A software developer asked me a simple question: "What do energy trading companies do?" A simple question deserves a (relatively) simple answer, so that's what I've tried to do below.
For the moment, let's ignore energy trading companies where trading is the primary profit centre and instead focus on a trading company that operates physical power generation assets. For example, a power plant that turns natural gas into electricity. Let's look at how that company's trading group is organised into several task-oriented and market-oriented teams.
Operations and Physicals team
- Schedules the operation of power generation.
- Organises the receipt of the energy source, in this case natural gas.
- Schedules the delivery of spot power to customers. "Spot" in this context means short-term trading, usually done via day-ahead auctions.
- This team relies on forward price curves and volatility surfaces to calculate the sensitivity of physical assets to changes in forward prices of gas and power.
Structured Products team
- Builds, markets, and trades non-standard OTC products for gas and power.
- This team relies on forward price curves and volatility surfaces to measure the sensitivity of open positions to changes in the forward prices of gas and power.
Exchange-Traded Products team
- Trades in forward markets for gas and power, in order to delta-hedge exposures to gas and power across the entire company.
Forward Curve Analysis team
- Each day this team builds new forward price curves and implied volatility surfaces for gas and power.
- These data structures are used by the above-mentioned teams to price and hedge their assets and instruments.
- This is the team in which I worked at Barclays Capital a few years back.
The above is clearly very simplistic, and just a starting point for a dive into the complex details.