What is the scattering of sparks’
The spread of the candles is the difference between the wholesale market price of electricity and the cost of production using natural gas. The spark spread can be negative or positive. If it is negative, the utility company loses money, and if it is positive, the utility company makes money. This measure is important because it helps utility companies determine their bottom line (profit). If the spark spread is small, on a certain day, the electricity production may be postponed until a more favorable distribution occurs.
Breaking down the ‘scattering sparks’
The spark spread is a common metric for estimating the profitability of natural gas electric generator. The difference between the cost of fuel and the wholesale price of electricity. For the generation of electric power, running on natural gas, this difference is called the spread the spark; for coal, the difference is called the dark spread. The spread of the candle is typically calculated using daily spot prices for natural gas and power at various regional trading points.
The Calculation Of The Spark Spread
According to the EIA, the Spark spread is calculated using the following equation:
Spark spread ($/MWh) = electricity price ($/MWh) – [natural gas prices ($/MMBtu) * heat capacity (BTU/h)]; where MWh megawatt hours and MMBtu million British thermal units.
A vital component of the spread equation, Spark is the heat rate, or efficiency indicator, as a unit that generate electricity. According to the EIA, one limitation of the spark spread calculation is that it does not take into account other costs associated with the production of electricity, such as manufacturing or fuel costs associated with financial costs and other variable costs (like operations and maintenance costs), taxes and fixed costs.
The following chart shows the three components of price (the price of electricity, prices for natural gas and spark spread) per megawatt-hour. When natural gas prices exceed the price of electricity, the spark spread is negative, and power companies are losing money.
The EIA also publishes a daily table of prices of the spark spread in ten different regions across the U.S. changes in the Spark spread for the electricity market indicate that overall operating competitiveness of gas power generators in meeting the demand for electricity in the market.
“Spark spread” is also the name of the trading strategies based on differences in the price of electricity and its cost. Investors can profit from changes in the spark spread through OTC trading contracts for electricity. Energy derivatives allow investors to hedge or to speculate on changes in electricity prices.