Merchant Power Finance

Abstract

Because power price fluctuations are so well linked to fuel-price movements most of the time, the spark spread, the margin between power prices and fuel costs measured in dollar volume per kilowatt-year, is a better measure of power markets than power prices. Overbuilding in a given market may lead to declining spark spreads and debt service coverage. Declining heat rates, or increased efficiency, in a market also may be evidence of overbuilding. This article analyzes the risk of overbuilding in three U.S. regions. It also discusses the impact of electricity price volatility and hedging on spark spreads.