INDEX

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Note: An f follows page numbers referencing figures; an n follows footnotes.

A

AC frequency, 385

AC power, 12–13

AC transmission, 343

ACA (annual cost adjustment) charge, 106, 399

Accounting fraud, 423

Accounting Standards Codification 820 (ASC 820), 425, 443

Acid rain, 208, 215, 218

Active market, 426

Actual, 81, 109

Actual position, 109

AEP-Dayton Hub (AD Hub), 130f, 155f

Affiliate, 441

Aframax tanker, 167f

Air compressor, 371–372

Air conditioning, 137–138, 227–229

Alberta Electricity System Operator, 126f

Alkanes, 211, 211f

Alkenes, 211, 211f

All-in position, 109

All-in price, 109, 119

Alternating current (AC) power, 12–13

Alternative compliance payment, 389, 390

American option, 256–257, 263

American Petroleum Institute (API) gravity, 165, 165f, 166f

Ancillary services markets, 383–385

Annual cost adjustment (ACA) charge, 106, 399

Annual energy outlook (EIA), 379

Anonymous trading, 66

Anthracite coal, 190

Antiknock agents, 172

API (American Petroleum Institute) gravity, 165, 165f, 166f

Appalachian coal reserves, 197, 197f

Aquifers, 412

Arab Light, 178f

Arbitrage, 2, 3, 267–268

Arbitrage-free pricing, 266–267, 272–275

Arbitrage relationship, 274f

Area under a curve, 235f

Arithmetic mean, 237

(See also Mean)

Asay model, 279

ASC 820, 425, 443

Asian option, 263, 282, 282f, 283f

Asphalt, 87f

Asset, 422

Assignability, 55

Associated gas, 164

Asymmetric P&L, 436f

At the money, 263

Atomic mass number, 365

Atomic number, 366

Auction

capacity, 386

daily power auctions, 131–132

day-ahead, 127, 314–315, 324

financial transmission rights (FTRs), 388–389

real-time, 127, 315, 324

Average, 237

(See also Mean)

Average price options, 282

Average residential power prices, 340, 340f

Avoided cost, 134

B

B2, 182

B5, 182

B20, 182

B99.9, 183

B100, 183

Bachelier, Louis, 266

Backtesting, 450, 451f

Bacteria, 206

Bad market data, 454

Band gap, 352

Bankruptcy, 60, 438–439, 439f

Barrel (bbl), 163

Barrel of oil equivalent (BOE), 96

Base gas, 406

Base load power, 302–304

Base load power plants, 303

Baseload contracts, 400

Baseload plants, 317

Basis, 80–81

Basis position, 109

Basis price, 67, 68, 108–109, 119

Batteries, 370–371

BBOE (one billion BOE), 96

Bcf (Billion cubic feet), 7

Benchmarking, 450, 451f

Beta particles, 364

Bid/ask spread, 254–255

Bid schedule, 315f

Bidweek, 115

Bilateral agreement, 176

Bilateral trade, 59–60

Bilateral trading, 5

Binomial tree model, 269–270, 270f

Biodiesel, 182–183

Biofuel, 86

Bitumen, 165f

Bituminous coal, 190

Black, Fischer, 266, 276

Black 76 model, 279, 282

Black Scholes formula, 276–278

Black Scholes genre option models, 278–283

Blackout, 140, 384

BOE (barrel of oil equivalent), 96

Boiler, 224, 225f

Boiling point, 223

Bond, 56, 75n

Bond market, 75n

Bose-Einstein condensates, 223n

Bottoming cycle cogeneration, 142

Break even cost, 314, 322–323

Brent crude, 15, 175, 183

British thermal unit (Btu), 7

Brown, Robert, 268

Brown coal, 189

Brown energy, 391

Brownian motion, 266, 268

Brownout, 140, 384

Btu (British thermal unit), 7

Bundling, 148

Bunker fuel, 184

Buoyancy, 89, 90

Buried power lines, 146

Burnable coal, 189

Burner tip, 119, 393

Butane, 87f, 104, 210f, 212

Buy and hold markets, 77f

Buy-and-hold strategy, natural gas, 114

Buy spot power, 130

Buying a crack spread, 178

C

C, 86

C5, 86

CAISO (California ISO), 126f, 152, 152f

Calculus, 235–236, 239

Calendar month average (CMA) price, 177

California ISO (CAISO), 126f, 152, 152f

California/Oregon Border (COB), 130f, 152f, 154, 154f

Call option, 70–71, 252, 260f

Cap and trade system

advantages, 204–205

carbon taxes, compared, 203

how it works, 203

Kyoto Protocol, 202

limitations, 206–207

Capacity, 314

Capacity auctions, 386

Capacity factor

levelized cost of entry (LCOE), 380f

solar power, 355, 355f

wind power, 361, 361f, 362f

Capacity markets, 385–388

Capacity payment, 385

Capital recovery factor (CRF), 378, 379f

Captive audience, energy consumers as, 50

Captive price, 195

Carbon chain, 86, 87f

Carbon dioxide (CO2), 215–216, 217, 218

Carbon dioxide (CO2) emissions (2005–15), 93f

Carbon dioxide emissions and fuel type, 219

Carbon emission trading, 207–208

Carbon equivalents, 208

Carbon monoxide (CO), 216, 217

Carbon sequestration, 205, 206

Carbon sink, 205

Carbon taxes, 203, 207

Cascade Mountain range, 154

Cash flows, 75

Cash market, 50, 81

Cash transaction, 62

CDD (cooling degree day), 466–467

CDS (credit default swap), 60, 81, 440

Change log, 453

Chemical properties, 222

Chemical reaction, 221, 223

Circuit, 139

Citygate, 104, 119, 393

Clean spark spread, 146

Clearing price, 127, 132, 138

Clearinghouse, 63

Closed form solution, 277

Closing price, 65

CLZ7, 175

CMA (calendar month average) price, 177

CO (carbon monoxide), 216, 217

CO2 (carbon dioxide), 215–216, 217, 218

Co-operative (Co-op), 129

Coal, 87f, 185–198

Appalachian coal reserves, 197, 197f

brief synopsis, 17

chemical structure, 219f

economies of scale, 191

Edison’s DC power, 191–192

energy independence versus pollution, 195

flue gas desulfurization (FGD), 191

ignition/energy content trade-off, 189

international market, 188

location of coal deposits, 195, 196f

nuclear power plant, compared, 364, 367

operating constraints, 186

pipelines, 187–188

pollution, 186, 195

price advantage over alternative fuels, 200

price volatility, 194

prices, 188

pricing terminology, 194–195

storage, 187

strip mining, 192–193

sulfur content, 190–191

summary/key topics, 185–186

surface mining, 192–193

trading, 193–194

transmission systems, 191–192

transportation, 187–188

types, 189–190

underground mining, 193

washing, 191

Westinghouse’s AC power, 192

what is it?, 187

Wyoming coal reserves, 198, 198f

Coal pipelines, 187–188

Coal trading, 193–194

Coal washing, 191

Coastal tanker, 167f

COB (California/Oregon Border), 130f, 152f

Cogeneration, 142

Cogeneration plant, 142

Coin flip, 268, 290

Collateral, 60, 440

Combined cycle power plant, 143f, 144

Combustion, 216, 217f

Combustion pollution, 216–218

Commissioner, 134

Commodity charge, 106, 399

Commodity swap, 62, 69

(See also Swap)

Common terms

accounting, 422–423

coal pricing terminology, 194–195

corporate structure, 441

credit exposure, 438

credit risk, 438

crude oil variable pricing, 177

energy market, 81–84

Exchange for Principal (EFP) transaction, 68

fair value accounting, 425–426

financial options, 263

hedge accounting, 462

margin, 64–65

natural gas, 119, 394

natural gas prices, 109, 399–400

natural gas storage, 412–413

oil, 183–184

renewable energy certificates (RECs), 391

transportation contracts, 106

weather derivatives, 467–468

Common units

BOE/TOE, 96

electricity, 9

natural gas, 7

oil, 163

Complex organizational structure, 441

Compressed air storage, 371–372, 374

Compressor, 228–229, 228f

Compressor stations, 227f, 395–397

Concentrated solar power, 350–352

Concept summary (See 30-second summary)

Condensate, 165, 165f

Condenser

air conditioning, 228f, 229

distillation, 224, 225f

Conduction band, 352

CONE (cost of new entry), 378

Confidence interval, 231

Congestion (electricity), 13, 131, 388

Conglomerates, 441

Consumer demand for power, 383, 387f

Continuous probability, 236

Controlled state changes, 222

Conventional fuel, 85, 86

Conversion efficiency, 351

Conway, 212, 213f

Cooling degree day (CDD), 466–467

Cooling system, 227–229

Corn, 180, 181

Corn crush spread, 182

Corona, 148

Corporate structure, 441

Correlated series trending apart, 247f

Correlation, 230, 244–248, 292f

Correlation coefficient (r), 246, 247f

Cost of carry, 280

Cost of new entry (CONE), 378

Costless collar, 459, 460

Counterparty, 438

Counterparty credit risk, 81, 437–444

bankruptcy, 438–439, 439f

brief synopsis, 44

collateral, 440

corporate structure, 441

credit default swap (CDS), 440

credit exposure, 438–439

credit limit, 440, 442–443

credit quality, 439–440

cross-default clause, 441

CVA/DVA, 443–444

expected loss calculation, 444f

know your trading partner, 440

master netting agreement, 441

probability of default (PD), 439–440

protecting against credit risk, 440–441

ring fencing, 442, 442f

structural subordination, 442, 442f

summary/key topics, 437

terminology, 438, 441

Crack spread, 79, 178–179

Crack spread futures, 180

Crack spread option, 180

Cracking, 170, 178

Credit default swap (CDS), 60, 81, 440

Credit exposure, 438–439

Credit insurance, 81

Credit limit, 440, 442–443

Credit quality, 439–440

Credit ratings, 440

Credit risk

counterparty (See Counterparty credit risk)

forwards, 69, 70

futures, 66

OTC trades, 83

swaps, 69

Credit value adjustment (CVA), 443–444

CRF (capital recovery factor), 378, 379f

Cross-default clause, 441

Crude oil, 165–166

Crude oil cargo vessels, 167f

Crude oil conversion, 166, 166f

Crude oil futures, 175–176

Crude oil market participants, 161–163

Crush spread, 182

Cumulative distribution, 234, 234f

Cushing, OK, 177

Cushion gas, 406

Cuttings, 90

CVA (credit value adjustment), 443–444

Cyclical markets, 76, 77f

Cycling, 412

Cylinder mistiming (knocking), 173

D

Daily margin, 65, 66, 83

Daily return, 241

Dark spread, 79

Data reduction, 231

Day-ahead auction, 127, 314–315, 324

Day/night power, 334

DC (direct current) power, 12–13

DC transmission, 344–345, 345f

DCF (discounted cash flow), 378

Debit value adjustment (DVA), 443–444

Deepwater drilling, 94

Default, 438

Definitions (See Common terms)

Deliverability, 412

Delivered price, 195

Delivery adder, 106, 399

Delivery date, 68

Delivery point, 68, 394

Delta (velocity), 284, 285

Delta hedging, 267

Demand for power, 383, 387f

Depleted gas reservoirs, 410

Deregulated market, 4, 52, 81, 126–127, 129

Deregulation, 3, 5

Derivatives, 54f, 56–57, 263

Desert Southwest power market, 153, 153f

Diamonds, 189

Diesel, 87f

Diesel fuel, 173–175

Diesel fuel pricing, 174f

Differential, 68

Diluted bitumen (dilbit), 212

Direct current (DC) power, 12–13

Discounted cash flow (DCF), 378

Discrete probability, 236

Disorderly transactions, 427–428

Dispatch capacity, 314

Dispatch stack, 316, 316f

Disraeli, Benjamin, 231n

Distillation, 16, 169, 224–225

Distillation tower, 170f

Distillation unit, 224, 225f

Distressed sale, 428

Distribution, 12, 146

Distribution pipelines, 393

Diversification, 434, 454

Documentation, 447–448, 448f

Dominion Hub (PJM DOM), 155f

Double distribution, 238f

Downstream processing, 168

Drill bits, 90

Drill string, 90

Drilling, 90, 91f

Drilling fluid, 90

Drilling rigs, 169

Dry natural gas, 98, 119

DVA (debit value adjustment), 443–444

Dynamic hedging, 24, 265

E

EAD (exposure at default), 438

Earnings, 41

Eastern Interconnection, 148f, 150–151, 151f

Eastern U.S. gas markets, 122, 122f

Edison, Thomas, 191–192

EFP (Exchange for Physical), 66–68

EIA (Energy Information Agency), 82, 379, 414

Elasticity, 50

Electric cars, 371

Electric Reliability Council of Texas (ERCOT), 126f, 149, 159, 159f

Electrical circuit, 139

Electrical demand, 134–136

Electrical generation, 10–11, 138

Electrical generator, 139–140, 139f

Electrical transformers, 343, 344f

Electrical transmission and distribution, 11–12, 146–148

Electricity, 125–159

AC and DC power, 12–13

air conditioning, 137–138

avoided cost, 134

brief synopsis, 7–14

brownout/blackout, 140

California power market, 152, 152f

cogeneration, 142

congestion, 13, 131

daily power auctions, 131–132

Desert Southwest power market, 153, 153f

Eastern Interconnection, 148f, 150–151, 151f

electrical demand, 134–136

financial transmission right (FTR), 13–14, 132

forecasting demand, 299–312

forecasting supply, 313–326

gas turbine, 142–144

generation, 10–11, 138

generator, 139–140, 139f

heat rate, 144–145, 145f

hourly demand, 135f, 136f

load forecasting, 135

locational marginal price (LMP), 131

major trading hubs, 130f

market participants, 128–129

mechanics of physical electricity market, 14

mid-Atlantic power market, 155, 155f

Midcontinent power market, 156, 156f

models (See Electricity models)

natural gas combined cycle plant, 143f, 144

New England power market, 158, 158f

New York electrical market, 157, 157f

overhead/buried power lines, 146

Pacific Northwest power market, 154, 154f

peak demand, 135

peak/off-peak hours, 137

physics of, 9–10

power grid, 128f, 146

power purchase agreement (PPA), 134

regional markets, 148–159

regulated markets, 132–134

seasonal demand, 136, 136f

short circuit, 10

simple circuit diagram, 140f

spark spread, 145–146, 145f

standard market design (SMD), 131, 132

steam turbine plant, 140–141

storage (See Electricity storage)

summary/key topics, 125

temperature, 137, 137f

Texas electrical market, 159, 159f

Texas Interconnection, 148f, 149

three-phase power, 147, 147f, 148

trading markets, 129–130

transmission and distribution, 11–12, 146–148

units, 9

voltage, current, load, 139, 140

Western Interconnection, 148f, 149–150, 150f

Electricity models, 26–35, 299–391

electricity storage, 369–376

generation stack, 313–326

levelized cost of entry, 377–381

nuclear power, 363–368

secondary electricity markets, 382–391

solar power, 348–356

spatial load forecasting, 299–312

tolling agreements, 327–338

wheeling power, 339–347

wind power, 357–362

(See also individual sub-entries)

Electricity storage, 369–376

batteries, 370–371

brief synopsis, 33–34

compressed air, 371–372, 374

expected profitability, 374–375

flywheels, 372–373

off-peak to peak price ratio, 375f

overnight power prices versus daytime power prices, 374

pumped hydropower, 373, 373f, 375–376

summary/key topics, 369

trading example (compressed air), 374

trading example (pumped hydropower), 375–376

valuation, 374

Electricity trading markets, 129–130

Electromagnetism, 10, 139

Emissions credits, 205, 325

Emissions markets, 199–208

brief synopsis, 18

cap and trade (See Cap and trade system)

carbon sequestration, 205, 206

carbon taxes, 203, 207

common lands problems, 204

developing nations, 201–202

distributing rights, 205

emissions credits, 205

goal, 200

government involvement, 208

historical overview, 201–202

industrialized countries, 202

Kyoto Protocol, 202

other markets, 208

plants/bacteria, 206

regional rather than global, 208

summary/key topics, 199

trading carbon emissions, 207–208

Energy, 9

Energy companies, 4

Energy exploration (See Exploration and production)

Energy Information Agency (EIA), 82, 379, 414

Energy market

common terms, 81–84

cyclical variation in prices, 48

defined, 1

major commodities, 3

major players, 4–5

spot market/forward market, 2

unique features, 75–82

Energy-related carbon dioxide (CO2) emissions (2005–15), 93f

Energy storage, 33–34

(See also Electricity storage)

Energy trading, 49

Energy trading markets, 6–20, 97–213

coal, 185–198

electricity, 125–159

emissions markets, 199–208

natural gas, 97–124

natural gas liquids (NGLs), 209–213

oil, 160–184

(See also individual sub-entries)

Engine knocking, 173

Enron, 439

ERCOT (Electric Reliability Council of Texas), 126f, 149, 159, 159f

ERCOT Houston, 130f, 159, 159f

ERCOT North, 130f, 159, 159f

ERCOT South, 130f, 159f

ERCOT West, 130f, 159f

Erroneous price/outlier price, 428

Error analysis, 310–311, 312f

Error of the model, 311

Ethane, 87f, 210f, 211–212

Ethanol, 180–182

European option, 257, 263

Evaporator, 228f, 229

Excess equity, 64

Exchange, 59, 60–62, 82

Exchange-based OTC clearing service, 70, 71f

Exchange for Physical (EFP), 66–68

Exchange traded spreads, 180

Executing a trade, 58

Exercise price, 252

Exit price, 425

Exotic options, 265, 289

Expected loss calculation, 444f

Expiration date, 57, 63

Exploration and production, 85–96

BOE/TOE, 96

deepwater drilling, 94

definitions, 86

gas versus oil wells, 91

heavy oil, 92

hydraulic fracking, 92–93

hydrocarbon fuels, 86–87, 87f

landman, 88

mechanisms which force hydrocarbons to the surface, 90

oil and gas reserves, 95

oil sands, 92

probabilistic description (P10, P50, etc.), 95

production sharing contract, 89

risky activity, 88

service contract, 89

shale gas, 92–94

shale rock processing, 93–94

summary/key topics, 85

tax and royalty contract, 89

traditional drilling, 91f

traditional wells, 89–91

Exploration and production company, 86

Exponential decay, 241, 242f

Exponential decay constant, 242f

Exponential weighting factor, 242f

Exponentially weighted volatility, 241–243

Exposure at default (EAD), 438

Extrinsic value, 252–253, 263

F

Fair Isaac, 440

Fair value, 423, 426

Fair value accounting, 425–427

Fair value hierarchy, 428–429

FASB ASC 820-10-35-51D, 427

FASB (Financial Accounting Standards Board), 425

Fat tail problem, 272

Federal Energy Regulatory Commission (FERC), 78, 82, 104

Federal Reserve Board H15 report, 73f

Federally owned utility, 129

Feedstock, 183

FERC (Federal Energy Regulatory Commission), 78, 82, 104

Fermentation, 181

Fertilizer, 180

FGD (flue gas desulfurization), 191

FICO score, 440

Financial Accounting Standards Board (FASB), 425

Financial assets, 54f, 56

Financial contract, 2

Financial instruments, 53–58

derivatives, 54f, 56–57

financial assets, 54f, 56

overview, 54f

real assets, 54f, 55

Financial market, 82

Financial options, 70–71, 250–287

all-or-nothing investment, 251

American/European option, 256–257

applications, 251

Asian option, 282, 282f, 283f

bid/ask spread, 254–255

breakeven point, 259, 259f

brief synopsis, 21–25

call option, 252, 260f

common terms, 263

early exercise, 254

exotic options, 265

how they work, 251–252

intrinsic and extrinsic value, 252–253

long option straddle, 262f

in the money/out of the money, 258

net profit, 259, 259f

option payoffs, 252f

option valuation (See Option pricing)

payoff diagrams, 257–259

put/call parity, 261–262

put option, 252, 261f

spread options (See Spread options)

summary/key topics, 250

synthetic options, 261–262, 263

typical payoff, 254, 255f

up-front costs, 253–254

vanilla options, 265

volatility, 255–256

why traders use options, 256–257

zero sum game, 257

Financial settlement, 53

Financial trade, 2

Financial transaction, 175

Financial transmission right (FTR), 13–14, 132, 388–389

Firm/interruptible service, 397, 399

Firm transportation contract, 105, 106, 400

5-3-2 crack spread, 179

Fixed income market, 75n

Flat generation stack, 326

Flat position, 58, 59

Flat yield curve, 72, 74f

Flipping a coin, 268, 290

Flue gas desulfurization (FGD), 191

Fly ash, 216, 219

Flywheel storage, 372–373

Fool’s gold, 190

Force majeure, 397n

Force outage, 386

Forced outage rate, 386

Forced sale, 428

Forecasting demand for electricity (See Spatial load forecasting)

Forecasting supply of electricity (See Generation stack)

forecast.weather.gov, 306

Formulation of fuel, 172

Forward market, 2, 3, 52, 62, 82

Forward power market, 129

Forward spread, 335

Forward trade, 71f

Forwards, 62, 68–70, 82, 260f

Fossil fuel, 85, 86

Fossil-fuel-based power plants, 98, 119

Fossil fuel exploration, 86

(See also Exploration and production)

Fossil fuel plants, 138

Four Corners, 130f, 153, 153f

Four-segment pipeline, 398f

Frac spread, 80

Fracking, 93, 103

Fractional distillation, 169–170

Fractional grade NGLs, 213

Free riders, 204

Frequency distribution, 234, 234f, 235f

Frequency response, 385

FTR (financial transmission right), 13–14, 132, 388–389

Fuel oil, 184

Fuel reserves, 95

Fuel usage, 106, 399

Fundamental analysis, 377

Fungibility, 55

Fungible, 54, 82

Future cash flows, 75

Future value, 72

Futures, 62, 63–66, 82, 459

Futures contract, 175

Futures month abbreviations, 176f

G

Game theory, 320

Gamma (acceleration), 284, 285–286

Gamma radiation, 364

Garman-Kohlhagen model, 279

Gas, 224, 225–226

Gas “cushion,” 410–411

Gas marketers, 100

Gas pipelines, 226–227

(See also Natural gas transportation)

Gas Research Institute (GRI) charges, 106, 399

Gas storage capacity, 413

Gas-to-oil ratio, 91

Gas turbine, 142–144

Gas wells, 91

Gasoline, 87f, 99, 171–172

Gasoline pricing, 171f

General terms and conditions (GTC), 213

Generalized Black Scholes cost of carry, 280f

Generalized Black Scholes formula, 280f

Generalized Black Scholes inputs, 281f

Generation stack, 313–326

active versus passive bidding strategies, 318–319

baseload plants, 317

bid schedule, 315f

break even costs, 314, 322–323

brief synopsis, 27–29

changes in hourly loads, 324, 325f

day-ahead auction, 314–315, 324

definition, 313

dispatch stack, 316, 316f

efficient versus economic dispatch, 325

flat, 326

gamesmanship, 318

generators, 315

heat rate stack, 323f

implied market heat rate, 322, 323

low cost/higher price providers, 316

marginal power plants, 29

marginal pricing, 326

mid-merit plants, 318

optimal bidding strategy, 319, 320

peaking generation plants, 317–318

power plant’s profit, 318

real-time auction, 315, 324

real-time/day-ahead prices, compared, 324f

sample, 314f

shift in the stack, 323, 323f

small changes in supply/major effect on prices, 321, 322f

summary/key topics, 313

variable generation, 320–321

visual representation, 314f

Generation stack shift, 323, 323f

Geology, 408–409

Geothermal power, 11

German solar power, 356

Global warming, 200

Glossary (See Common terms)

Gold forward curve, 77f

Grade differential, 177

Graphite, 189

Grease, 87f

Greeks, 283–287

acceleration (gamma), 284, 285–286

changes in volatility (vega), 284, 286

interest rates (rho), 284, 287

passage of time (theta), 284, 286–287

velocity (delta), 284, 285

Green energy, 391

Greenhouse effect, 20f

Greenhouse gases, 208, 215

GRI (Gas Research Institute) charges, 106, 399

GTC (general terms and conditions), 213

Gypsum, 191

Gypsum scrubbers, 191

H

HDD (heating degree day), 466–467

HDD reference level, 468

He-4, 366

Heat, 89, 90

Heat energy, 7

Heat rate, 113, 138, 144–145, 145f, 328

Heat rate spread, 336f

Heat rate stack, 323f

Heating degree day (HDD), 466–467

Heating oil, 87f, 173–175, 184

Heavy crude oils, 163, 165, 165f

Heavy fuel oil, 87f

Heavy metals, 216, 218–219

Heavy oil, 92, 184

Heavy sour crude, 169

Hedge accounting, 460–462

Hedge effectiveness tests, 462–464

Hedge ratio, 267

Hedging, 80, 82, 456–464

accounting issues, 457

brief synopsis, 45–46

costless collar, 459, 460

definitions, 457

delta, 267

dynamic, 24, 265

futures, 459

hedge accounting, 460–462

hedge effectiveness tests, 462–464

hidden costs, 457, 459–460

minimum variance hedge ratio, 460, 461f

Modigliani-Miller proposition on hedging, 457–458

option strategies, 460

regression analysis, 462–463, 463f

risk management issues, 457

statistical tests, 463–464, 464f

summary/key topics, 456

types of hedges, 458–459

uses, 457

Helium, 366

Henry Hub, 6, 61, 81, 104, 105f

Henry Hub contracts, 110

Henry Hub futures contract, 105

Henry Hub price, 109

HGLs (hydrocarbon gas liquids), 211

High octane fuels, 173

High voltage direct current (HVDC) transmission, 344–345, 345f

Highest and best use, 426

Histogram, 233, 233f, 235f

Historical cost accounting, 421

Holding company, 441

Hoover Dam, 153

Hub, 104, 119, 393, 394

Hub price, 132

HVDC (high voltage direct current) transmission, 344–345, 345f

Hydraulic fracking, 92–93

Hydraulic fracturing, 93, 103

Hydrocarbon fuels, 86–87, 87f

Hydrocarbon gas liquids (HGLs), 211

Hydrocarbons, 85

Hydroelectricity, 138

Hydrogen sulfide, 104

I

IASB (International Accounting Standards Board), 425

ICE (Intercontinental Exchange), 5

ICE Brent, 175

(See also Brent crude)

Ideal gas law, 226, 226f

IESO (Independent Electricity System Operator), 126f

IFERC survey, 115

IFRS 13, 425

Illiquid asset, 3

Illiquid market, 2, 55

Illiquidity, 77–78 (See also Liquidity)

Implied market heat rate, 322, 323

Implied volatility, 280, 282–283

In-sample test, 311

In the money, 258, 263

Independent Electricity System Operator (IESO), 126f

Independent system operator (ISO), 5, 126

Index price, 68, 109, 177

Individual rate of return (IRR), 72

Induced fission, 364

Information ratio, 244, 244f

Initial margin, 64, 66, 83

Injection, 394

Injection capacity, 413

Intangible assets, 55

Integral, 235f

Integrated utility, 129, 133

Integration, 235–236

Interactions list, 454

Intercontinental Exchange (ICE), 5

Interest rate curve, 72, 74f

Interest rates, 72, 75, 75n

International Accounting Standards Board (IASB), 425

International Financial Reporting Standards topic 13 (IFRS 13), 425

International Swaps and Derivatives Association (ISDA), 60, 82

Interruptible transportation contract, 106, 400

Interstate pipeline transportation, 101, 104

Interstate pipelines and compressor stations (map), 397f

Into-Dominion, 133

Into-Southern Company, 133

Intrinsic value, 252–253, 263, 335

Inverter, 353

Investor owned utility, 129

Invoice price, 68

Ionization, 148

Iron core transformer, 343

IRR (individual rate of return), 72

ISDA (International Swaps and Derivatives Association), 60, 82

ISDA agreement, 82–83

ISO (independent system operator), 5, 126

ISO-NE (New England ISO), 126f, 158, 158f

Isobutane, 87f, 210f, 212

ISONE Hub, 130f

Isotope, 365

J

Joule (J), 7

Jump diffusion, 272

K

Kerosene, 87f, 184

Kilojoule (kJ), 7

Kirk’s approximation, 294–295

Kirk’s approximation, rearranged, 298f

kJ (Kilojoule), 7

Knocking, 173

Know your trading partner, 440

Kyoto Protocol, 202

L

Lake Mead, 153

Lambda (λ), 242, 242f

Landman, 88

Large binary trees, 276f

Law of demand, 49

Law of supply, 49

LCOE (See Levelized cost of entry (LCOE))

Lead, 219

Lead pollution, 172

Legs (tolling agreement), 330, 331

Level 1/2/3 fair value inputs, 428–429, 428f

Level 1/2/3 securities, 429, 429f

Levelized cost of entry (LCOE), 377–381

brief synopsis, 34

calculation of LCOE, 378, 379f, 380f

regulatory use, 379

summary/key topics, 377

U.S. average levelized costs, 381f

uses of LCOE analysis, 378

LGD (loss given default), 438

Liability, 422

LIBOR (London Interbank Offered Rate), 72

Light crude oils, 163, 165, 165f

Light sweet crude oil, 169

Lighter fuels, 92

Lignite, 189

Lime scrubbers, 191

Line losses, 131, 132

Liquefaction, 99, 108

Liquid, 223–224

Liquid asset, 3

Liquid market, 2, 55

Liquid petroleum gas (LPG), 212, 212f

Liquidation, 422

Liquidity, 55, 77–78, 83, 422–423

Liquified natural gas (LNG), 108, 416–419

brief synopsis, 38–39

global market, 39

liquefaction and exporting, 417–418

safety concerns, 418

summary/key topics, 416

trading example (peak shaving units), 419

transportation, 418

List of topics covered in book (See 30-second summary)

LMP (locational marginal price), 131, 389

LNG (See Liquified natural gas (LNG))

Load, 137, 139, 300

Load forecasting, 135

(See also Spatial load forecasting)

Load serving entity (LSE), 129, 315

Location differential, 177

Location spread, 112–113

Location spread trade, 346, 347

Locational marginal price (LMP), 131, 389

Lognormal distribution, 271f, 290f

London Interbank Offered Rate (LIBOR), 72

Long, 83

Long a call, 260f

Long a forward, 260f

Long a put, 261f

Long an asset, 5

Long-distance AC transmission, 343

Long-distance DC transmission, 344–345, 345f

Long-form transaction, 70

Long option straddle, 262f

Long position, 58, 59, 83

Long-term temperature forecast, 308f

Long the crack spread, 179

Long the option, 252

Long volatility, 252

Loss given default (LGD), 438

Low density (light) crude oils, 163

Low-percentage biodiesel blends, 182

LPG (liquid petroleum gas), 212, 212f

LR1 Panamax tanker, 167f

LR2 Aframax tanker, 167f

LSE (load serving entity), 129, 315

Lubricating oils, 87f

M

Margin, 61, 64, 83

Margin account, 65

Margin call, 65

Margin of error, 231

Marginal power plants, 29

Marginal price, 127, 138

Marginal pricing, 326

Marginal producer, 127

Mark, 422

Mark-to-market (MTM), 83

Mark-to-market accounting, 420–429

accounting fraud, 423

brief synopsis, 39–41

disorderly transactions, 427–428

fair value accounting, 425–427

fair value hierarchy, 428–429

illiquid assets, 421–422

level 1/2/3 fair value inputs, 428–429, 428f

level 1/2/3 securities, 429, 429f

primary market, 425

pros/cons, 423–425

summary/key topics, 420

terminology, 422–423, 425–426

Market, 422

Market contagion, 424, 425

Market implied heat rate, 144

Market participant, 426

Martingale, 268, 291f

Master netting agreement, 441, 467

Master netting clause, 69

Maximum transaction payment amount, 468

Mead, 130f, 153, 153f

Meal, 181

Mean, 233, 237

Mean absolute deviation, 239

Mean average deviation, 239f

Mean-reverting sequence, 291f

Measures of central tendency, 237

Measures of dispersion, 239

Median, 237

Medium crude, 165, 165f

Megajoule (MJ), 7

Megawatt-Hour (MWh), 9

Megawatt (MW), 9

Melting point, 223

Merchant generator, 129

Mercury, 104, 218–219

Merton, Robert, 266, 276

Merton model, 279

Methane, 87f, 101, 104, 208, 218

(See also Natural gas)

Mid-Atlantic power market (PJM ISO), 151, 151f, 155, 155f

Mid-Columbia (MIDC), 130f, 154, 154f

Mid-merit plants, 318

MIDC (Mid-Columbia), 130f, 154, 154f

Midcontinent ISO (MISO), 126f, 156, 156f

Midwestern U.S. gas markets, 121, 121f

Mineral rights owner, 86, 88

Minimum variance hedge ratio, 460, 461f

MISO (Midcontinent ISO), 126f, 156, 156f

MISO Arkansas, 130f, 156f

MISO Illinois, 130f, 156f

MISO Indiana, 130f, 151, 156f

MISO Louisiana, 130f, 156f

MISO Michigan, 130f, 156f

MISO Minnesota, 130f, 156f

MISO Texas, 130f, 156f

MJ (Megajoule), 7

MMBtus (millions of Btus), 7

Mode, 237

Model ID, 452

Model overlays and reserves, 454–455

Model owner, 452

Model reserve, 454–455

Model risk, 445–455

bad market data, 454

brief synopsis, 44–45

causes, 446–447

defined, 445

documentation questions, 448f

employee turnover, 452

maintaining models, 450–454

model appropriateness questions, 449f

model documentation, 447–448, 448f

model input questions, 455f

model maintenance questions, 453f

model overlays and reserves, 454–455

model testing questions, 451f

problematic assumptions, 45

SR 11-7, 445–447

summary/key topics, 445

testing the model, 450, 451f

was model used appropriately?, 448–449, 449f

Modeling electrical flows, 342–343

Modified Black 76 formula, 282

Modigliani-Miller proposition on hedging, 457–458

Mont Belvieu, 212, 213f

Monte Carlo analysis, 248–249

Monthly gas consumption, 118f

Most advantageous market, 426

MTM (mark-to-market), 83

Multiperiod binary tree, 275f

Multistage compression station, 396f

Municipally owned utility (Muni), 129

MW (Megawatt), 9

MWh (Megawatt-Hour), 9

N

N-type semiconductor, 352

Naphtha, 87f, 212

Nash equilibrium, 320

National defense, 203–204

National Renewable Energy Laboratory (NREL), 358

National Weather Service (NWS), 306

Natural gas, 87f, 97–124

actual versus basis prices, 109–110

basis position, 109

basis price, 108–109

bidweek, 115

brief synopsis, 6–7

buy-and-hold strategies, 114

chemical structure, 219f

composition, 98

delivery charges, 112

distribution, 112

drilling, 101, 102f

dry/wet, 98, 119

eastern U.S. gas markets, 122, 122f

electrical generation (power plants), 119

energy content/volume of dry gas, 98

exploration and extraction, 101–103

formation, 102f

forward prices, 115–116

gas marketers, 100

gasoline, compared, 99

Henry Hub, 6

home heating, 97

how pipelines work (pipeline structure), 110, 110f

industrial clients, 119

LNG (See Liquified natural gas (LNG))

major market participants, 99–100

midwestern U.S. gas markets, 121, 121f

monthly gas consumption, 118f

natural gasoline, contrasted, 210

physical natural gas business, 101

pipeline map and tariff schedule, 107f

pipeline transportation (See Natural gas transportation)

porosity/permeability, 103

price certainty, 116

processing, 103–104

residential clients, 119

southeastern U.S. gas markets, 124, 124f

spot and forward markets, 113–114

spot prices, 116–117

spread trades, 112, 113

standard for energy per unit volume, 104

storage (See Natural gas storage)

summary/key topics, 97

supply and demand, 118

swing swaps and options, 114–115

terminology, 119

Texas/Gulf Coast region, 123, 123f

trading and marketing, 112–113

transportation contracts, 105–107

units, 7, 98

volatility, 116f, 117

weather considerations, 118

western U.S. gas markets, 120, 120f

zone rates/postage stamp rates, 107

Natural gas combined cycle plant, 143f, 144

Natural gas drilling, 101, 102f

Natural gas forward curve, 77f, 116f

Natural gas futures, 110

Natural gas liquids (NGLs), 209–213

alkanes, 211, 211f

alkenes, 211, 211f

brief synopsis, 18–19

butane, 210f, 212

definition, 109

ethane, 210f, 211–212

fractional grade, 213

isobutane, 210f, 212

liquid petroleum gas (LPG), 212, 212f

natural gasoline, 210, 210f, 212

NGL trading, 212–213

overview, 210f

pentane, 210f

pentanes+, 210f, 212

pipeline grade, 213

propane, 210f, 211

summary/key topics, 209

trading hubs, 212, 213f

Natural gas marketers, 100

Natural gas models, 35–39, 392–419

liquefied natural gas (LNG), 416–419

natural gas storage, 404–415

natural gas transportation, 392–403

(See also individual sub-entries)

Natural gas pipeline map, 105f

Natural gas pipeline network (2008), 105f

Natural gas prices (2003–08), 117f

Natural gas storage, 110–112, 404–415

aquifers, 412

base gas/working gas, 406

benefits of storage, 406f

brief synopsis, 36–37

depleted gas reservoirs, 410

economic value of storage facility, 404

gas “cushion,” 410–411

geology, 408–409

how it works, 404–405

inserting/removing gas from storage facility, 407, 409f

physically unrecoverable gas, 409, 410f

porosity/permeability, 409

pressure constraint, 408

salt caverns, 411–412

storage facilities (map, Dec 31/2013), 111f, 408f

storage reports, 414, 415f

summary/key topics, 404

terminology, 412–413

trading example, 413–414

Natural gas storage reports, 414, 415f

Natural gas transportation, 104–107, 392–403

baseload contracts, 400

brief synopsis, 36–37

compressor stations, 395–397

cost-effectiveness of pipelines, 393

economic trade-off, 37

firm contracts, 400

firm/interruptible service, 397, 399

four-segment pipeline, 398f

how pipelines work, 226–227, 394–397

injections/removals, 394–395

interstate pipelines and compressor stations (map), 397f

national/regional distribution, 395f

operating constraints, 393

pipeline map and tariff schedule, 401f

prices, 395f

reservation charge, 399

short-term interruptible contracts, 400

summary/key topics, 392

terminology, 393–394, 399–400

trading example (pipelines as insurance providers), 401–402

trading example (short-term interruptible trades), 403

transportation/distribution pipelines, 393

U.S. natural gas pipeline network (2008), 105f

Natural gasoline, 210, 210f, 212

Natural hedge, 83

Negative correlation, 246, 246f

Negative prices, 75–76

Net-profit formula, 329, 329f

Netting of positions provision, 83

Neutrons, 365, 366

New England ISO (ISO-NE), 126f, 158, 158f

New Jersey Hub (NJ Hub), 155f

New Jersey solar renewable energy certificate (NJ SREC), 390

New York ISO (NYISO), 126f, 157, 157f

New York Mercantile Exchange (NYMEX), 5

NGLs (See Natural gas liquids (NGLs))

Nigerian Bonny Light, 178, 178f

Nighttime off-peak hours, 137

Nitrogen, 218

Nitrogen oxides (NOx), 208, 216, 218

NJ Hub (New Jersey Hub), 155f

NJ SREC (New Jersey solar renewable energy certificate), 390

NOx (See Nitrogen oxides (NOx))

No. 1 fuel oil, 184

No. 2 fuel oil, 173–175, 184

No. 4/5/6 fuel oil, 184

Node price, 132

Nondiscriminatory auction, 127

Nonfungible asset, 54

Nonspinning reserve, 385

Normal distribution, 238f, 271f, 290f

Normal yield curve, 74f

North American power interconnections, 148f

Notional amount, 468

Notional quantity, 57, 63

Notional value, 83

NP-15, 130f, 152, 152f

NREL (National Renewable Energy Laboratory), 358

Nuclear bomb, 365

Nuclear chain reaction, 364

Nuclear cycle, 365–367

Nuclear enrichment, 365

Nuclear fission, 364–365

Nuclear generators, 138

Nuclear power, 363–368

brief synopsis, 33

coal plants, compared, 364, 367

long-distance transmission of power, 367

nuclear chain reaction, 364

nuclear cycle, 365–367

nuclear enrichment, 365

nuclear fission, 364–365

nuclear radiation, 364

nuclear weapon proliferation, 367

pollution, 367

storing concentrated nuclear waste, 366–367, 368

summary/key topics, 363

toxic waste, 366–367

uranium enrichment process, 365

uranium reserves, 367

Nuclear radiation, 364

Nuclear reactor, 364–365

Nuclear weapon proliferation, 367

Number of samples (test 5), 464, 464f

NWS forecasts, 306, 307f, 308f

NYISO (New York ISO), 126f, 157, 157f

NYISO G Hudson Valley, 130f

NYISO J NYC, 130f

NYMEX (New York Mercantile Exchange), 5

NYMEX natural gas contracts, 61

NYMEX WTI crude oil contract, 77, 175

(See also WTI crude)

NYMEX WTI open interest, 77f

O

Obligor, 438

Observed/simulated VAR, 434–435

Octane, 172

Octane ratings, 172

Off-peak to peak price ratio, 375f

Offsetting trade, 58

Offshore drilling rigs, 169

Ohio in-state nonsolar REC, 391

Ohio in-state solar REC, 391

Ohio out-of-state nonsolar REC, 391

Ohio out-of-state solar REC, 391

Ohm’s law, 140

Oil, 160–184

API gravity, 165, 165f, 166f

biodiesel, 182–183

brief synopsis, 14–17

CMA price, 177

crack spread, 178–179

crude oil, 165–166

crude oil cargo vessels, 167f

crude oil conversion, 166, 166f

crude oil market participants, 161–163

density and sulfur content, 163

diesel fuel, 173–175

distillation, 16, 169

distillation tower, 170f

downstream processing, 168

ethanol, 180–182

exchange traded spreads, 180

exploration and drilling, 163–164

fractional distillation, 169–170

futures, 175–176

gasoline, 171–172

heating oil, 173–175

no. 2 fuel oil, 173–175

petroleum, 163

physical trading, 176–177

Posting Plus (P-Plus), 177

refined petroleum, 170–171

refining, 167–169

renewable identification number (RIN), 183

seismology, 164

summary/key topics, 160

terminology, 183–184

transportation, 166–167

trap, 164, 164f

units, 163

variable pricing, 177

Oil and gas reserves, 95

Oil and gas resources, 95

Oil exploration company, 4

Oil futures, 175–176

Oil sands, 92

Oil tankers, 167f

Oil trap, 164, 164f

Oil wells, 91

Olefins, 211, 211f

One-axis tracking, 355

One-sided/two-sided VAR, 434, 434f

OPEC (Organization of Petroleum Exporting Countries), 162n

Open form solution, 277

Open market price, 195

Operating scenarios, 333, 333f, 334, 334f

Option, 70–71

premium, 71, 251

(See also Financial options)

Option pricing, 264–287

abbreviations, 296f

arbitrage-free pricing, 266–267, 272–275

Asay model, 279

Asian options, 282, 282f, 283f

binomial tree model, 269–270, 270f

Black 76 model, 279

Black Scholes formula, 276–278

Black Scholes genre option models, 278–283

bleeding small amount of money every day, 287

brief synopsis, 23–25

Brownian motion, 266, 268

delta hedging, 267

dynamic hedging, 24, 265

exotic options, 265

extending arbitrage pricing over longer periods, 275–276

fair value of option, 274, 275f

fat tail problem, 272

Garman-Kohlhagen model, 279

generalized Black Scholes cost of carry, 280f

generalized Black Scholes formula, 280f

generalized Black Scholes inputs, 281f

Greeks (See Greeks)

historical overview, 266

implied volatility, 280, 282–283

interest rate models, 272, 273f

large binary trees, 276f

Merton model, 279

models of future prices, 269–271

multiperiod binary tree, 275f

replicating portfolios, 268–269

summary/key topics, 264

vanilla options, 265

volatility smile, 283, 284f

(See also Financial options)

Option pricing abbreviations, 296f

Option valuation (See Option pricing)

Option writer, 251

Orderly market, 426

Organic sulfur, 190

Organization of Petroleum Exporting Countries (OPEC), 162n

OTC-cleared forward trade, 71f

OTC clearing, 71f

OTC trade, 60, 83

Other differential, 177

Out-of-merit order, 131

Out-of-sample test, 311

Out of the money, 258, 263

Outage rates, 386

Outcomes analysis, 451f

Outlier price, 428

Outright position, 79

Over-the-counter market, 83

Over-the-counter trading, 5

Overhead power lines, 146

Overnight power prices versus daytime power prices, 374

Overpressure, 89, 90

Overview (See 30-second summary)

Ozone, 208, 218

P

P10, 95

P50, 95

P90, 95

P-Plus (Posting Plus), 177

P-type semiconductor, 352

P-value, 464n

Pacific Northwest power market, 154, 154f

Palo Verde, 130f, 153, 153f

Panamax tanker, 167f

Parabolic mirror, 351f

Paraffin wax, 87f

Paraffins, 211, 211f

Parallel shift, 73, 74f

Parametric VAR, 435

Parent company, 441

Particulate matter, 349

Particulate pollution, 218–219

Path 15, 152

PD (probability of default), 439–440

Peak shaving units, 418, 419

Peaking generation plants, 317–318

Pentane, 210f

Pentanes+, 87f, 210f, 212

Perforating gun, 90

Permeability, 103, 164, 409

Permeable rock, 103f, 409

Persian Gulf crude oil, 15, 163

Petroleum, 163

(See also Oil)

Phase, 222

Phase changes, 221, 223

Photovoltaic (PV) power, 348, 349, 352–353

Physical contract, 2

Physical crude oil trades, 176–177

Physical delivery, 53

Physical market, 83

Physical properties, 221–229

air conditioning and refrigeration, 227–229

brief synopsis, 20–21

definition, 222

distillation, 224–225

gas, 224, 225–226

gas pipelines, 226–227

ideal gas law, 226, 226f

liquid, 223–224

phase changes, 221, 223

separation, 222, 223

solid, 223

states of matter, 223–224

summary/key topics, 221–222

temperature, 223

Physical trade, 2

Physical transaction, 175

Physically unrecoverable gas, 409, 410f

Pinging, 173

Pinking, 173

Pipeline grade NGLs, 213

Pipeline operators, 4

Pipeline structure, 110, 110f

Pipeline transportation

coal, 187–188

gasoline, 171

natural gas (See Natural gas transportation)

PJM-AD, 130f, 155f

PJM DOM (Dominion Hub), 155f

PJM-E, 130f, 155f

PJM ISO (Mid-Atlantic power market), 151, 151f, 155, 155f

PJM-NI, 130f

PJM-W, 130f, 151, 155f, 305

P&L movements, 433

P&L (profit and loss), 41

Plants, 206

Plasma, 223n

Platts Inside FERC survey, 115

Plutonium, 219

Point-to-point HVDC transmission, 345f

Pollution, 214–220

acid rain, 215

brief synopsis, 19, 20

carbon dioxide, 215–216, 217, 218

carbon dioxide emissions and fuel type, 219

carbon monoxide, 216, 217

coal, 186, 195

combustion, 216–218

defined, 214

economically dispatched markets, 325

fly ash/soot, 216, 219

greenhouse effect, 20f

greenhouse gases, 215

heavy metals, 216, 218–219

largest polluting countries, 202

lead, 172, 219

mercury, 218–219

nitrogen oxides, 216, 218

nuclear power, 367

overview, 215–216

particulate, 218–219

sulfur oxides, 216, 218

summary/key topics, 214

toxic chemicals, 220

POLR (provider of last resort), 129

Pores, 409

Porosity, 103, 164, 409

Porous, impermeable rock, 103, 103f

Porous, permeable rock, 102, 103f

Portfolio VAR, 434–435

Position, 58–59, 84

Position limit, 454

Positive correlation, 246, 246f

Possible reserves, 95

Postage stamp rates, 107, 399

Posting Plus (P-Plus), 177

Power, 9

Power grid, 128f, 146

Power grid operators, 4

Power marketer, 5, 328

Power plant operating scenarios, 333, 333f, 334, 334f

Power plant’s profit, 318

Power purchase agreement (PPA), 134, 388

PPA (power purchase agreement), 134, 388

Preferred debt, 44

Premium

options, 71, 251, 263

weather derivatives, 468

Premium crude oils, 169, 178

Present value, 72

Pressurized metal containers, 99

Price

correlation between electricity and fuel prices, 334–335

negative, 75–76

off-peak to peak price ratio, 375f

overnight power prices versus daytime power prices, 374

residential power prices, 340, 340f

Price transparency, 78

Price volatility (See Volatility)

Primary market, 425

Primary winding, 343

Principal market, 426

Probabilistic description (P10, P50, etc.), 95

Probability of default (PD), 439–440

Probable reserves, 95

Product grade, 177

Production, 86

(See also Exploration and production)

Production sharing contract, 89

Profit and loss (P&L), 41

Profit per unit, 328f

Prompt contract, 177

Propane, 87f, 104, 210f, 211

Proven reserves, 95

Provider of last resort (POLR), 129

Public goods, 203–204

Public service commission, 4, 126, 132–133, 134

Public utility commission, 4, 126, 132, 134

Pumped hydropower, 373, 373f, 375–376

Pumpjack, 91f

Pure biodiesel, 183

Put/call parity, 261–262

Put option, 71, 252, 261f

PV effect, 352

PV (photovoltaic) power, 348, 349, 352–353

Pyrite, 190, 191

Q

Quebec Interconnection, 148f

R

r (See Correlation coefficient (r))

R2 test, 463, 464f

Radioactive decay, 364

Random walk, 268, 335

Rate base, 133, 133f

Rate cases, 126, 133

RBOB (reformulated blendstock for oxygen blending) gasoline, 179, 184

RCC (readily convertible to cash), 57

Readily convertible to cash (RCC), 57

Real assets, 54f, 55

Real options model, 328

Real-time auction, 127, 315, 324

Rearrangement of Kirk’s approximation, 298f

Receipt adder, 106, 399

Receipt point, 394

Recovery rate, 438

RECs (renewable energy certificates), 389–391

Reference weather station, 468

Refined petroleum products, 160, 170–171

Refiner, 162, 179

Refineries, 169

Refining, 86, 167–169

Reformulated blendstock for oxygen blending (RBOB) gasoline, 179, 184

Refrigeration and cooling system, 221, 227–229

Regasification, 108

Regional transmission operator (RTO), 5, 126

Registry, 391

Regression analysis, 462–463, 463f

Regulated market, 4, 51, 84, 126, 129, 132–134

Regulation down (reg down), 384

Regulation energy, 384

Regulation up (reg up), 384

Regulators, 4

Renewable energy certificates (RECs), 389–391

Renewable identification number (RIN), 183

Renewable portfolio standard (RPS), 390, 391

Reservation charge, 106, 399, 400

Reserve generation, 384

Reserves, 95

Residential power prices, 340, 340f

Resources, 95

Retail consumer demand for electricity, 387f

Retail price, 127

Retail sales, 128

Rho (interest rates), 284, 287

RIN price spikes, 183

RIN (renewable identification number), 183

Ring fencing, 442, 442f

Risk management, 39–47, 420–470

counterparty credit risk, 437–444

hedging, 456–464

mark-to-market accounting, 420–429

model risk, 445–455

value at risk (VAR), 430, 436

weather derivatives, 465–470

(See also individual sub-entries)

Risk of a portfolio, 431

Risk/reward measures, 243–244

RMS (root mean square), 240

Rolling volatility, 241f

Root mean square (RMS), 240

Royalties, 88

RPS (renewable portfolio standard), 390, 391

RTO (regional transmission operator), 5, 126

RTO/ISO operators, 126f

S

Salt beds, 411

Salt caverns, 411–412

Salt domes, 411

Sampling, 233–234

Scatter diagram, 245, 245f

Scholes, Myron, 266, 276

Secondary electricity markets, 382–391

ancillary services markets, 383–385

brief synopsis, 34–35

capacity markets, 385–388

financial transmission rights (FTRs), 388–389

power purchase agreement (PPA), 388

renewable energy certificates (RECs), 389–391

summary/key topics, 382–383

Secondary winding, 343

Securities, 53, 84

(See also Financial instruments)

Seismology, 164

Selling a crack spread, 179

Semiconductor, 352

Sensitivity analysis, 284

(See also Greeks)

Separation processes, 222, 223

Service contract, 89

Settlement price, 65

Seven-day rolling volatility, 241f

Shale gas, 92–94

Shale rock processing, 93–94

Sharpe ratio, 244

Sharply sloping interest rate curve, 72

Short, 84

Short a call, 260f

Short a forward, 260f

Short a put, 261f

Short an asset, 6

Short circuit, 10

Short-form transaction, 70

Short position, 58, 59, 84

Short-term interruptible contracts, 400

Short the crack spread, 179

Short the option, 252

Short volatility, 252

Shoulder months, 136

Shutting down the plant, 330

σ, 435

(See also Standard deviation (σ))

σ2 (See Variance (σ2))

Significance F test, 464, 464f

“Significant,” 464n

Silicosis, 216

Simple distillation, 167–168, 170f

Simulation, 248

Sink, 388

Skewed distribution, 238f

Slope significance (test 3), 464, 464f

Slope (test 1), 463, 464f

Slurry pipelines, 187

SMD (standard market design), 131, 132

SOx (See Sulfur oxides (SOx))

Solar cell, 353f

Solar collector, 350, 351f

Solar concentration, 350–352

Solar panels, 352, 353

Solar power, 348–356

advantage of thermal power, 354

brief synopsis, 31–32

capacity factor, 355, 355f

conversion efficiency, 351

cost of solar installation/additional production trade-off, 355–356

more favorable/less favorable locations, 349–350, 354

particulate matter, 349

photovoltaic (PV) power, 348, 349, 352–353

position of sun, 349, 350f

PV effect, 352

solar cell, 353f

solar collector, 350, 351f

solar concentration, 350–352

solar panels, 352, 353

solar production volume, 354–356

solar radiation, 348

summary/key topics, 348–349

thermal power, 348, 349, 353–354

trading example (German solar power), 356

Solar radiation, 348

Solar REC (SREC), 391

Solid, 223

Soot, 216, 219

Sour crude oil, 163, 165

Source, 388

Source code control, 453

Southeastern U.S. gas markets, 124, 124f

Southwest Power Pool (SPP), 126f

SP-15, 130f, 152, 152f

Spark spread, 79, 145–146, 145f, 292, 293f, 329

Spark spread option models, 337–338

Spatial load forecasting, 299–312

base load power, 302–304

brief synopsis, 27

consumer type and location, 301–302

creating a model, 310–312

defined, 300

error analysis, 310–311, 312f

expected or worst-case scenario?, 300

forecasting, 301

goal, 300

hour of day, 308–310

month, 305–306

NWS forecasts, 306, 307f, 308f

summary/key topics, 299

temperature, 304–308

temperature heat index (THI), 304–305

weekdays, weekends, holidays, 308, 309f

wind chill index (WCI), 305

Spinning reserve, 384

Spontaneous fission, 364

Spot market, 2, 3, 50–52, 84

Spot market contract, 175, 176

Spot market delivery for crude oil, 176

Spot power market, 130

Spot price, 176, 195

Spot transaction, 62

SPP (Southwest Power Pool), 126f

SPP North, 130f

SPP South, 130f

Spread options, 288–298

brief synopsis, 25–26

correlation, 289

implied correlation, 296–298

Kirk’s approximation, 294–295

Kirk’s approximation, rearranged, 298f

martingale, 291f

mean-reverting sequence, 291f

modeling a spread, 290–291

prices and correlation estimates, 291, 292f

spread option call formula, 295f

spread option call payoff, 289f

spread option payoff, 294f

summary/key topics, 288

underlying assets, 289

what actual spread looks like, 292–294

Spread trades, 79–80, 112, 113

SR 11-7, 445–447

SREC (Solar REC), 391

Stability testing, 450

Standard deviation (σ), 240, 240f

Standard market design (SMD), 131, 132

Standard normal density functions, 296f

Standard pricing models, 271

State changes, 222

(See also Phase changes)

States of matter, 223–224

Statistical tests, 463–464, 464f

Statistics, 230–249

brief synopsis, 21

calculus, 235–236, 239

common notation, 232–233

confidence interval, 231

correlation, 230, 244–248

correlation coefficient, 246, 247f

cumulative distribution, 234, 234f

discrete/continuous probability, 236

exponential decay, 241, 242f

exponentially weighted volatility, 241–243

frequency distribution, 234, 234f, 235f

histogram, 233, 233f, 235f

information ratio, 244, 244f

main goals of statistical analysis, 231

mean absolute deviation, 239

mode, median, mean, 233, 237

Monte Carlo analysis, 248–249

risk/reward measures, 243–244

rolling volatility, 241f

sampling, 233–234

scatter diagram, 245, 245f

Sharpe ratio, 244

standard deviation, 240, 240f

summary/key topics, 230–231

variance, 239, 239f, 240f

variation and volatility, 237–240

volatility, 230, 240

Steam turbine, 141, 141f, 354

Steam turbine plant, 140–141

Steep yield curve, 72, 74f

Step-down transformer, 344f

Step-up transformer, 344f

Stochastic process, 268

Stock, 56

Storage

coal, 187

electricity (See Electricity storage)

natural gas (See Natural gas storage)

nuclear waste, 366–367, 368

Stress testing, 436, 450

Strike, 468

Strike price, 63, 252, 263

Strip mining, 92, 192–193

Structural subordination, 442, 442f

Sub-bituminous coal, 189

Subsidiary, 441

Suezmax tanker, 167f

Sugarcane, 180

Sulfur, 163, 172

Sulfur oxides (SOx), 208, 216, 218

Summarization, 231

Summary/key topics (See 30-second summary)

Sunlight, 320

Superheated steam, 11, 140

Superheated water, 142

Supply and demand

captive audience, 50

elasticity, 50

lag between high prices and increased supply, 50

law of demand, 49

law of supply, 49

natural gas, 118

Surface mining, 192–193

Swap, 68–69

Sweet crude oil, 163, 165

Swing options, 114–115

Swing swaps, 114–115

Swing trade, 113

Synchronized reserve, 384

Synchronizing power plants, 148

Synthetic forward, 261f

Synthetic options, 261–262, 263

Synthetic put, 262f

System frequency, 385

T

T (tonne), 163

Tar, 87f

Tariff, 106, 133, 400

Tax and royalty contract, 89

Technical primer, 20–26, 214–298

financial options, 250–287

option pricing, 264–287

physical properties, 221–229

pollution, 214–220

spread options, 288–298

statistics, 230–249

(See also individual sub-entries)

Temperature

boiling/melting point, 223

electricity, 137, 137f

long-term temperature forecast, 308f

natural gas, 118

Paris, 201f

physical properties, 223

spatial load forecasting, 304–308

THI/WCI, 304–305

(See also Weather derivatives)

Temperature heat index (THI), 304–305

Temperature modeling, 469–470

Terminology (See Common terms)

Tesla, Nikola, 192

Test case, 454

Test well, 90

Texas/Gulf Coast region, 123, 123f

Texas Interconnection, 148f, 149

Théorie de la spéculation, 266

Thermal solar power, 348, 349, 353–354

Theta (passage of time), 284, 286–287

THI (temperature heat index), 304–305

30-second summary

coal, 185–186

counterparty credit risk, 437

electricity, 125

electricity storage, 369

emissions markets, 199

energy markets, 1

exploration and production, 85

financial options, 250

generation stack, 313

hedging, 456

levelized cost of entry (LCOE), 376

liquefied natural gas (LNG), 416

mark-to-market accounting, 420

model risk, 445

natural gas, 97

natural gas liquids (NGLs), 209

natural gas storage, 404

natural gas transportation, 392

nuclear power, 363

oil, 160

option pricing, 264

physical properties, 221

pollution, 214

secondary electricity markets, 382–383

solar power, 348–349

spatial load forecasting, 299

spread options, 288

statistics, 230–231

tolling agreements, 327

trading markets, 48

value at risk (VAR), 430

weather derivatives, 465

wheeling power, 339

wind power, 357

Thorium-232, 367

Thorium cycle, 367

3-2-1 crack spread, 179, 179f

Three-phase power system, 147, 147f, 148

Time spread, 113

Time value of money, 71–75

TOE (tonne of oil equivalent), 96

Tolling agreements, 327–338

breaking up the model, 330–331

brief synopsis, 29–30

converting fuel to electricity, 328–330

correlation between electricity and fuel prices, 334–335

day/night power, 334

heat rate spread, 336f

intrinsic value, 335

legs, 330, 331

net-profit formula, 329, 329f

operating scenarios, 333, 333f, 334, 334f

optimal operating mode, 333

path dependence, 30

physical model of power plant, 331–333

power marketer, 328

profit per unit, 328f

real options model, 328

shutting down the plant, 330

simpler/complicated models, 30

spark spread option models, 337–338

summary/key topics, 327

underlying instruments, 331

valuation and volatility, 335–337

zero profit, 329, 330

Tonne (t), 163

Tonne of oil equivalent (TOE), 96

Topics covered in book (See 30-second summary)

Topping cycle cogeneration, 142

Toxic pollution, 218–219

Tradable, 54, 55

Trade, 84

Trade confirmation

short-form transaction, 70, 70f

weather derivatives, 469f

Trader, 4

Trading, 48

Trading example

compressed air, 374

German solar power, 356

location spread trade, 347

natural gas storage, 413–414

peak shaving units, 419

pipelines as insurance providers, 401–402

pumped hydropower, 375–376

short-term interruptible natural gas trades, 403

wheeling trade, 345–346

Trading markets, 48–84

(See also Energy trading markets)

Traditional drilling, 91f

Traditional wells, 89–91

Transformers, 343, 344f

Transmission, 12, 146

Transmission system operator (TSO), 4, 5, 126

Transportation

coal, 187–188

liquified natural gas (LNG), 418

natural gas (See Natural gas transportation)

oil, 166–167

Transportation pipelines, 393

Trap, 164, 164f

Treasury bonds, 72

TSO (transmission system operator), 4, 5, 126

Twain, Mark, 231n

2-1-1 crack spread, 179

U

U-235, 365

Ultra large crude carrier (ULCC), 167f

Uncontrolled state changes, 222

Underground mining, 193

Underlying asset (underlying), 52, 63, 263

Units (See Common units)

Uranium-233, 367

Uranium-235, 365

Uranium-238, 365

Uranium dioxide (UO2), 365, 366

Uranium enrichment process, 365

Uranium hexafluoride (UF6), 365

Uranium reserves, 367

U.S. energy-related carbon dioxide (CO2) emissions (2005–15), 93f

U.S. natural gas pipeline network (2008), 105f

U.S. retail consumer demand for electricity, 387f

U.S. Treasury bonds, 72

U.S. underground natural gas storage facilities, 111f

V

Valence band, 352

Valuation and volatility, 335–337

Value at risk (VAR), 430–436

asymmetric P&L, 436f

“big picture” summary, 431

brief synopsis, 41–43

calculating VAR, 432–433

diversification, 434

frequency at which event will occur, 432

lack of detail, 432

magnitude of expected move, 432

observed/simulated VAR, 434–435

one-sided/two-sided VAR, 434, 434f

parametric VAR, 435

P&L movements, 433

portfolio VAR, 434–435

purpose, 431

sidedness of expected move, 432

stress testing, 436

summary/key topics, 430

time horizon of expected move, 432

trade-off between simplicity and insightfulness, 436

weaknesses, 435

Vanilla options, 265, 289

VAR (See Value at risk (VAR))

Variable generation, 320–321

Variance (σ2), 239, 239f, 240f, 435

Variance of correlated assets, 435f

Variation and volatility, 237–240

Vega (changes in volatility), 284, 286

Velocity and acceleration, 285f

Very large crude carrier (VLCC), 167f

Vintage, 391

VLCC (very large crude carrier), 167f

Volatility, 230, 240

coal, 194

correlation, 292f

daily volatility of natural gas futures (1994–2009), 53f

Exponential weighting, 241–243

financial options, 255–256

implied, 280, 282–283

long/short, 252

natural gas, 116f, 117

rolling, 241f

sigma (σ), 435

spot market, 51, 52

tolling agreements, 335–337

Volatility smile, 283, 284f

Voltage, 139

Volume, 400

Volumetric risk, 465

Voluntary REC market, 391

W

WACC (weighted average cost of capital), 378, 379f

WCI (wind chill index), 305

Weather (See Temperature)

Weather contracts, 467, 469f

Weather derivative confirmation, 469f

Weather derivative option, 466

Weather derivatives, 465–470

brief synopsis, 46–47

defined, 465

heating and cooling degree days (HDD/CDD), 466–467

insurance, compared, 466, 466f

summary/key topics, 465

temperature modeling, 469–470

terminology, 467–468

trade confirmation, 469f

users, 465

valuation, 465

volumetric risk, 465

weather contracts, 467, 469f

weather derivative option, 466

weather swap, 466

Weather index unit, 468

Weather swap, 466

WECC subregions, 153f, 154f

Weighted average cost of capital (WACC), 378, 379f

West Texas Intermediate (WTI) crude, 175, 178, 178f, 184

West Texas Sour (WTS) crude, 177

Western Interconnection, 148f, 149–150, 150f

Western U.S. gas markets, 120, 120f

Westinghouse, George, 192

Wet natural gas, 98, 119

Wheeling, 340

Wheeling power, 339–347

AC transmission, 343

average residential power prices, 340, 340f

brief synopsis, 30–31

DC transmission, 344–345, 345f

modeling electrical flows, 342–343

purpose of wheeling, 340

spread trades compared to wheeling trades, 346–347

summary/key topics, 339

trading example (location spread trade), 347

trading example (wheeling trade), 345–346

transformers, 343, 344f

wheeling, defined, 340

wheeling trades, 340, 341, 345–346, 348

Wheeling trades, 340, 341, 345–346, 348

Wholesale price, 127

Wiener, Norbert, 268

Wiener process, 268

Wind chill index (WCI), 305

Wind energy, 358–360

Wind farms, 358

Wind power, 357–362

brief synopsis, 32–33

capacity factor, 361, 361f, 362f

downwind facility, 361

installation and maintenance, 360

location, 358, 361

long-distance power lines, 362

migratory birds, 362

monthly/hourly wind capacity factors, 361f, 362f

National Renewable Energy Laboratory (NREL), 358

overload risk, 362

season, 361

summary/key topics, 357

time of day, 361

unpredictability, 357

wind energy, 358–360

wind farms, 358

Wind turbines, 358

Winner’s curse, 414

“Wires” company, 129

Withdrawal, 394

Working gas, 406

WTI crude, 175, 178, 178f, 184

WTI December 2017, 175

WTS (West Texas Sour) crude, 177

Wyoming coal reserves, 198, 198f

Y

Yellowcake, 365

Yield curve, 72, 74f

Z

Zero correlation, 246, 246f

Zero profit, 329, 330

Zone price, 132

Zone rates, 107

Zones, 400, 401f

ZP-26, 152f

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