The spark spread is a quantity that represents the difference between the wholesale market price of electricity and the cost of producing electricity using natural gas. The spark spread may be negative or positive and is the common equation used to determine profitability for gas-fired generation facilities. If the spark spread is negative, a generator makes more money by not generating and instead selling the natural gas. If it is positive, it is more profitable to use the natural gas to generate electricity and then sell the power. The spark spread is calculated by generators for prices and heat rates specific to their unit, and it is also published using daily spot prices for natural gas and power at various regional trading points and various unit heat rates.
The spark spread is calculated using the following equation:
Spark spread ($/MWh) =
power price ($/MWh) – [natural gas price ($/MMBtu) x heat rate (MMBtu/MWh)]
A key component of the spark spread equation is the heat rate, or measure of efficiency, of a generating unit. The heat rate of a generating unit is a means of measuring the efficiency of the unit by answering the question "how much fuel is required to generate a kWh of electricity?" However, the spark spread calculation does not take into consideration other costs associated with electric generation such as variable costs in addition to natural gas (like operations and maintenance), taxes, finance charges, or fixed expenses. Thus, it is not necessarily a complete measure of the profitability for a gas-fired generator.