Understanding the "Spark Spread" in Natural Gas
"Spark spread" is an esoteric term of the utility industry that the Energy Information Administration has seen fit to explain in its daily postings of charts and graphs on www.eia.gov.
The term is a very useful, measuring the profits that utilities can make by generating electricity from natural gas. It is calculated by taking the price of electricity per megawatt-hour and subtracting the spot price of natural gas multiplied by the "heat rate" of the generator that is producing the electricity:
Spark spread ($/MWh) = power price ($/MWh) – [natural gas price ($/mmBtu) * heat rate (mmBtu/MWh)]
The heat rate is a measure of the amount of heat (and therefore fuel) required to produce a unit of electricity from the generator. Thus the less efficient the generator, the more fuel will be required. This produces a larger number that must be subtracted from the price received for selling the power. The greater the efficiency of the boiler, the wider the spark spread.
Co-generation boilers, which use the exhaust heat from the gas as well as the steam in the boiler, have conversion (i.e., efficiency) ratings of over 60 percent, the highest of any fuel in the industry. Other boilers have conversion rates of only 30-40 percent.
The graph shows the spark spread over the course of 2012 for four locations around the country - New York City (light blue), Chicago (dark green), Alabama and Georgia (black) and Oregon and Washington (dark blue). The horizontal axis charts the time from January to December. The vertical axis measures the spark spread in dollar per megawatt-hour, from zero to $140.
The spark spread in New York City is consistently higher and spikes several times in the summer months. This occurs on extremely hot days when power demand peaks. It is at this point that gas turbines - essentially jet engines bolted to the ground - are called into play to provide peaking power. Gas turbines are the most inefficient way of generating electricity from gas but because power is in such short supply during these brief periods, they are able to make extraordinary profits. (Solar power would compete very well here.) This huge spark spread covers the costs of keeping the turbines idle throughout most of the year.
In the rest of the country, spark spread are much smaller, particularly in the Pacific Northwest where cheap hydro keeps power prices extremely low.
Other forms of generation have their own versions of spark spread. The gap in oil is called the "crack spread," coal the "dark spread" and nuclear energy has the "quark spread."