Heat rate

Heat rate is a term of measure of how efficiently a power plant converts its fuel source to electricity. For example, a heat rate of 10 indicates it takes 10 units of fuel to produce one unit of electricity. In deregulated electricity markets, heat rate values are an indication of the efficiency of a collection of power plants across a geographic area, and are commonly used as an indication of the cost of power generation separately from the cost of the fuel used for power generation.

The heat rate electricity product has become one of the main product structures since the advent of deregulated electricity markets. Rather than committing to a fixed price, a heat rate contract indexes the electricity price to natural gas prices, and the contract price becomes a formula of a fixed heat rate multiplied by a natural gas price, plus a fixed retail adder as follows:

Contract Price = (Heat Rate Multiplier x Gas Price) + Retail Adder

Heat Rate Multiplier:

Fixed for the contract term, expressed in MMBtu per kWh

Natural Gas Price:

Indexed to gas futures prices (typically NYMEX) determined either through monthly settlement prices or executed price hedges, expressed in $ per MMBtu

Retail Adder:

Fixed for the contract term, includes ancillary services, line losses, ISO fees, retailer margin and consultant fee, expressed in $ per kWh

Many of Amerex’s clients use this purchasing strategy as a means to capture value and lock in most of the retail price components, while managing gas prices hedges to take advantage of market opportunities and achieve a lower price over time than offered by a fixed price product. Amerex continuously monitors the forward curve of gas prices on behalf of our clients, keeps those clients informed on market conditions and makes recommendations according to the agreed-upon strategy. When managed correctly, this product can help avoid risk and capture lower price opportunities.

To learn about additional electricity products, visit one of the links below or contact us to explore how a heat rate structure may help your business.

Other Electricity Products