Journal of Adam Chen Longhui : Power & Gas Trading

- 1/3 power is traded in day-ahead spot market. 2/3 in OTC or intraday market

Gas Trading Hubs in Asia

- spot and forward contracts, LNG derivatives

- Shanghai Petroleum and Natural Gas Exchange (SHPGX)

- Singapore Exchange (SGX)

- Japan Korea Marker (JKM) (benchmark price assessment for spot LNG to Northeast Asia)

- India Gas Exchange (IGX)

Power Trading Hubs in Asia

- day-ahead. term-ahead, intraday, real-time markets

- Japan Electric Power Exchange (JEPX)

- India Energy Exchange (IEX)

- Korea Power Exchange (KPX)

Gas Trading Hubs

- Henry Hub (USA) (benchmark for US gas price and for gas futures on NYMEX)

- Title Transfer Facility (TTF) (Netherlands) (benchmark for European gas prices)

- National Balancing Point (NBP) (UK)

Power Trading Hubs

- European Power Exchange (EPEX SPOT)

- Nord Pool (Nordic and Baltic countries)

- 98% of energy futures are not physically delivered, and the futures contract is closed by an opposite-position energy futures

- 80% of power needs by retailers are secured through futures and forwards, 20% via spot market

Henry Hub Natural Gas Futures

- 10,000 MMBtu (MMBtu = one million British thermal units)

- British thermal unit (Btu): A Btu is a measure of energy; it is the amount of energy needed to raise the temperature of one pound of water by one degree Fahrenheit.

- An average U.S. household uses approximately 90 MMBtu of natural gas per year for heating.

SGX Electricity Futures

- 0.5MW over half hour. one million watts. 1 MW of electricity can power about 1,000 average U.S. homes

- Singapore electricity market >90% dependent on natural gas. Most natural gas is imported through pipelines from Malaysia and Indonesia, and is linked to the market price of High Sulfur Fuel Oil (“HSFO”). The natural gas is primarily used by the generation companies (“Gencos”) to generate Singapore’s electricity, which is bought and sold through the National Electricity Market of Singapore (“NEMS”), the wholesale electricity market (i.e. spot market) operated by the Energy Market Company (“EMC”).

Electricity Price

10 SGD cents/kWh= 75 USD pe MWh

0.5MW over half half = 0.25MW*0.5hr = 0.25MWh

for 90-day contract, 48 half-hours * 0.25MWh * 90 = 1080 MWh

Minimum price fluctuation S$0.01 per MWh

MC: Marginal cost (€/MWh)

Y: Maximum capacity (MWh)

P: Spot market price (€/MWh)

F: Futures contract price (€/MWh)

X: Quantity in the futures contract (MWh)

Q: Quantity produced (MWh)

Cascading

Cascading refers to the process where longer-term futures contracts split into several shorter-term contracts as they approach their delivery period.

Example

On Jan 2008, buy a 2009 futures. On Dec 2008, split 2009 futures into Jan, Feb, Mar 2009 futures, and Q2, Q3,Q4 2009 futures. On March 2009, split Q2 2009 futures into Apr, May, Jun 2009 futures.

Backwardation

- Spot > forward

- Expect price of commodity to increase over time, expect increase in storage cost and cost of capital

- Producers has a strong need to lock in a price, hence are willing to accept lower forward price

Contango

- Forward > spot

- Expect decrease in supply

Producers' Risk Management

- producers want to lock in a revenue that covers their costs and earn a profit, hence a higher need for hedging and is willing to accept a lower forward price

Storage and carrying costs

- electricity is hard to store. Electricity is stored in batteries (chemical energy), pumped hydro storage (potential energy), and compressed air storage

Why power and gas come together?

- Natural gas is a primary fuel for electricity generation

- a power producer using natural gas as a feedstock will need to hedge against both power and gas price volatility

- the same infrastructure (such as pipelines and power plants) may be used for both power and gas

Sources of Electricity

- Coal 35.4%

- Natural Gas 22%

- Hydropower 15%

- Nuclear 10%

- Solar 7%

- Oil 3%

- Other renewables (biomass, geothermal) 4%

Battery

- Battery is expected to store 945 gigawatts of electricity by 2050

- Energy sector now accounts for over 90% of annual lithium-ion battery demand

CFD and Power Purchase Agreements (PPA)

- are swaps

- producer receive a fixed amount per MWh for their electricity (strike price) from purchaser

4000bcm of natural gas produced per day

1 Barrel of Oil has 5.8mil british thermal units (BTU), 1bcm of natural gas has approximately 1.02trillion BTU, hence 1bcm of natural gas = 176000 barrels of oil. Hence everyday, 100 mil barrels of oil is produced, while 4000bcm of natural gas is produced (or an equivalent of 704 mil barrels of oil)

- (Electric Power) The electric power sector uses natural gas to generate electricity and produce useful thermal output

- (Industrial Sector) feedstock (raw material) to make products and to generate electricity

- (Residential Sector) About 60% of U.S. homes use natural gas for space and water heating, cooking, and drying clothes.

- (Commercial Sector) fuel to generate electricity and in combined heat and power systems.

- (Transportation Sector) About 96% of transportation sector natural gas consumption was to power compressors that move natural gas through transmission and distribution pipelines. Nearly all natural gas consumption in vehicles is by government and private vehicle fleets as compressed and liquefied natural gas.