Key Indicators

Power generators and traders need a comprehensive understanding of the bulk power markets in which they operate. RDC services are designed to help companies gain that understanding. Among the key indicators that must be followed in the bulk power market are:

Market design. Bulk power markets are highly balkanized due to varying regulatory treatments, transmission constraints. From the perspective of a generation company, several market design issues are critical?


  • What bulk power products are traded?
  • What are the transmission rules?
  • What sets their prices and how do they relate?
  • What access do power generators have to large end-use customers?

Emerging business cycles. Like other commodities, the electric power business promises to by cyclical, with periods of excess demand and low prices alternating with periods of excess supply and high prices. Power generators must learn to catch the wave of good markets and leap from one wave to another.

Relationships between fuel and power markets. Fuel prices are the critical variable cost of power generation and therefore are a key determinant of the profitability of generation. Many companies already follow the spark spread, the difference between fuel and power prices expressed in equivalent terms. See box.

Volatility patterns. Electric power prices are the most volatile of any commodity. This creates both risks and opportunities. Since there is considerable volatility in the price (and sometimes the supply) of fuel or hydro inputs, changes in the volatility of the "spark spread" may also be important.


Using Spark Spreads

"Spark spread" is a useful measure of the potential profitability of power plants. It is defined as the difference between the price of power and the price of fuel, expressed in equivalent terms (using the unit's heat rate to make the conversion.) In order to be operated profitably, this spread must be sufficiently positive such that is must cover all other variable and fixed costs plus the required return.

Estimates of spark spreads in different regions are published daily in the trade press. While these are general indicators of market conditions, unit specific data are most useful. Some tips on using these spreads:

  • Collect data on unit-specific spreads for analysis of patterns and trends.
  • Use a variable-cost spread as a more accurate indicator your needs.
  • Account for multiple revenue streams, if applicable.
  • Consider hedging strategies that lock in spreads, not just component prices.

Environmental regulations. Environmental concerns will continue and even grow as major constraints-and opportunities-for power generators. Changes in the market due to global climate change concerns have a good chance of starting to impact power generators over the next several years. While most of the attention has focused on carbon trading, renewable portfolio standards may be an even nearer-term consideration. Companies that get an early lead in meeting these with the lowest-cost qualifying renewables will have a real competitive edge.

Evolving technology. The unbounded rewards of unregulated power markets provides tremendous incentives for proprietary technological innovation. Much attention has been given to longer-term options such as fuel cells and, but incremental advances may also offer less-obvious opportunities. In addition, companies also need to monitor lesser-known and less-developed technologies that are potential "killer apps." Economical carbon sequestration or flexibly-sited electricity storage may, for example, be such killer apps.