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Heat Rate

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 geographical area and commonly are 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.

Many of Power Connection’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 achieving a lower price over time than offered by a fixed price product. Power Connection 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.