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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
Active market, 426
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
All-in position, 109
Alternating current (AC) power, 12–13
Alternative compliance payment, 389, 390
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-free pricing, 266–267, 272–275
Arbitrage relationship, 274f
Area under a curve, 235f
Arithmetic mean, 237
(See also Mean)
Asay model, 279
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
financial transmission rights (FTRs), 388–389
Average, 237
(See also Mean)
Average price options, 282
Average residential power prices, 340, 340f
Avoided cost, 134
B2, 182
B5, 182
B20, 182
B99.9, 183
B100, 183
Bachelier, Louis, 266
Bacteria, 206
Bad market data, 454
Band gap, 352
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
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 Scholes formula, 276–278
Black Scholes genre option models, 278–283
BOE (barrel of oil equivalent), 96
Boiling point, 223
Bond market, 75n
Bose-Einstein condensates, 223n
Bottoming cycle cogeneration, 142
British thermal unit (Btu), 7
Brown, Robert, 268
Brown coal, 189
Brown energy, 391
Btu (British thermal unit), 7
Bundling, 148
Bunker fuel, 184
Buried power lines, 146
Burnable coal, 189
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
Calendar month average (CMA) price, 177
California ISO (CAISO), 126f, 152, 152f
California/Oregon Border (COB), 130f, 152f, 154, 154f
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
Capacity markets, 385–388
Capacity payment, 385
Capital recovery factor (CRF), 378, 379f
Captive audience, energy consumers as, 50
Captive price, 195
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
Cascade Mountain range, 154
Cash flows, 75
Cash transaction, 62
CDD (cooling degree day), 466–467
CDS (credit default swap), 60, 81, 440
Change log, 453
Chemical properties, 222
Circuit, 139
Clean spark spread, 146
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
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
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
Combined cycle power plant, 143f, 144
Combustion pollution, 216–218
Commissioner, 134
(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 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 stations, 227f, 395–397
Concentrated solar power, 350–352
Concept summary (See 30-second summary)
Condenser
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
Conversion efficiency, 351
Cooling degree day (CDD), 466–467
Cooling system, 227–229
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
Counterparty, 438
Counterparty credit risk, 81, 437–444
brief synopsis, 44
collateral, 440
corporate structure, 441
credit default swap (CDS), 440
credit exposure, 438–439
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
structural subordination, 442, 442f
summary/key topics, 437
Crack spread futures, 180
Crack spread option, 180
Credit default swap (CDS), 60, 81, 440
Credit exposure, 438–439
Credit insurance, 81
Credit quality, 439–440
Credit ratings, 440
Credit risk
counterparty (See Counterparty credit risk)
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
Cycling, 412
Cylinder mistiming (knocking), 173
D
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 date, 68
Delta hedging, 267
Depleted gas reservoirs, 410
Deregulated market, 4, 52, 81, 126–127, 129
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
Disraeli, Benjamin, 231n
Distillation, 16, 169, 224–225
Distillation tower, 170f
Distressed sale, 428
Distribution pipelines, 393
Dominion Hub (PJM DOM), 155f
Double distribution, 238f
Downstream processing, 168
Drill bits, 90
Drill string, 90
Drilling fluid, 90
Drilling rigs, 169
DVA (debit value adjustment), 443–444
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
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
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 purchase agreement (PPA), 134
regional markets, 148–159
regulated markets, 132–134
short circuit, 10
simple circuit diagram, 140f
standard market design (SMD), 131, 132
steam turbine plant, 140–141
storage (See Electricity storage)
summary/key topics, 125
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
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
Emissions markets, 199–208
brief synopsis, 18
cap and trade (See Cap and trade system)
carbon sequestration, 205, 206
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
Erroneous price/outlier price, 428
Error of the model, 311
Ethanol, 180–182
Excess equity, 64
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
Expected loss calculation, 444f
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
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 constant, 242f
Exponential weighting factor, 242f
Exponentially weighted volatility, 241–243
Exposure at default (EAD), 438
F
Fair Isaac, 440
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 contract, 2
Financial instruments, 53–58
overview, 54f
Financial market, 82
Financial options, 70–71, 250–287
all-or-nothing investment, 251
American/European option, 256–257
applications, 251
bid/ask spread, 254–255
brief synopsis, 21–25
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
option payoffs, 252f
option valuation (See Option pricing)
payoff diagrams, 257–259
put/call parity, 261–262
spread options (See Spread options)
summary/key topics, 250
synthetic options, 261–262, 263
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
Flue gas desulfurization (FGD), 191
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
Fossil-fuel-based power plants, 98, 119
Fossil fuel exploration, 86
(See also Exploration and production)
Fossil fuel plants, 138
Four-segment pipeline, 398f
Frac spread, 80
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
Fundamental analysis, 377
Fungibility, 55
Future cash flows, 75
Future value, 72
Futures contract, 175
Futures month abbreviations, 176f
G
Game theory, 320
Gamma (acceleration), 284, 285–286
Gamma radiation, 364
Garman-Kohlhagen model, 279
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 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
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/day-ahead prices, compared, 324f
sample, 314f
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
Green energy, 391
Greenhouse effect, 20f
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 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 sour crude, 169
Hedge accounting, 460–462
Hedge effectiveness tests, 462–464
Hedge ratio, 267
accounting issues, 457
brief synopsis, 45–46
definitions, 457
delta, 267
futures, 459
hedge accounting, 460–462
hedge effectiveness tests, 462–464
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
Historical cost accounting, 421
Holding company, 441
Hoover Dam, 153
Hub price, 132
HVDC (high voltage direct current) transmission, 344–345, 345f
Hydraulic fracking, 92–93
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)
IESO (Independent Electricity System Operator), 126f
IFERC survey, 115
Illiquid asset, 3
Illiquidity, 77–78 (See also Liquidity)
Implied market heat rate, 322, 323
Implied volatility, 280, 282–283
In-sample test, 311
Independent Electricity System Operator (IESO), 126f
Independent system operator (ISO), 5, 126
Individual rate of return (IRR), 72
Induced fission, 364
Injection, 394
Injection capacity, 413
Intangible assets, 55
Integral, 235f
Integration, 235–236
Interactions list, 454
Intercontinental Exchange (ICE), 5
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
ISONE Hub, 130f
Isotope, 365
J
Joule (J), 7
Jump diffusion, 272
K
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
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
Liquid, 223–224
Liquid asset, 3
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 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-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 account, 65
Margin call, 65
Margin of error, 231
Marginal power plants, 29
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
Market, 422
Market implied heat rate, 144
Market participant, 426
Master netting agreement, 441, 467
Master netting clause, 69
Maximum transaction payment amount, 468
Meal, 181
Mean absolute deviation, 239
Mean average deviation, 239f
Mean-reverting sequence, 291f
Measures of central tendency, 237
Measures of dispersion, 239
Median, 237
Megajoule (MJ), 7
Megawatt-Hour (MWh), 9
Megawatt (MW), 9
Melting point, 223
Merchant generator, 129
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
Minimum variance hedge ratio, 460, 461f
MISO (Midcontinent ISO), 126f, 156, 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
summary/key topics, 445
was model used appropriately?, 448–449, 449f
Modeling electrical flows, 342–343
Modified Black 76 formula, 282
Modigliani-Miller proposition on hedging, 457–458
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
Nash equilibrium, 320
National defense, 203–204
National Renewable Energy Laboratory (NREL), 358
National Weather Service (NWS), 306
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
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
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
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
brief synopsis, 18–19
definition, 109
fractional grade, 213
liquid petroleum gas (LPG), 212, 212f
natural gasoline, 210, 210f, 212
NGL trading, 212–213
overview, 210f
pentane, 210f
pipeline grade, 213
summary/key topics, 209
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
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
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
Netting of positions provision, 83
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. 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 value, 83
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
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 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
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 wells, 91
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
(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
delta hedging, 267
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
(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
Other differential, 177
Out-of-merit order, 131
Out-of-sample test, 311
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
Overview (See 30-second summary)
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
Panamax tanker, 167f
Parabolic mirror, 351f
Paraffin wax, 87f
Parametric VAR, 435
Parent company, 441
Particulate matter, 349
Particulate pollution, 218–219
PD (probability of default), 439–440
Peaking generation plants, 317–318
Pentane, 210f
Perforating gun, 90
Persian Gulf crude oil, 15, 163
Petroleum, 163
(See also Oil)
Phase, 222
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 pipelines, 226–227
liquid, 223–224
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 transportation
coal, 187–188
gasoline, 171
natural gas (See Natural gas transportation)
PJM DOM (Dominion Hub), 155f
PJM ISO (Mid-Atlantic power market), 151, 151f, 155, 155f
PJM-NI, 130f
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
carbon dioxide, 215–216, 217, 218
carbon dioxide emissions and fuel type, 219
combustion, 216–218
defined, 214
economically dispatched markets, 325
greenhouse effect, 20f
greenhouse gases, 215
largest polluting countries, 202
mercury, 218–219
nuclear power, 367
overview, 215–216
particulate, 218–219
summary/key topics, 214
toxic chemicals, 220
POLR (provider of last resort), 129
Pores, 409
Porous, impermeable rock, 103, 103f
Porous, permeable rock, 102, 103f
Portfolio VAR, 434–435
Position limit, 454
Positive correlation, 246, 246f
Possible reserves, 95
Posting Plus (P-Plus), 177
Power, 9
Power grid operators, 4
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
weather derivatives, 468
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
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
PV effect, 352
PV (photovoltaic) power, 348, 349, 352–353
Q
Quebec Interconnection, 148f
R
r (See Correlation coefficient (r))
Radioactive decay, 364
RBOB (reformulated blendstock for oxygen blending) gasoline, 179, 184
RCC (readily convertible to cash), 57
Readily convertible to cash (RCC), 57
Real options model, 328
Real-time auction, 127, 315, 324
Rearrangement of Kirk’s approximation, 298f
Receipt point, 394
Recovery rate, 438
RECs (renewable energy certificates), 389–391
Reference weather station, 468
Refined petroleum products, 160, 170–171
Refineries, 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
Risk management, 39–47, 420–470
counterparty credit risk, 437–444
hedging, 456–464
mark-to-market accounting, 420–429
model risk, 445–455
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
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
(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-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
Slurry pipelines, 187
SMD (standard market design), 131, 132
SOx (See Sulfur oxides (SOx))
Solar cell, 353f
Solar concentration, 350–352
Solar power, 348–356
advantage of thermal power, 354
brief synopsis, 31–32
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
PV effect, 352
solar cell, 353f
solar concentration, 350–352
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
Source, 388
Source code control, 453
Southeastern U.S. gas markets, 124, 124f
Southwest Power Pool (SPP), 126f
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
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 contract, 175, 176
Spot market delivery for crude oil, 176
Spot power market, 130
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
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
common notation, 232–233
confidence interval, 231
correlation coefficient, 246, 247f
cumulative distribution, 234, 234f
discrete/continuous probability, 236
exponentially weighted volatility, 241–243
frequency distribution, 234, 234f, 235f
main goals of statistical analysis, 231
mean absolute deviation, 239
Monte Carlo analysis, 248–249
risk/reward measures, 243–244
rolling volatility, 241f
sampling, 233–234
Sharpe ratio, 244
summary/key topics, 230–231
variation and volatility, 237–240
Steam turbine plant, 140–141
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)
Strike, 468
Structural subordination, 442, 442f
Sub-bituminous coal, 189
Subsidiary, 441
Suezmax tanker, 167f
Sugarcane, 180
Sulfur oxides (SOx), 208, 216, 218
Summarization, 231
Summary/key topics (See 30-second summary)
Sunlight, 320
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
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
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
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
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
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
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
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
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
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
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
coal, 194
correlation, 292f
daily volatility of natural gas futures (1994–2009), 53f
Exponential weighting, 241–243
financial options, 255–256
long/short, 252
rolling, 241f
sigma (σ), 435
tolling agreements, 335–337
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 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 derivative option, 466
weather swap, 466
Weather index unit, 468
Weather swap, 466
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
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
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
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
Z
Zone price, 132
Zone rates, 107
ZP-26, 152f
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