The heat rate of a power plant is a quantity that reflects the amount of fuel required to generate one unit of electrical energy. The heat rate is a means of measuring the efficiency of a power plant by answering the question "how much fuel is required to generate a kWh of electricity?"
Heat rates are typically stated in units of Btu per kWh or GJ per kWh. This indicates how many Btus or GJ of gas, coal, or oil are needed to generate one kWh of electricity. But in markets where wholesale traders trade in units of MMBtu and MWh, heat rates are often described in units of MMBtu/MWh.
Typical heat rates for various generation types are as follows:
| Unit type | Typical heat rate (Btu/kWh) |
| Natural gas steam turbine | 10,000 —12,000 |
| Natural gas combined-cycle | 6,200 —8,000 |
| Natural gas combustion turbine | 8,000 —10,000 |
| Natural gas reciprocating engine | 7,500 —8,500 |
| Coal steam turbine | 9,000 —11,000 |
| Natural gas turbine with cogeneration | 5,000 —6,500 |
The variable fuel cost of operating a unit can be determined by multiplying the cost of fuel by the heat rate (and usually making some unit conversions). For instance, a natural gas combined-cycle unit with a gas cost of $4/MMBtu and a heat rate of 7,000 Btu/kWh will have a fuel cost of $28/MWh.
For electric markets where thermal units are on the margin, fluctuations in power prices can often be explained by two factors – the cost of fuel and the marginal power plant’s heat rate. The marginal unit is the last unit that must be used to serve customer loads during any period in time. Because power plants are usually dispatched based on least cost, the last unit turned on will be the unit with the highest variable operating cost. And since generally no one wants to sell their power for less than the price of competitive alternatives, the marginal unit sets the market price.