Spark Spread and Heat Rate
The spread that measures a gas-fired power plant's profit margin — the price of electricity it sells minus the price of the gas it burns to make it.
A gas-fired power plant is essentially a machine that converts natural gas into electricity, and its profitability depends on the gap between what it pays for gas and what it earns selling power. The spark spread is exactly that gap: the price of electricity minus the price of the natural gas needed to generate it, expressed per megawatt-hour. Traders and plant operators watch it because it approximates the plant's gross margin before fixed costs, and because power and gas markets don't always move together — a spark spread can widen or collapse even when both prices individually look calm.
Converting gas prices into an equivalent electricity cost requires the plant's heat rate: how many British thermal units of gas it needs to burn to produce one megawatt-hour of power. A more efficient plant has a lower heat rate and a fatter spark spread at any given pair of prices, which is exactly why efficient plants run first and inefficient ones sit idle when margins are thin.
Worked example. Electricity sells at $40/MWh and gas trades at $3/MMBtu. A plant with a heat rate of 7,000 Btu/kWh (7 MMBtu/MWh) spends 7 \times 3 = \2140 - 21 = $19$/MWh.
The spark spread is a gas plant's margin — power price minus fuel cost — and the plant's heat rate converts gas price into an equivalent power cost, so a lower heat rate (more efficient plant) means a wider spread and priority in the dispatch order.
Further reading
- US EIA, Electric Power Monthly, heat rate methodology