Table of Contents

Spark Spread: What It Is and How It's Used

By

The Investopedia Team

Updated December 20, 2023

Reviewed by Charles Potters

Fact checked by

Yarilet Perez

What Is the Spark Spread?

The spark spread is the difference between the wholesale market price of electricity and its cost of production using natural gas. The spark spread can be negative or positive. When negative, the utility company posts a loss, but if it is positive, it posts a gain. This measure helps utility companies determine their bottom lines.

Key Takeaways

The spark spread is a method to determine how profitable natural gas-fired electric generators are.
The spread is the difference between the wholesale market price of electricity and the cost of production using natural gas.
When the spread is negative, the utility company takes a loss, but when the spread is positive, the company sees a profit.

How to Measure

The spark spread is a means of estimating the profitability of a natural gas-fired electric generator. It is the difference between the input fuel costs and the wholesale power price. The spark spread is calculated using daily spot prices for natural gas and power at various regional trading points.

Spark Spread = Power Price ($/MWh) – [Natural Gas Price ($/mmBtu) * Heat Rate (mmBtu/MWh)]; MWh represents megawatt-hours and MMBtu is a Million British thermal units.

Evaluating Spark Spreads

A vital component of the spark spread equation is the heat rate of an electric generating unit. According to the EIA, the spark spread calculation does not account for other costs associated with the production of electricity, such as pipeline costs, fuel-related finance charges, taxes, or fixed expenses.

The relationship between natural gas prices and wholesale electricity prices is demonstrated through the spark spread. The higher the spark spread, the more profitable a natural gas-fired plant. In New York City, spark spreads waver due to the volatility of wholesale electricity and natural gas prices.

In 2022, NYC spark spreads were occasionally negative as fuel prices outstripped the cost of electricity, making running a natural gasfired plant unprofitable during periods of low wholesale electricity prices and high natural gas prices.

New York City Spark Spread Example

8xbet1Liên kết đăng nhập — Source: Federal Energy Regulatory Commission - Derived from S&P Global Platts data. Uses Transco Z6 NYC gas prices with Zone J Day-ahead electricity prices. Uses a heat rate of 7,000 Btu/kWh.

How Do Investors Use Spark Spread?

"Spark spread" is also the name of a trading strategy based on differences in the price of electricity and its cost of production. Investors attempt to profit from changes in the spark spread through over-the-counter trading in electricity contracts. Energy derivatives allow investors to hedge against or speculate on changes in electricity prices.

What Is a Dark Spread?

When measuring the electric power generation fueled by natural gas, the difference in cost is the spark spread. When analyzing coal, the difference is called the dark spread.

What Do Spreads Indicate for Electricity Consumers?

Changes in spark spreads in an electricity power market indicate the operational competitiveness of natural gas-fired electric generators in meeting electricity demand.

The Bottom Line

The spark spread represents the difference between the wholesale market price of electricity and the cost of production using natural gas. Investors can attempt to profit from changes in the spark spread through over-the-counter trading in electricity contracts.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

U.S. Energy Information. "."
Federal Energy Regulatory Commission. "," Pages 12-13.
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