Heat rate and spark spreads

Heat rates

• Heat rate represent the efficiency of a power plant to convert fuel into electricity ==> Lower heat rate implies a more efficient power plant.
\[\text{Heat Rate}=\frac{\text{Quantity of fuel used}}{\text{Quantity of power produced}}\]
• The unit of heat rate is Btu/KWh or MMBtu/MWh, with 1 MMBtu/MWh = 1000 Btu/KWh
• For example, heat rate of 8 MMBtu/MWh means a natural-gas-fired power plant will sell power profitably when the power price is 8 times of the natural gas price
• Market implied heat rate
\[\text{Market implied heat rate}=\frac{\text{Power price}}{\text{Fuel price}}\] with the unit also being Btu/KWh or MMBtu/MWh.
• As a rule of thumb, natural gas power plants commonly have heat rates between 7 ~ 10 MMBtu/MWh.
• Heat rate extremely efficient
• Heat rate > 10 MMBtu/MWh ==> less efficient

Spark spreads

• Spark spread is the theoretical profit that a natural-gas-fired power plant can make from buying fuel and selling power at current market prices, ignoring any charges for operational cost.

Spark Spread = Power Price - (Gas Price × Heat Rate)

• Below tables shows an example of heat rates and spark spreads that are used by traders to approximate the behavior of electricity generators.



• Note: for coal-burning power generator, the corresponding spread is called dark spread.