Energy market

The energy financial market has a lot of similarities with a stock market. You buy products, GOOGL on the stock market, ENOFUTBLYR-19. Given an underlying asset derivatives, for example futures and call / put options can be bought. Energy derivatives make it possible to using hedging strategies, just like with other financial products.

Acronym breakdown, ENOFUTBLYR-19

• E = Energy
• NO = Norway
• FUT = future
• BL = baseload, baseload Vs. peakload, baseload most common since peak load is more seldom
  • peak load can be at the warmest time interval of the day in spain, when air condition uses a lot of electricity
• YR = year

Financial terms

• bid / ask, market participants selling / buying
• close, markets are open at certain interval, the closing price is important for next days opening
• spread, can be between any values, i.e bid-ask spread and low-high spread
• Volatility, more volatility -> more uncertainty -> more risk
• Volume, low volume = illquid
• Black and Scholes option pricing formula.
  • Takes in strike price, risk free interest rate, volatility underlying price and gives option price
• Implied volatility, Black and Scholes solved for volatility when we know option price, no closed form solution
• call / put option, the right to buy / sell a financial product at strike price
• factoring, buying accounts payable / loans at reduced price
• Granularity, Yearly, Quarterly, Monthly, Daily

Energy

Energy is a commodity, i.e, the market treats each unit of energy as equally valuable. In the European energy market, the pricing is in Eur / MWh.

• 1 Watt = Joule / Second
• 1 MWh = 3 600 000 000 Joule

Players

• TSO - transmission system operators
  • responsible for a functioning electricity grid
• Electricity retailers

Physical distribution

• Generator
• Generator transformer
• Transmission lines
• Distribution transformers
• Distribution lines
• Destination, Homes and offices

Price areas

• System price, price assuming infinite capacity
• Norway is divided into NO[1-5], which have different spot prices
• Transmission lines are AC on land, and can be HVDC underwater

Emergy sources

Renewable - often intermittent

• Wind
  • Wind cannibalization, negative energy prices
• Solar
  • Voltaic cells, photoelectric effect
  • Geographic dependency
• Water
  • Magazines
  • Can be stored and saved for later
  • Too much rain -> waste

Not renewable

• Oil
• Coal
• Gas

links

• https://www.nordpoolgroup.com/
  • See spot prices, price differences between areas, capacities
• https://www.montelnews.com/en/

Pricing models

Price models are used by quants, quantitative finance experts, to decide a price for financial instruments.

option pricing

Black-Scholes model, https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model, which uses:

• Strike price
• Risk free interest rate
• Underlying price
• Volatility
• Time to expiration

To give a price for an option. An option can be “European” or “asian”, which differ in when it can be cashed out, European option is only cashed out at expiration, while asians can be cashed out any time from start of option to expiration.