Spark Spread

What Is the Spark Spread?

The spark spread is the difference between the wholesale market price of electricity and its cost of production utilizing natural gas. The spark spread can be negative or positive. Assuming it is negative, the utility company loses money, while on the off chance that it is positive, the utility company brings in money. This measure is important on the grounds that it assists utility companies with deciding their bottom lines (profits). In the event that the spark spread is small on a specific day, electricity production may be delayed until a more profitable spread emerges.

Understanding the Spark Spread

The spark spread is a means of assessing the profitability of a natural gas-terminated electric generator. It is the difference between the information fuel costs and the wholesale power price. For electric power generation fueled by natural gas, this difference is called the spark spread; for coal, the difference is called the dull spread. The spark spread is commonly calculated involving daily spot prices for natural gas and power at different regional trading points.

Ascertaining Spark Spreads

As indicated by the EIA, the spark spread is calculated utilizing the accompanying equation:

Spark spread ($/MWh) = power price ($/MWh) - [natural gas price ($/mmBtu) * heat rate (mmBtu/MWh)]; where MWh is megawatt-hours and MMBtu is 1,000,000 British thermal units.

A fundamental part of the spark spread equation is the intensity rate, or measure of effectiveness, of an electric generating unit. As indicated by the EIA, one limitation of the spark spread calculation is that it doesn't think about other costs associated with the generation of electricity, for example, pipeline costs or fuel-related finance charges, and other variable costs (like operations and maintenance costs), taxes, or fixed expenses.

The accompanying chart shows the three-part prices (power price, natural gas price, and spark spread) each megawatt-hour. At the point when natural gas prices surpass power prices, the spark spread is negative, and power utility companies are losing money.

Likewise, the EIA distributes a daily price table appearance spark spreads for ten unique locales around the U.S. Changes in spark spreads for a given electricity power market demonstrate the overall operational seriousness of natural gas-terminated electric generators in meeting the market's electricity demand.

"Spark spread" is likewise the name of a trading strategy in view of differences in the price of electricity and its cost of production. Investors can profit from changes in the spark spread through over-the-counter trading in electricity contracts. Energy derivatives permit investors to hedge against or theorize on changes in electricity prices.

Features

• At the point when the spread is negative, the utility company assumes a loss, and when the spread is positive, the company sees a profit.
• It is the difference between the wholesale market price of electricity and what it costs to deliver that electricity utilizing natural gas.
• While the spark spread can assist utility companies with overseeing profitability, on the downside, it doesn't incorporate other costs associated with generating electricity.
• The spark spread is a method for sorting out how profitable natural gas-terminated electric generators are.