What Is a Spark Spread?

A spark spread is a term that is often used in the energy production industry, and specifically relates to the cost involved in producing electricity. The spread itself has to do with the difference that exists between the current market price charged for the unit of electricity produced and the actual cost to the utility to produce that unit. Identifying the difference between these two figures is very important, since that spread represents the amount of profit that the utility can hope to generate from each unit of electricity produced.

In order to accurately determine the spark spread, it is necessary to account for all the costs associated with producing the electricity. This requires taking into account such factors as the cost of maintaining the facilities where the electricity is produced, including the use of fuel and other raw materials that go into the production process. One of the primary expenses associated with the production of electricity is the price of the fuel used in the process. Changes in the cost of fuel can have a significant effect on the actual cost of production, which in turn narrows the difference between the current market price and what the expense of producing the electricity.

Several factors can impact the nature of the spark spread. Using different fuels in the production process, with those fuels representing various levels of efficiency and cost, will have some impact on the total cost of production. The efficiency of the equipment used in the process, along with operating policies and procedures in the plant itself, many also serve to increase or decrease the cost per unit produced. On the other end, changes in consumer demand may have some effect on the current market value of the produced energy.

Typically, the goal is to have the spark spread be somewhat broader, meaning that the manufacturer can sell the electricity at a higher profit to the distributors. In order to accomplish this, steps are taken to keep production costs as low as possible while at the same time tracking the standard and usual market price for electricity within a given market. Since that market price can shift with some regularity, there is a good chance that manufacturers will experience periods in which the spark spread is broader while at other times the spread will narrow a bit. Electricity producers will attempt to project these shifts and adjust their production in order to meet demand but also enjoy the most favorable spread possible.