From the February 01, 2012 issue of Futures Magazine • Subscribe!

Trading power to spark profits

Calculating the spread

Now we can discuss the spark spread calculation formula, which is presented below:

Spark spread =
electricity price – [(gas price)*( heat rate)] =
$/MWh – (($/mmBtu)*(mmBtu/MWh))

Here is an example of calculating the value of a spark spread. On July 16, 2010, the electricity price was $54.56/MWh (September futures PJM AEP Dayton Hub Peak Calendar-Month Day-Ahead LMP Swap Futures) and the gas price was $4.519/mmBtu (September futures). By substituting these values in the spark spread calculation formula, we will obtain the following: $54.56/MWh - ($4.59/mmBtu * 6.94 mmBtu/MWh) = $23.1981/MWh. The spark spread value is $23.1981/MWh (see “Got spark?” below).

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