AEE CEP flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Merit order

Ranking of generating units by ascending marginal cost. Dispatch proceeds from cheapest to most expensive, and the marginal unit's bid sets the clearing price in most wholesale electricity markets.

Heat rate

Fuel energy needed per unit of electricity output, measured in Btu per kWh. Heat rate equals 3,412 divided by thermal efficiency, so a lower number indicates a more efficient plant.

Spark spread

Gross generation margin equal to the electricity price minus the gas price multiplied by the plant heat rate. Usually quoted in dollars per megawatt-hour and used to gauge gas-fired profitability.

Negative power prices

Prices below zero occur when must-run or subsidized generation plus weak demand exceeds supply needs. Generators pay to inject power to capture production tax credits or avoid shutdown and restart costs.

Contango and backwardation

Contango means forward prices exceed spot, typical when storage and carry costs dominate. Backwardation means forward prices sit below spot, typical when prompt supply is scarce and convenience yield is high.

Henry Hub

The principal North American natural gas pricing point, located in Louisiana and serving as the NYMEX futures delivery location. Most US supply contracts price as Henry Hub plus or minus a basis differential.

Crack spread

Refining margin equal to the market value of refined products such as gasoline and distillate minus the cost of the crude oil input. Used to hedge refinery profitability.

Block-and-index procurement

Sourcing strategy that buys fixed-shape energy blocks for part of forecast load and leaves the remainder at a floating index, blending budget certainty with continued market participation.

Full requirements contract

Supply agreement in which the supplier serves all of a customer's load and hourly shape, assuming volume and shape risk in exchange for a risk premium embedded in the price.

Layered procurement

Hedging approach that fixes prices in tranches over successive periods instead of a single transaction, averaging the achieved cost and reducing entry-timing risk.

Load factor

Average load divided by peak load over a defined period. A low load factor means peaky consumption, which raises unit cost because capacity is used less intensively.

Reverse auction

Competitive sourcing event in which prequalified suppliers bid prices down in real time against a transparent baseline. Best suited to standardized commodity supply rather than bespoke or complex contracts.

Total delivered cost

Sum of commodity, capacity or demand charges, transmission and distribution, ancillary services, taxes, and supplier margin. Comparing suppliers on commodity price alone can mislead the sourcing decision.

Swing tolerance band

Contractual allowance permitting delivered volume to vary within a stated percentage of the nomination, commonly plus or minus 10 to 20 percent, before imbalance charges or penalties apply.

Take-or-pay clause

Obligation to pay for a minimum contracted quantity whether or not the buyer takes it. The buyer may accept later delivery but bears volume risk below the stated threshold.

Change in law clause

Provision allocating the cost of new taxes, carbon levies, or market rule changes arising after signing, typically passing defined regulatory costs through to the buyer.

BATNA

Best alternative to a negotiated agreement, meaning the fallback outcome available if talks fail. A strong alternative, such as a competing supplier offer, supports a firmer negotiating position.

Liquidated damages

Pre-agreed compensation payable for a specified breach or delay, such as a missed commercial operation date, avoiding the need to prove actual losses in litigation.

ZOPA

Zone of possible agreement: the range between the two parties' walk-away points within which a deal is feasible. No overlap between reservation values means no mutually acceptable contract exists.

Fixed-for-floating swap

Contract exchanging a fixed price for a floating index over a set volume and term. Settlement is financial and in cash, with no physical delivery of energy required.

Price cap

Option granting the buyer a maximum price. If the index settles above the strike, the seller pays the difference, protecting the budget while preserving benefit from price declines.

Collar

Structure combining a purchased cap with a sold floor, often at zero or low net premium. The buyer gains upper protection but forgoes benefit below the floor strike.

Basis risk

Risk that the hedging instrument and the price actually paid diverge, typically because the hedge references a hub while physical delivery occurs at a different node or citygate.

Variation margin

Daily cash settlement of gains and losses on cleared futures positions. Rising prices require a short hedger to post cash before the physical purchase settles.

Hedge ratio

Percentage of forecast exposure that is financially fixed. A 70 percent hedge ratio leaves 30 percent of volume exposed to floating market prices.

Weather derivative

Financial contract paying out according to measured heating or cooling degree days. Used to hedge volume or revenue risk when consumption, rather than price, is the dominant exposure.

Scope 2 emissions

Indirect greenhouse gas emissions from purchased electricity, steam, heat, or cooling. Reported under the GHG Protocol using either the location-based or the market-based method.

Energy attribute certificate

Tradable instrument such as a renewable energy certificate or guarantee of origin representing the environmental attributes of one megawatt-hour of renewable generation, retired to substantiate a claim.

Carbon pass-through cost

Emissions allowance price multiplied by the emissions intensity of generation. Added to marginal cost, it shifts the merit order and raises clearing prices.

Hedge accounting

Accounting treatment matching gains and losses on a hedging derivative with the hedged item in the same reporting period, reducing earnings volatility when effectiveness criteria are met.

Capacity charge

Payment for reserved capacity or metered maximum demand, incurred regardless of energy consumed. It can dominate the bill for loads with sharp, narrow peaks.

Renewable portfolio standard

Regulation requiring a minimum share of electricity sales to come from renewable sources, typically satisfied by retiring certificates or by paying an alternative compliance payment.