ICIS Heren Coal Swaps Daily Methodology

 

Coal Swaps Daily Methodology

The publication uses information gathered from market sources by ICIS Heren every day. These sources include but are not limited to:  
 o Utilities
 o Producers
 o Independent suppliers
 o Proprietary traders
 o Physical speculators
 o Brokers

Information collected through the course of the day will inform the daily market comment and regular analysis features explaining trends and movements in price.

The information is checked and analysed by ICIS Heren in order to produce close of day price assessments and indices.

Price assessments
 Information for the price assessments is gathered between 16:30  and 17:30 (London time).
 The assessments reflect typical prevailing prices of the coal swaps contracts as of 16:30 London time on all UK working days, except on the final working day immediately preceding 25th December and 1st January each year, when these assessments reflect typical prevailing prices at 12:00 London time.
 Assessments are derived from transaction levels and bids and offers widely available to the market at the close.
 The final price assessment will consist of a bid, offer and midpoint.
 “Bid” is deemed to be the highest price bid by buyers at the close of business on the trading day in question.
 “Offer” is deemed to be the lowest price offered by sellers at the close of business on the trading day in question.
 Rollover dates on the contracts will be the last day of the calendar month, quarter or year preceding the respective contracts. For example, the last date of quotes for May ’09 would be April 30 2009, the last date for quotes on Q3 ’09 would be June 30 2009, and the last date for quotes on Calendar Year 2010 would be 31 December 2009.

Index
 ICIS Heren’s market indices share a number of common characteristics, regardless of market or time period. They are all volume-weighted averages of trades gathered by ICIS Heren during the course of its market reporting activities.
 All of the trades on which the index is based are published in Coal Swaps Daily on a daily basis as part of its list of trades reported.
 All trading information is subject to ICIS Heren’s usual tests of reliability:
  1. Confirmation is sought from both parties to the deal.
  2. If, as is often the case, both counter-parties are unwilling to confirm, confirmation is accepted from one side only. However, corroboration is also sought from other market participants. If no confirmation is available, the deal may still be included if it is accepted by the wider market, and if ICIS Heren itself regards it as reliable.
  3. In addition to price and volume, which are essential for inclusion in the Index, ICIS Heren ensures that deals included in the Index are stand-alone deals.
  4.In the event that reported trades fall noticeably above or below the traded range for that contract on a given day, and in the absence of any reasonable explanation, ICIS Heren would discard the deal or deals. Deals would be liable for rejection if they were 1% above or below the highest or lowest deals reported to Coal Swaps Daily on that day.  Evidence of the traded range given by market participants during the market reporting process would also be taken into account when assessing whether to include or discard a deal. Any discarded deals would not be entered into ICIS Heren’s database and would not appear in the reported deals tables in Coal Swaps Daily. They would therefore also be excluded from any Heren Index.
 The front-year index in Coal Swaps Daily is based on trades for the contract collected only during the day of publication.
 A minimum of six trades will be used to calculate the index. If there are five trades or less, the index will be automatically published as the mid-point of the CIF ARA assessment for the front-year contract published in that day’s Coal Swaps Daily. Any trades collected will be published, but not used to generate the index.
 All collected and verified trades will be published in Coal Swaps Daily, in order to give total transparency.
 Specifications of the swaps
  - The underlying physical component of the swap assessment will be termed CIF ARA.
  - This specifies the following basic characteristics:
 

Contract:	Delivery	Origin	Price Unit	Indicative Volume
	Cost, insurance, freight, Amsterdam, Rotterdam, Antwerp	Australia, Colombia, Indonesia, Poland, Russia, South Africa	US$/metric tonne	75,000-150,000 metric tonnes
Quality	Net Calorific Value	Total moisture	Volatile matter	Sulphur	Hardgrove index
Typical	6,000kCal/kg	13%	8-16%	0.3-1%	45-56
Reject	Less than 5,800kCal/kg	more than 15%	more than 16%	more than 1%	less than 44

ICIS Heren Volatility Index
 The ICIS Heren Volatility Index, published in the Coal Swaps Daily Price Assessment table is the 20-trading day rolling volatility by contract for the coal swaps forward curve. Volatility is defined as the annualised standard deviation of the percentage change in price between periods. The ICIS Heren Volatility Index is the standard deviation of the percentage change in the daily prices for the last 20 trading days multiplied by the square root of 252. There are on average 252 trading days in the year.

Clean Spark and Clean Dark Spreads
 Clean Spark/Clean Dark Spreads are a reflection of the cost of generating after taking into account fuel (gas/coal) and carbon allowance costs. A positive spread effectively means that it is theoretically profitable to generate electricity on a baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However it is important to note that the Clean Spark/Clean Dark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.
 The German Clean Dark and Spark Spread data represented in the line graph in Coal Swaps Daily is derived from ICIS Heren’s proprietary German power, gas and  EUA carbon data. These are published in European Daily Electricity Markets (EDEM), European Spot Gas Markets (ESGM), and European Daily Carbon Markets (EDCM). All the power prices quoted are for baseload delivery. Gas prices cited are Dutch TTF for Germany as the TTF hub is more liquid than the German gas hub and has a more robust forward curve. For a full explanation of how the power, gas and carbon prices are derived please see the EDEM/ESGM/EDCM methodologies.

CLEAN SPARK SPREAD
 The German Spark Spread tables use a fuel efficiency factor of 49.13% for the gas conversion. In reality, each gas-fired plant has a different fuel efficiency, but 49.13% is used as a standard because it provides an easy conversion between gas and power volumes (25,000 therms of gas per day = 15 MW of power). The Spark Spread value is therefore the power price minus the gas price divided by 0.4913, i.e. Spark Spread = Power Price - (Gas price/0.4913).
 The Clean Spark Spread is calculated using a gas emissions intensity factor of 0.411 tCO2/MWh. Therefore the Clean Spark Spread is calculated by subtracting the carbon price (multiplied by 0.411) from the 'dirty' Spark Spread, i.e. Clean Spark Spread = Spark Spread - (Carbon Price*0.411).

CLEAN DARK SPREAD
 Clean Dark Spreads are a reflection of the cost of generating after taking into account fuel (coal) and carbon allowance costs. A positive spread effectively means that it is profitable to generate electricity on a baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However it is important to note that the Clean Spark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.
 The German Dark Spread tables use a fuel efficiency factor of 35% for the coal conversion, and an energy conversion factor of 7.1 for converting tonnes/coal into MWh/electricity, on the basis that CIF ARA coal is rejected below a standard quality of 5,800kcal/kg. In reality, different types of coal have a different energy value and each coal-fired plant has a different fuel efficiency, but 35% is accepted as a broad standard. The Dark Spread value is the power price minus the coal price divided by 0.35, i.e. Dark Spread = Power price - (Coal price/0.35).
 The Clean Dark Spread is calculated using a coal emissions intensity factor of 0.96 tCO2/MWh. Therefore the Clean Dark Spread is calculated by subtracting the carbon price (multiplied by 0.96) from the 'dirty' Dark Spread, i.e. Clean Dark Spread = Dark Spread - (Carbon Price*0.96).

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