a real option. If oil pricesremain low, the field can be left dormant at noadditional cost. If oil prices rise sufficiently, theprofits earned on the sale of the oil will morethan outweigh the costs of extraction.

Real-time prici gUp-to-date prices for commodities, moving

with every purchase or sale.

RebateA rebate is paid to the holder of a derivative,such as a barrier option, if the instrument isknocked out or is never activated.





RedExchange notation for contracts trading beyondthe next 12 months. For example, in November 2005, ‘red December’ refers to December 2006.

Re ere ce priceIn an energy derivatives contract, the marketprice reference based on a particular locationor specified grade or blend of the commodity,which is used for settlement of the contract.

Re ere ce temperatureA typical index variable in weather derivativetransactions.

Re i ed productsThe products derived from crude oil that hasbeen processed in a refinery.

Re i eryA plant where crude oil is separated intovarious components, such as usable products or feedstocks.

Re ormi g margi s

The uplift obtained – usually expressed incents per barrel – from reforming naphtha intogasoline.

Re ormulated gasoli e (RFG)A cleaner form of gasoline, providing significantreductions in emissions of ozone-forming andtoxic air pollutants.

Regasi icatioThe vaporisation of liquefied natural gas (LNG)after transport to its destination, in order todirectly deliver natural gas to downstreammarkets. Regasification traditionally has been

done by the LNG ships offloading their cargoas liquid into tanks at on-shore terminals,which then convert it to natural gas, however,the technology now exists for regasification onboard specially designed vessels such as EnergyBridge LNG ships so that natural gas can bedelivered directly into the natural gas pipelines.Similarly, dockside regasification can be done atspecially equipped seaports such at the GasPortnow operational in the UK.

Regio al tra smissio orga isatio s (RTOs)Organisations to administer the electricitytransmission grid on a regional basis throughoutNorth America (including Canada). Creation of RTOs was encouraged by the Federal EnergyRegulatory Commission (Ferc) under the termsof Ferc order 2000.

Regressio a alysis

An analysis to relate one or more dependentvariables to one or more independent variables.

Rei vestme t risk The risk that an asset manager will be unable tomatch the yield from an interest rate instrument(such as a swap or bond) when reinvesting itscoupon payments and principal repayments.

Relative per orma ce optio

An option giving the buyer the right to thereturn from a single asset from a basket of two or more, either as a cash settlement or byphysical delivery. The asset selected may bethe best- or worst-performing of the assets inthe basket, as measured against a common or independent benchmark.





Re ewable e ergyAny form of energy that is replaced by nature,with or without human assistance. Commonforms of renewable energy include wind, solar,geothermal and tidal energy.

Replaceme t costThe replacement cost of a financial instrumentis its current market value. In credit risk terms,it is the cost of replacing a given contract if thecounterparty defaults.

ReplicatioTo replicate the payout of an option by buyingor selling other instruments. In the case of

dynamic replication, this involves dynamicallybuying or selling the underlying (or futures,where transaction costs are cheaper) inproportion to an option’s delta. In the case of static replication, the option is hedged with abasket of standard options whose compositiondoes not change with time.

Repo agreeme tTo buy (or sell) a security while at the same

time agreeing to sell (or buy) the samesecurity at a predetermined future date. Theprice of the second transaction determines therepo rate, the interest rate earned on the securitybetween the two transactions. In a reverse repo,the buyer sells cash in exchange for a security.

Reserve margiThe amount of reserve capacity set bythe North American Electric Reliability

Corporation that needs to be on the accountingbooks of an electricity utility. It has to have acertain specified amount of capacity above theutility’s peak requirements, which are calculatedusing probabilistic models.

ReservesBack-up power that must be made availableat all times to meet fluctuations in systemdemand within a given range, to ensure smooth,continuous delivery of energy at proper voltage

and current levels.

Residual uel oilHeavy fuel oil produced from the residue in thefractional distillation process rather than fromthe distilled fractions.

Retail wheeli gThe use of gas or electricity transmissionfacilities to “wheel in” energy from various

suppliers to local customers.

ReutersThompson Reuters is a leading source of newsand information for businesses and professionals.www.reuters.com

Reverse crack The sale of crude oil against the purchase of the refined products. In futures trading, it is the

simultaneous sale of crude oil futures versus thepurchase of heating oil and gasoline futures.

ReversalTo take advantage of mispriced options bycreating a synthetic long futures position andhedging it by selling futures contracts against it.

A trader may buy an undervalued call, at thesame time selling a fairly valued put andbuying a futures contract. The same strategy

could be applied if the put was undervalued.The ability to undertake this riskless arbitragerelies on put-call parity.H see also box, conversion

RHOA measure of an option’s sensitivity to a changein interest rates; this will affect the future price of the option and the time value of the premium. Itsimpact increases with the maturity of the option.





Risk-adjusted retur o capital (Raroc)A technique of risk analysis that assumes ahigher return for a riskier project than a lessrisky one.

Risk capitalFunds at risk in a company or trading business.

Risk ma ageme tControl and limitation of the risks facedby an organisation due to its exposure tochanges in financial market variables, such asforeign exchange and interest rates, equityand commodity prices or counterpartycreditworthiness. It may be necessary because

of the financial impact of an adverse move inthe market variable (market risk); because theorganisation is ill-prepared to respond to such amove (operational risk); because a counterpartydefaults (credit risk); or because a specificcontract is not enforceable (legal risk). Marketrisks are usually managed by hedging withfinancial instruments, although a firm may alsoreduce risk by adjusting its business practices(see natural hedge). While financial derivatives

lend themselves to this purpose, risk can also bereduced through judicious use of the underlyingassets – for example, by diversifying portfolios.

Risk measureme tAssessment of a firm’s exposure to risk.

Risk premiumA payment that factors in the inherent risk of a trade.

Risk policies a d proceduresThe fundamental control documents in mostcorporate risk management programmes.

Roll-lock swapA swap that enables futures traders to lock-in their roll-over costs by paying the averagedifference between near and far contracts.

Roll-over clauseA clause in a contract that allows the contractto be extended beyond the initially agreedtermination date.

Roll-over risk The risk that a derivative hedge position willbe at a loss at expiration, necessitating a cashpayment when the expiring hedge is replacedwith a new one.

Rotterdam marketA term sometimes used to describe the oilmarket in northwest Europe. There is noRotterdam trading floor, as oil business is

transacted electronically, by telephone or onthe futures markets in New York, London or Singapore.

Rou d-trip tradeAn outlawed trade in which two counterpartiestrade the same asset at the same price toeffectively boost their trading volume figuresand artificially inflate revenues. Also known aswash trade.

RTOsH see regional transmission organisations





SSarba es-Oxley Act (SOX)US legislation enacted in response to theaccounting and corporate scandals of 2001– 2002, including Enron’s collapse. The Actwas named after Senator Paul Sarbanes andRepresentative Michael Oxley and is arrangedin 11 titles. Compliance with provisions of theAct is mandatory. The Sarbanes-Oxley Act of 2002 established the duties of a firm’s board of directors, as well as advising on auditing and

other business requirements.The Sarbanes-Oxley Act of 2002 is generally

considered the single most important pieceof legislation affecting corporate governance,financial disclosure, and public accounting sincethe US securities laws enacted in the 1930s.The Act is often referred to variously as SOX,S-O or SOA.

Sce ario pla i g

A methodology that attempts to build plausibleviews of a small number of different possiblefutures for an organisation operating inconditions of high uncertainty.

Scheduli g co-ordi atorAn entity certified by California’s independentsystem operator to provide schedules for electricity deliveries within the state’s market.

Seaso al suppliesSupplies of gas used for winter demand. Thisoften includes gas from storage systems.

Seaso alityAll commodity futures markets are affectedto some extent by an annual seasonal cycle or ‘seasonality’. This cycle of pattern refers to thetendency of market prices to move in a givendirection at certain times of the year.

Seco dary CDM marketThe secondary market that encompasses allsubsequent transactions following the primarysale within the Clean Development Mechanism.H See also Clean Development Mechanism.

SecuritisatioThe packaging of assets (normally debt of some description) into securities. These may behigher-yielding and more freely tradable thanthe unpackaged assets. Securitising productionrevenues has become increasingly popular among commodity producers over the pastfew years. Electricity utilities have also startedsecuritising their retail revenue.

Seller’s omi atio co tract(Gas) the seller nominates the amount of gasit expects to deliver in a range around theestimated daily contract quantity. The buyer is obliged to take or pay for the nominatedquantity on a daily basis.

SERCSERC Reliability Corporation – a North

American Electric Reliability Council withinthe Eastern Interconnection.

Settleme t risk The risk that arises when payments are notexchanged simultaneously. The simplestcase is when a bank makes a payment to acounterparty but will not be recompenseduntil some time later; the risk is that thecounterparty may default before making

the counterpayment. Settlement risk is mostpronounced in the foreign exchange markets,where payments in different currencies takeplace during normal business hours in their respective countries and can therefore be madeup to 18 hours apart, and where the volumeof payments makes it impossible to monitor receipts except on a delayed basis. This typeof risk afflicted counterparties of Germany’sBank Herstatt in 1974, which closed its doors





between receipt and payment on foreignexchange contracts. As a result, settlement risk issometimes called Herstatt risk.H see also credit risk

ShipperA company that transports gas along a pipelinesystem. Shippers need to be registered with thelocal regulatory body. In UK gas market terms, ashipper is a company that buys gas ‘at the beach’and pays Transco to transport the gas along thepipeline system.

ShortThe seller of a financial contract.

Short positioA position that increases in value if the valueof the underlying instrument or market pricedecreases in value.

Short toEqual to 0.9072 tonnes. A measure of weightused in the coal industry.

Shri kage1) gas losses in the transportation anddistribution systems.2) gas volume lost through the extractions of liquid gases and the removal of water and other impurities.

Shri kage allowa ceThe percentage of gas expected to be lostduring the transportation and distribution

of gas.

Si gapore Excha ge (SGX)The SGX was established in 1999 by the merger of the Stock Exchange of Singapore and theSingapore International Monetary Exchange.It is the Asia-Pacific’s first demutualised andintegrated securities and derivatives exchange.

SkewSkew is a measure of the asymmetry of adistribution. A perfectly symmetrical distributionhas zero skew, while a distribution with positive(or negative) skew is one where outliers above

(or below) the mean are more probable. Anexample is the distribution implied by thepresence of a volatility skew between out-of-the-money call and put options.

Sleevi gA transaction whereby two counterparties,which do not have credit with each other, aska third party that has credit with both to be amiddleman to facilitate a trade. This practice

achieved some notoriety in 1998, when itemerged that the collapsed US power marketer Power Company of America had been regularlysleeving forward electricity deals.

SMEsH see superconducting magnetic energy storage

SO2Sulphur dioxide.

SO2 allowa ce tradi gAllowance trading is the centrepiece of theUS Environmental Protection Agency’s acidrain programme. Allowances are the currencywith which compliance with SO 2 emissionrequirements is achieved. They authorise a unitwithin a utility or industrial source to emit oneUS ton of SO 2 during a given year or any year thereafter.

Utilities that can use high-sulphur coal – which commands a lower price per Britishthermal unit than low-sulphur coals – can buyan SO 2 allowance and bundle it with a high-sulphur coal purchase to produce more energy.

Sour crudeCrude oil containing a relatively highpercentage of sulphur by weight, typically morethan 0.5%.





Sour gasNatural gas with a high sulphur content, whichrequires treatment before use.

SOXH see Sarbanes-Oxley Act

SOxH see sulphur oxides

Spark spreadThe difference between the price of electricitysold by a generator and the price of the fuelused to generate it, adjusted for equivalent units.The spark spread can be expressed in dollars

per megawatt hour ($/MWh) or dollars per million British thermal units ($/mmBtu) or other applicable units. To express it in $/MWh,the spread is calculated by multiplying the priceof gas, for example (in $/mmBtu), by the heatrate (in Btu/kilowatt hour), dividing by 1,000and then subtracting the electricity price (in$/MWh). Also called a spark arbitrage.

Speci ic gravity

The ratio of the mass of a given volume of liquid at 60° Fahrenheit to the mass of an equalvolume of water at the same temperature. This isused to calculate the API gravity.

Speci ic risk Specific risk is the portion of a security’s marketrisk that is unique to that security. For example,the risk that an individual stock’s price may varybecause of its industrial sector rather than the

broader equity market.

SpeculatioThe opposite of hedging. The speculator holds no offsetting cash market position anddeliberately incurs price risk in order to reappotential rewards.

Spi i g reservesAny back-up energy production capacitythat can be made available to a transmissionsystem at 10 minutes’ notice and can operatecontinuously for at least two hours once it is

brought online.

Spot cargoA cargo that is available for immediate loading.

Spot marketIn the energy sector, the spot market is thephysical/cash crude, refined product, gas or electricity market. The market for immediatedelivery rather than future delivery.

Spot priceThe price of a security or commodity in thecash market.

Southwest Power Pool (SPP)A North American Electric Reliability Councilwithin the Eastern Interconnection.

SPRH see strategic petroleum reserve

SpreadThe difference between the bid and ask price.Liquid markets are characterised by narrow bid/ask spreads.

Spread optioAn option written on the differential between theprices of two commodities. Spread options may

be based on the price differences between pricesof the same commodity at two different locations(location spreads); prices of the same commodityat two different points in time (calendar spreads);prices of inputs to, and outputs from, a productionprocess (processing spreads); and prices of differentgrades of the same commodity (quality spreads).Nymex offers the only exchange-traded optionson energy spreads: the heating oil/crude oil andgasoline/crude oil crack spread options.







Sta dard deviatioStatistical measure of the degree to which anindividual value in a probability distributiontends to vary from the mean of the distribution.Indicates probability of a variable or price falling

within a certain band around the mean.

Sta dard Europea coal agreeme tThe standard European coal agreement isa physical contract for coal delivered free-on-board into the Amsterdam-Rotterdam-Antwerp area. It is traded in contracts (lots) of 5,000 tonnes for delivery and priced at 6,000kilocalories per kilogram.

Although it is primarily a physical contract,

counterparties have the option, where mutuallyagreed, to close out the position should neither party want to make or take delivery of the coal.

Sta dard market desigDesigned by the US Federal Energy RegulatoryCommission, in light of market manipulationof energy prices, to standardise all US wholesalepower markets.

Static replicatioH see dynamic replication

Stochastic processA stochastic process is one that can bedescribed by the evolution of some randomvariable over some parameter such as time.One example is geometric Brownian motion,which is commonly used to describe themovements of asset prices.

Stochastic volatilityThe Black-Scholes model of option pricingassumes stock prices follow geometric Brownianmotion with constant volatility and interest rates.But the assumption of constant volatility fails for real markets, prompting a number of attempts tomodel volatility as a stochastic process. The mostnotable of these is the Heath-Jarrow-Mortonframework.

Storage capacityThe amount of gas that can be stored to cover peak demand. The main types of storage (apartfrom pipeline storage) are:1) Liquefied natural gas – gas cooled until in

liquid form at -162° Celsius and stored ininsulated metal tanks.2) Salt cavities (caverns) – many cavities have beencreated underground by dissolving layers of salt.3) Aquifers (porous rocks).4) Depleted gas fields now converted intostorage facilities.

Storage gasGas kept in storage in order to balance supply

and demand over time.

Storage ma agerA company operating a storage facility wheregas can be stored during periods of low demandfor use in times of greater demand.

StraddleThe combination of a put and a call optionwith the same expiration date and strike price.

A buyer of a straddle hopes the volatility of theunderlying prices will increase, thereby creatingprofit opportunities.

Stra ded cost recoveryDuring the period of power deregulation inthe late 1990s and early 2000s, many electricityutilities in the US have tried to recover strandedcosts by pushing their state government toimpose a tariff charge on all the state’s electricity

consumers to pay for stranded costs. This processis known as stranded cost recovery.

Stra ded costsThe costs accumulated by electricity utilitiesthat have built expensive power plants andentered into high-priced power purchaseagreements, which are no longer commerciallyviable when competition forces prices downand reduces market share.





Stra gleAn options position consisting of the purchaseor sale of put and call options that have the sameexpiration, but different strike prices.

Strategic petroleum reserve (SPR)Stockpiles of crude oil owned and controlled bythe US government. The SPR exists to protectthe US from the effects of interruptions in thesupply of oil and can only be accessed by order of the US President. As of October 2008, the SPRconsisted of around 701 million barrels of oilstored in underground salt caverns along the coastof the Gulf of Mexico. In May 2008, the USCongress voted to temporarily suspend shipments

to the SPR.

Stress-testi gTo stress-test is to simulate an extreme marketevent and examine what happens to prices under the ‘stress’ of that behaviour.

Strike priceThe price at which the underlying futurescontract is bought or an option is exercised. Also

called an exercise price.

Structured oteAn over-the-counter product, which mayincorporate several individual instruments – generally options embedded in a debt instrument,such as a medium-term note. The aim is generallyto construct a payout profile that is attractive to aspecific investor or group of investors, because of their risk-reward preferences and/or opinions on

the market.

Structured tra sactioNon-standard contracts not associated withowned or leased assets and involving tailoring of terms to fulfil client needs.

Sulphur oxides (SO x)Gases formed principally by the burning of fossilfuels containing sulphur, such as coal and oil.

Sulphur oxides, such as sulphur dioxide (SO 2)and sulphates, are pollutants that contribute tothe formation of smog. Since SO 2 dissolves inwater vapour to form acid and interacts withother gases in the atmosphere to form sulphates

and other products that can be harmful to theenvironment, ambient air-quality standards havebeen adopted in many areas to regulate sulphur oxides emissions.H see also nitrogen oxides

Su shi e optioA corollary to the precipitation swap, thisinstrument is linked to the number of hours of sunshine. The party taking out a sunshine option

would be compensated if the number of hours of sunshine fell below a certain level.H see also weather derivatives

Superco ducti g mag etic e ergy storage(SMES)A method of storing energy within asuperconducting magnetic field.

Supply poi t omi atio

The nomination a gas shipper gives the pipelineowner when the shipper signs up a new customer.The pipeline owner then works out the chargefor transporting gas to the new supply point.Once the shipper accepts this charge, he takesresponsibility for transportation charges to thatsupply point.

SwapAn agreement whereby a floating price is

exchanged for a fixed price over a specified period.It is an off-balance-sheet financial arrangementinvolving no transfer of physical energy – bothparties settle their contractual obligations bymeans of a transfer of cash. The agreement definesthe volume, duration and fixed reference price.Differences are settled in cash for specific periods

– monthly, quarterly or six-monthly.Swaps are also known as contracts for

differences and fixed-for-floating contracts.





SwaptioAn option to buy (call option) or sell (putoption) a swap at some future date.

Sweet crude

Crude oil containing a relatively low percentageby weight of sulphur – typically less than 0.5%.

Swi gVariations in gas demand.

Swi g actorIn gas purchase agreements, the swing factor isa measure of the flexibility to vary nominationsand is expressed as a ratio of peak to average

supplies.

Swi g optioThe right to take more or less of a specifiedcommodity. The opportunity to swing up iseffectively a call option on the commodityspecified in the contract, and the opportunity toswing down is a put option on the commodity,subject to obligations to take certain quantitiesover the entire life of the contract. Swing

options are most commonly used in the gasmarket.

Swi g producerA company or country that changes its crude oiloutput to meet fluctuations in market demand.Saudi Arabia is seen as the world’s major swingproducer, as it deliberately limits its crude oilproduction in an attempt to keep supply anddemand roughly in balance.

Swiss Electricity Price I dex (Swep)Launched in 1998, Swep was the first ever electricity index in continental Europe. It isbased in the Swiss town of Laufenburg, a major hub for power supplies between Switzerlandand Germany.

Syd ey Futures Excha ge (SFE)The SFE lists electricity futures contracts basedon the markets of the Australian states of NewSouth Wales and Victoria.

Sy dicatio o risk A method of splitting risk among severalcounterparties.

Sy thetic credit rati gAn internal rating based on factors that aredeemed the most important for establishingcounterparty credit quality.

Sy thetic optio

Also known as portfolio insurance, this is atechnique for replicating an option payout bybuying or selling the underlying or futurescontracts in proportion to movements in thetheoretical option’s delta. Essentially, it is deltahedging with nothing to hedge. Those trying toreplicate a long option position lay themselvesopen to increases in market volatility, but benefitif volatility declines. Synthetic replication isgenerally used if implied volatility of options is

thought to be too high.

System operatorA body responsible for operating andmaintaining the physical electricity network. For the US, see independent system operator

System priceThe benchmark price for all electricity soldwithin an integrated grid system, calculated

on the basis of all transactions within thearea disregarding price fluctuations causedby bottlenecks. The system price is used as areference for financial settlements.H see also area price



Systemic risk The risk that the financial system as a wholemay not withstand the effects of a market crisis.In recent years, attention has been focused onemerging derivatives markets, where a handful

of players dominate trading. The concern is thatthe failure of any of these might have seriousand widespread consequences for others in themarket. The economic crisis and credit marketcontraction that developed in 2008 raisedconcerns about financial institution collapses andresulting systemic risk.

TTake or payIn a buyer’s contract, take or pay is theobligation to pay for a specified amount of gas,whether this amount is taken or not. Dependingon the contract terms, under-takes or over-takesmay be taken as make-up or carry-forward intothe next contract period. When it is credited

into another contract period, this is calledmake-up gas.H see also make-up gas

TapisA crude oil produced in Malaysia and used as areference crude for Far East light oil.

Tari Public schedules detailing utility rates, rules,

service territory and terms of service that arefiled for official approval with a regulatoryagency.

Tech ical a alysisTechnical analysis is based on the assumptionthat price takes into consideration all factors thatcould influence the price of the commodity. Itis, therefore, broader than fundamental analysis,

which looks at supply and demand. Past pricemovements can be analysed for indications of future commodity price movements.H see also fundamental analysis

Tech ical rallyA short rise in commodity futures prices withina general declining trend. Such a rally may resultfrom bargain hunting by market participantsor because technical analysts have noticed a

particular support level at which the commodityprice is expected to increase.

Tech ical sigA significant short-term trend identifiedthrough technical analysis of a commodity’sprice movement.

Te orThe time to maturity of an asset, liability, trade,

transaction or portfolio.

Terawatt (TW)1,000 gigawatts (1 trillion watts).

Terawatt hour (TWh)1,000 gigawatt hours.

ThermThe imperial unit of measurement for a

quantity of gas, equivalent to 100,000 Britishthermal units.

ThetaOption risk parameter that measures the speedof time decay of the option premium.





Third-party access (TPA)Where the owner of a pipeline or electricitynetwork is obliged to transport gas, crude or electricity in a non-discriminatory way – i.e.,for any third party at the same rate as all other

users. Third-party access can either be regulatedby a separate agency or law, or negotiatedbetween the incumbent and the new entrant.Also called common carriage.

Tick The minimum price movement of a financialcontract, expressed in fractions of a point.

Time decayH see theta

Time charterCharter party agreement for a fixed period of time instead of for a certain number of voyages.In this type of agreement usually loading andunloading costs are not included in the charter rate.

Time value

Part of the option premium that reflects theexcess over the option’s intrinsic value, or theentire premium, if there is no intrinsic value. Atgiven price levels, the option’s time value willdecline until expiration.

Title Tra s er Facility (TTF)A virtual trading point for natural gas in theNetherlands, created in 2003 by Gasunie inorder to facilitate trading in the Dutch market.

TOETonnes of oil equivalent.

Tokyo Commodity Excha geThe exchange that regulates trading of futures contracts and option products of allcommodities in Japan. Since July 1999, thisexchange has listed yen-based gasoline andkerosene futures based on the Japanese market.

Tolli g agreeme tA processing agreement for the conversion of an input product for a fee. In the energy sector,tolling agreements are contracts where oneparty – the toller – provides a company with

one form of fuel to be converted into another form of fuel on their behalf. In particular, in theliquefied natural gas (LNG) industry, tolling isa common method for financing liquefactionplants or regasification terminals. In the former case the tollers are natural gas owners whowish to convert their natural gas into LNG for transportation and storage purposes, in the latter,the tollers are LNG owners who wish their LNG to be converted into gas for distribution

into the relevant end-market. In the electricpower market, tolling agreements are typicallybetween a power buyer and a power generator,under which the buyer supplies the fuel andreceives an amount of power generated based onan assumed heat rate at an agreed cost.

To e, metricA unit of measure that represents themeasurement of mass equal to 1,000 kilograms,

or 2204.6226 pounds.

TPAH see third-party access

Tradi g arou d assetsUsed in tandem with hedging, this activityinvolves selling more production or buying backmore volumes than are currently hedged.

Trai (lique actio )Liquefied natural gas production units;liquefaction facilities.

Tra scoUS industry jargon for transmission facilities, or for a company engaged almost exclusively in theprovision of transmission service.





Tra smissio acilityEquipment used to deliver power at highvoltages in bulk quantity, from generatingfacilities to local distribution facilities, for finalretail use.H see also distribution

Tra smixA by-product of refined petroleum productspipeline operations. Transmix of refinedpetroleum products is created by the mixing(co-mingling) of different specification productsduring pipeline transportation.

Tra sportatio capacity

The capacity of the UK natural gas system,which is assessed by the National Grid in threeplaces: 1) The entry capacity at the entry to thenational transmission system (NTS).2) The exit capacity at the NTS offtakes. 3) Local distribution zone (LDZ) capacitywithin the LDZs.

Trigger co ditio

The payout of path-dependent options, such asbarrier options and digital options, depends ona specified market variable satisfying a specifictrigger condition. The most common conditionis that the spot rate (or price) of the underlyingmust trade through a specified level before theoption becomes active (or inactive), but manyother types of condition are possible.H see also corridor option, range binary

UUKPXAn electronic exchange that launched electricityfutures in June 2000. Trading includes spotphysical electricity contracts, prompt power contracts and cleared forward contracts, andis open to companies active in the UK power market. In 2003 it has been bought by APXGroup, the energy exchange for gas and power.

U accou ted- or gas

Gas lost through leakage or errors inmeasurement.

U bu dli gThe separating of the various componentsof electricity production, supply and service,in order to introduce greater elements of competition to these segments of the industry.

‘Functional unbundling’ would requiremonopolistic utilities to provide access to

their transmission and distribution networkin exchange for an access fee. ‘Structuralunbundling’ would require complete verticaldisaggregation, so that monopolistic utilitieswould be required to divest either their generation assets or their transmission/distribution assets.

U derlyi gThe variable on which a futures, option or other

derivatives contract is based.





Upside/dow side risk A short forward position taken withoutan offsetting long physical position in theunderlying commodity is said to have upsiderisk. This means the trader is speculating that the

price of the commodity will decline.A long forward position taken without

an offsetting short physical position in theunderlying commodity is said to have downsiderisk. This means the trader is speculating that theprice of the commodity will increase.

UpstreamOil and gas exploration and production, asopposed to downstream, which refers to the

areas of refining and marketing.H see also downstream

VValue-at-risk The value-at-risk (VaR) of a portfolio is the

worst loss expected to be suffered over a givenperiod of time with a given probability. Thetime period is known as the holding period,and the probability is known as the confidenceinterval. VaR is not an estimate of the worstpossible loss, but the largest likely loss. For example, a firm might estimate its VaR over 10 days to be $100 million, with a confidenceinterval of 95%. This would mean there is aone-in-20 (5%) chance of a loss larger than

$100 million in the next 10 days.In order to calculate VaR, a firm must modelboth the way the relevant market factors willchange over the holding period and the way,if any, these changes are correlated betweenmarket factors. It must then evaluate thepotential effects of these changes on its portfolioat the desired level of consolidation (by assetclass, group or business line, for example).H see also credit value-at-risk

Va illa optioA standard transaction that is not tailored to theneeds of either party. A plain-vanilla option paysout the difference between the strike price of the option and the spot price of the underlying

at the time of exercise.H see also exotic option, option

VaRH see value-at-risk

Varia ceA measure of volatility, risk, or statisticaldispersion. It is the square of the standarddeviation.

Varia ce-covaria ceLinear value-at-risk.

Variatio margiThe margin on a derivatives contract whosevalue varies in line with levels of volatility inthe market. The higher the fluctuations in dailyprices, the higher the variation margin.

VegaOption risk parameter that measures thesensitivity of the option price to changes in theprice volatility of the underlying instrument.

Vertical disaggregatioH see divestiture

Vertical spreadAn option strategy relying on the difference

in premium between two options that share acommon underlying and maturity but are struckat different prices.H see also call spread, put spread





VIK An acronym for Verband der IndustriellenEnergie- und Kraftwirtschaft e.V., the Germanassociation of industrial energy users andself-generators. This association represents the

interests of industrial energy users in Germanyfor whom energy is a major cost component,with current members accounting for themajority of industrial energy consumption.www.vik.de

ViscosityA measurement of a liquid’s resistance to flow.As temperature increases, viscosity decreases.

VLCCAn acronym for very large crude carrier; thesuper-tankers used for transporting crude oilthat are capable of carrying more than 200,000metric tons.

VolatilityA measure of the variability of a market factor,most often the price of the underlyinginstrument. Volatility is defined mathematically as

the annualised standard deviation of the naturallog of the ratio of two successive prices. Theactual volatility realised over a period of time(the historical volatility) can be calculated fromrecorded data.

Volatility is one of the variables that must bespecified in the Black-Scholes model of optionpricing: a vanilla option will cost more whenvolatility is high than when it is low. However,volatility is the only one of these variables

whose value must be estimated.The estimate used (known as the impliedvolatility) can be derived from the prices of options in the market and the known inputvariables. However, the Black-Scholes model alsoassumes that volatility is constant, which is nottrue. New techniques have been developed tocope with volatility’s variability, including mean-reverting models (such as Garch) and stochasticvolatility models.

Volatility skewThe difference in implied volatility betweenout-of-the-money puts and calls. The originsof the volatility skew are not always clear,but factors may include reluctance to write

calls rather than puts, sentiment about marketdirection, and supply and demand.H see also implied volatility

Volatility smileIf the implied volatility of an option is plottedagainst its strike on a graph, the chart is typicallyshaped like a smile (less often a frown). Thiscurve is known as the volatility smile. It mayreflect the fact that out-of-the-money events

are more common than geometric Brownianmotion would predict. This leads to extra valuefor out-of-the money options.H see also implied volatility

Volatility term structureThe term structure of volatility is the curvedepicting the differing implied volatilities of options with differing maturities. The termstructure is curved, because the volatility implied

by short-dated option prices changes faster thanthat implied by longer-term options, but other effects, such as mean reversion, may also play a part.H see also implied volatility

Volatility tradi gTrading, usually through the options markets,based on the belief that implied volatility willnot match the volatility actually realised over agiven period, or that the difference in implied

volatility between different options will alter over a given period. Options are used because of their sensitivity to volatility.

Volumetric risk The effect of fluctuations in demand for aproduct or service on revenue.

Vv2H see Verbandevereinbarung







WWACCH see weighted average cost of capital

WacogWeighted average cost of gas.

War premiumA price that factors in the risk associated withwar – particularly relevant for the oil market.

Warra tA certificate giving the buyer the right, but notthe obligation, to buy a specified amount of anasset at a certain price over a specified period of time. Warrants differ from options only in thatthey are usually listed.

Wash tradeH see round-trip trade

Watt (W)Unit of electrical power equivalent to one jouleper second.

Watt hour (Wh)Unit of electrical energy equivalent to thepower of one watt operating for one hour.

Weather derivativesForward instruments used to hedge against

or speculate on weather. Virtually all theinstruments are based on degree days, althoughprecipitation swaps and sunshine options areamong other possible instruments.H see also sunshine option

Weather-li ked bo dsThe payout of weather-linked bonds,commonly known as nature-linked bonds, islinked to weather conditions. The return onthe nature-linked bond is pegged to a suitable

meteorological index. A trigger level is defined,which remains active during the exposureperiod. If this trigger is hit by the index, theissuer of the bond is allowed to default. Suitableindexes might include rainfall or temperature.Insurance companies commonly issue thesebonds to hedge against high weather damageclaims.

Weighted average cost o capital (WACC)

The sum of the market returns of eachcomponent of a corporate capitalisation,weighted by each component’s share of thetotal capitalisation.

Wellhead pricePrice of natural gas at the wellhead.

West Texas I termediate (WTI)US crude oil used as a benchmark for pricing

much of the world’s crude oil production. WTIis a relatively low specific gravity ‘intermediate’crude with low sulphur content (‘sweet’).

Wester Systems Power Pool (WSPP)The Western Systems Power Pool, now typicallyreferred to just by its acronym WSPP, is anorganisation of more than 300 electricityutilities and power marketers throughout theUS operating under an umbrella marketing

agreement. The WSPP Agreement is open topower sellers and customers, though it providesonly for wholesale and not retail sales. Itestablished the WSPP electricity spot marketcontract, the standard contract for short-termpower trading across the US. The contracttraded on a trial basis in May 1987 and wasgiven final approval on July 1991 by the FederalEnergy Regulatory Commission.



Wet gas1) methane (dry gas) mixed with other hydrocarbons.2) gas with a high liquid content, which oftenneeds to be dried using a dehydration process.H see also dry gas

WholesaleEnergy supplied by one producer or marketer toanother for eventual resale to consumers.

Wholesale wheeli gThe transmission of gas or electricity to bulkdistributors.

Wobbe I dexAn index to indicate the interchangeabilityof fuel gases and is the best indicator of thesimilarity between natural gas and a specificpropane-air mixture. Since this index relatesheating characteristics of blended fuel gases,it can also be used to obtain constant heatflows from gases of varying compositions. TheWobbe Index, however, does not relate flametemperatures, heat transfer co-efficients or

temperature gradients.

Worki g gas(US) the amount of gas in a storage facilityabove the amount needed to maintain aconstant reservoir pressure (the latter amount isknown as cushion gas).

Wie er ProcessA type of Markov Stochastic process. It refers

to changes in value over small time periods.Sometimes, this process is also called Brownianmotion.

WriterThe seller of an option.

WRMAThe Weather Risk Management Associationis a Washington, DC-based trade associationrepresenting the interests of the global weather derivatives market.

WECCWestern Electricity Co-ordinating Council – aNorth American Electric Reliability Council for the Western Interconnection.

WTIH see West Texas Intermediate

YYear spreadSpread between two-year contracts.

YieldThe interest rate that will make the net presentvalue of the cash flows from an investment equal

to the price (or cost) of the investment.The net present value is the present value of future cash flows, discounted at the present costof capital.

The current yield relates the annual coupon yield to the market price by dividing thecoupon by the price divided by 100, neglectingthe time value of money or potential capitalgains and losses.

The simple yield-to-maturity takes into

account the effect of the capital gained or lost atmaturity, as well as the current yield.





Yield curveThe yield curve is a graph of the term structureof interest rates. It is usually given in termsof the spot yields on bonds with differentmaturities but the same risk factors (such as

creditworthiness of issuer), plotted againstmaturity. In general, yields will increase withmaturity and with the riskiness of the debt.

Yield curves can be plotted for default-freebonds. Bonds that may default will fall onanother yield curve at some spread to thedefault-free curve.

Yield curve optioAn option whose underlying is the shape of

the yield curve, normally defined as the yieldof a longer-maturity bond minus the yield of ashorter-maturity bond. This allows investors totake a view on interest rates without taking aview on the bond market’s direction. The valueof a call yield curve option appreciates as thecurve flattens, whereas a put’s value decreases.

Yield curve swapA swap in which two interest rate streams are

exchanged, reflecting different points on the yield curve.

ZZ-scoreA statistical measure that quantifies the distance(measured in standard deviations) a data point isfrom the mean of a data set. The terminology isalso used to refer to the output from a credit-strength test that gauges the likelihood of bankruptcy, more precisely known as the AltmanZ-score.

Zero-cost optioAn option strategy under which one option isbought by simultaneously selling another optionof equal value.H see also collar, cylinder


Documents

Energy Risk Glossary