Spark spread

The spark spread is the theoretical gross margin of a gas-fired power plant from selling a unit of electricity, having bought the fuel required to produce this unit of electricity. All other costs (operation and maintenance, capital and other financial costs) must be covered from the spark spread. The term was first coined by Tony West's trading team on the trading floor of National Power Ltd in Swindon, UK during the late 1990s and quickly came into common usage as other traders realised the trading and hedging opportunities. The spark spread is the theoretical gross margin of a gas-fired power plant from selling a unit of electricity, having bought the fuel required to produce this unit of electricity. All other costs (operation and maintenance, capital and other financial costs) must be covered from the spark spread. The term was first coined by Tony West's trading team on the trading floor of National Power Ltd in Swindon, UK during the late 1990s and quickly came into common usage as other traders realised the trading and hedging opportunities. The term dark spread, quark spread and bark spread refers to the similarly defined difference between cash streams (spread) for coal-fired power plants, nuclear power plants and bio-mass power plants respectively. These indicators of power plant economics are useful for tracing energy markets. For operating or investment decisions published 'spread' data are not applicable. Local market conditions, actual plant efficiencies and other plant costs have to be considered. The higher the dark spread the better, for the generator; an IPP with a dark spread of €15/MWh will be more profitable than a competitor with a dark spread of only €10/MWh. Further definition of clean spread indicators include the price of carbon dioxide emission allowances (see: Emission trading). The spark spread SS is defined as: A precise definition of a spark spread has to be given by the source publishing such indicators. Definitions should specify energy (electricity and fuel) prices considered (delivery point & conditions) and the plant efficiency used for the calculation. Also, any plant operating costs that may be included should be stated. Typically, an efficiency of 50 % is considered for gas-fired plants, and 36% for coal-fired plants. In the UK, a non-rounded efficiency of 49.13% is used for calculating the gas conversion. In reality, each gas-fired plant has a different fuel efficiency, but 49.13% is used as a standard in the UK market because it provides an easy conversion between gas and power volumes. The spark spread value is therefore the power price minus the gas cost divided by 0.4913, i.e. Spark Spread = Power Price – (Gas cost/0.4913). As of August 2006, UK dark spreads were in the range of 10–30 £/MWh, while UK spark spreads were in the range of 4–9 £/MWh. In countries that are covered by the European Union Emissions Trading Scheme, generators have to consider also the cost of carbon dioxide emission allowances that will be under a cap and trade regime. Emission trading has started in the EU in January 2005.