HSNO professionals have calculated hundreds of loss of profits related to power generation facilities in the United States. HSNO clients are typically insurance carriers, independent adjusting firms and attorneys dealing in the power generation industry.
HSNO tracks the electricity pricing, natural gas pricing, and spark spreads for ten different regions in the United States. The basis for the electricity and natural gas prices is shown in the chart below by region:
|Region||Gas Point Used||Power Point Used|
|New England||Algonquin Citygate||Massachusetts Hub (ISONE)|
|New York City||Transco Zone 6-NY||NYC Zone J (NYISO)|
|Mid-Atlantic||TETCO-M3||Western Hub (PJM)|
|Midwest||Chicago Citygate||Illinois Hub (MISO)|
|Louisiana||Henry Hub||Entergy (SNL index)|
|Houston||Houston Ship Channel||Houston Zone (SNL index)|
|Southwest||El Paso San Juan||Palo Verde (SNL index)|
|Southern California (CA)||SoCal Border||SP-15 (CAISO)|
|Northern California (CA)||PG&E Citygate||NP-15 (CAISO)|
|Northwest||Northwest Sumas||Mid-Columbia (SNL index)|
Source: U.S. Energy Information Administration, based on SNL Energy
The spark spread is a common metric for estimating the profitability of natural gas-fired electric generators. The spark spread is the difference between the price received by a generator for electricity produced and the cost of the natural gas needed to produce that electricity. It is typically calculated using daily spot prices for natural gas and power at various regional trading points. Spark spreads tend to be fairly volatile, more so than crack spreads in petroleum markets, largely due to the volatility of wholesale electric power prices, which vary widely with changes in demand for electricity and the available electric supply. The spark spreads tracked by HSNO are calculated using the following equation:
Spark Spread ($/MWh) equals
Power Price ($/MWh) minus
[Natural Gas Price ($/MMBtu) times Heat Rate (MMBtu/MWh)]
A key component of the spark spread equation is the heat rate (BTU’s consumed divided by kilowatt hours generated), or measure of efficiency, of a generating unit. Those marketing the output of a unit will use the unit’s tested heat rate to assess its profitability. Market participants and observers rely on a generic benchmark to assess overall market conditions. The spark spreads are computed using a benchmark heat rate of 7,000 Btu/kilowatt hours (kWh), which represents a fairly new and efficient natural gas combined-cycle generator.
Less efficient units have higher heat rates and therefore require more natural gas to produce a kWh of electricity. A combined-cycle unit, which combines a combustion turbine with a steam turbine, is more efficient than a steam turbine alone.
The most efficient natural gas combined-cycle power plants have heat rates somewhat below 7,000 Btu/kWh; the spark spread for such units would be larger than the value shown here. Conversely, as a generating unit’s efficiency decreases, the spark spread also decreases—thus, older, less-efficient plants have smaller spark spreads than those achieving a heat rate of 7,000 Btu/kWh because they require more fuel per unit of output. Generators burning other fuels have similar metrics; for example, dark spreads (electricity price minus the cost of coal) are calculated for coal-fired generators, and quark spreads (electricity price minus the cost of enriched uranium fuel) for nuclear generators.
A limitation of the spark spread calculation is that it does not take into consideration other costs associated with the generation of electricity, such as:
- Pipeline costs or fuel-related finance charges
- Other variable costs (like operations and maintenance costs)
- Taxes or
- Fixed expenses
In that sense, a spark spread is an indicator of market conditions, but it is not necessarily an exact measure of profitability for any one specific generator.
Historical spark spreads for the 10 regions listed above can be viewed in the interactive table below for the past year. To download all historical data, sign up using the link below!