Spark spread

Spark spread is the difference between the wholesale price of electricity and the cost of the fuel used to generate it. The wholesale price is the price in the market in which electricity generators sell to distributors. http://moneyterms.co.uk/spark-spread/ Definition: A long position in electrical power and short position in fuel (typically natural gas) that simulates the profit from operating a power plant (e.g., a gas turbine generator). The heat rate (q.v.) determines the size of the short position in fuel. Example: Long one megawatt of forward power and short 10 million Btus of forward natural gas, indicating a heat rate of 10 MBtu/MwH. If the price of power went from $30 to $33 per MwH and the price of gas from $2.50 to $2.75 per MBtu, then the profit from the position would be $0.50 = $3.00 - 10 x $0.25 per MwH. Application: A speculator might want to bet that operating a power plant with a specific heat rate during some period would be more profitable than others anticipate, so he might put on the spark spread in the futures markets. Pricing: In the futures markets the initial value of a spark spread is zero, and one's daily profit is the change in the obvious linear combination of futures prices over the trading day. In the forward markets the value of the spark spread is the present value of the linear combination of current forward prices, minus the present value of the linear combination of the forward prices at the time the trade went on. Risk Management: The spark spread could be a tool for managing the risk of owning a power plant. http://www.margrabe.com/Energy.html i. Types: a. Clean spark spread:

Represents the net revenue a generator makes from selling power, having bought gas and the required number of carbon allowances. This spread is calculated by adjusting the cost of natural gas in MMBtu for the efficiency of the generation and subsequently applying the market cost of procuring or opportunity cost of setting aside an emissions allowance. Clean spark spread = E - G - Ng*Pcc = S - Ng*Pcc Let S: spark spread, E: electricity price, G: gas cost, Ng: number of carbon credits necessary to cover gas operation, Pcc: price of a carbon credit.

b. Clean dark spread

Refers to an analogous indicator for coal-fired generation of electricity. The spark green spread and the dark green spread are especially important in areas where coal-fired electricity generation is prevalent as the convergence of the spreads will lead to an important decision point. Let D: dark spread, E: electricity price, C: coal cost, Nc: number of carbon credits necessary to cover coal operation (22.5x that of gas), Pcc: price of a carbon credit. Clean dark spread = E - C - Nc*Pcc = D - Nc*Pcc

c. Climate spread
The difference between the dark green spread and the spark green spread is known as the "Climate Spread". Climate spread = Clean dark spread - Clean spark spread = (D - Nc*Pcc) - (S - Ng*Pcc) = (D - S) - (Nc Ng)*Pcc. Note: (D - S) and (Nc - Ng) are positive numbers.

http://en.wikipedia.org/wiki/Spark_spread

http://www.energyblogs.com/windenergy/index.cfm/2008/9/24/Spark-Spread-and-Dark-Spread-Concepts-in-Energy-Trading

Different types of options Spark spread option Definition: An option on a specific spark spread (q.v.). Example: The option to be long one megawatt of power and short 10 million Btus of natural gas, indicating a heat rate of 10 MBtu/MwH. If the price of power were $30 per MwH and the price of gas $2.50 per MBtu, then the profit from the position would be $5 = $30 - 10 x $2.50 per MwH, and the option would be in the money, hence its owner would exercise it. If the price of power were $30 per MwH and the price of natural gas $3.15 per MBtu, then the profit would be -$1.50, and the owner would not exercise it. Analogously the owner of a gas turbine power plant with a heat rate of 10 MBtu/MwH would not exercise it. Application: A speculator might want to bet that operating a power plant with a specific heat rate during some period would be profitable, so he might buy the spark spread in the futures markets. Pricing: A first pass approximation of the spark spread option would be a Margrabe option or a variant with a nonzero strike. The biggest danger of this is the extraordinarily instability over time of the prices of electrical power and natural gas. Risk Management: The spark spread option could be a tool for managing the risk of owning a power plant.

Gas Transportation Deals

It is a process of delivering natural gas from wellhead and processing plants to city gate stations or industrial/electric power generation end users.
There are three major types of pipelines along the transportation route: the gathering system, the interstate pipeline system, and the distribution system.

The gathering system consists of low pressure, small diameter pipelines that transport raw natural gas from the wellhead to the processing plant. Interstate pipelines are similar to in the interstate highway system: they carry natural gas across state boundaries, in some cases clear across the country. Intrastate pipelines, on the other hand, transport natural gas within a particular state. Distribution system local distribution systems deliver natural gas into our homes, businesses and power
plants.

http://www.naturalgas.org/naturalgas/storage.asp http://www.adventuresinenergy.org/Natural-Gas-Pipelines/index.html http://www.eia.gov/pub/oil_gas/natural_gas/analysis_publications/ngpipeline/process.html

Power Transmission: Power transmission is the movement of energy from its place of generation to a location where it is applied to performing useful work. Examples: Vatnsfells 245 kV overhead transmission line, total of 10 km Fljtsdals 3&4 - 420 kV overhead transmission line supplying power to the Fjardaal aluminum plant, total distance 110 km Sultartanga 3 - 420 kV overhead transmission line that supplies the Nordural aluminum plant, total distance 130 km