Bump.
Spark Spreads anyone? Or even a pointer in the right direction?
p.s. who among us is actually long crude, or are we all just watching and waiting until $150, where we can say "told you so" - I'm flat, but I can't find a good reason why I dont just Buy and hold one contract.
Spark Spreads anyone? Or even a pointer in the right direction?
p.s. who among us is actually long crude, or are we all just watching and waiting until $150, where we can say "told you so" - I'm flat, but I can't find a good reason why I dont just Buy and hold one contract.
I've traded the dark and clean dark spread in Euros i.e. German power, Zeebrugge gas, API#2 coal and EUAs. It's only really for utilities who know what their margins for each power station are i.e. the formula for the spread takes into account the thermal efficiency of the station and heat content of the coal or gas it's burning.
Don't know of any resources but the general formula for the spark spread is something like:
SS = Power Price - Nat Gas Price (expressed in USD/MWh)
Clean SS = SS - Emissions Price (again in USD/MWh)
Normal gas plant efficiency is around 40 - 45%.
The spark spread is essentially the payoff from exercising the real option created by owning a power plant. When the price of a MW is more than the cost of the fuel used to make that MW you have a positive payoff, hence run the plant/exercise the option. The opposite is also true, although constraints around ramping plant will mean that the utilities cant just turn it on and off in the short run, thus -ve spark spread. As others have eluded to, this will change depending on plant efficiency, but I think 8-10GJ/MW is probably a good ball park for fairly modern gas plant. I have no experience in the US though.
I guess you could use instruments around the SS create dynamic hedges on gas really effectively but you'd also need to consider heating demand on gas, and all the other variables that go into the electricity price. There is a website called sparkspread.com I think that will probably be a good place to start.
Anyway, thats my first post here but hope it is of some help.
I guess you could use instruments around the SS create dynamic hedges on gas really effectively but you'd also need to consider heating demand on gas, and all the other variables that go into the electricity price. There is a website called sparkspread.com I think that will probably be a good place to start.
Anyway, thats my first post here but hope it is of some help.
Yes, I know sparkspread.com - I'm just a little hesitant to subscribe for a couple of thousand dollars before I know if my idea has any "legs".
I should add that I'm not looking to trade the SS exclusively; I have never traded in the energy markets properly - my thinking was that it might be possible to take positions in NG from looking at the SS and electricity contracts (and probably some data from Platts, though I don't know what specifically) - simple trade being to buy NG futures when peak demand is high and spark spreads are wide...???
... I'm not sure if this is technically correct; my thinking was that there must be a threshold where it is more efficient for a Power plant to buy NG and bring it in, rather than produce it the electricity from their inefficient fuel???
TBH I've been concentrating on other things, so haven't had the chance to go through it properly - I got the idea from an ex Enron guy I met a few weeks ago, and now I can't remember what he specifically said
I'm sure there's a trade here though; to buy NG futures when the demand for electricity exceeds what is readily available in the market, as the next most liquid resource (in terms of producing power) will be NG. Or to buy NG simply when it is more efficent to produce electricity than fuel, as specified by the spark spread.
Thanks for the reply - can you enlighten me on where I should be looking for some info on this? I am keen to understand how some of these energy markets work; NG, electricity; coal; and emmission contracts - any hints?
I should add that I'm not looking to trade the SS exclusively; I have never traded in the energy markets properly - my thinking was that it might be possible to take positions in NG from looking at the SS and electricity contracts (and probably some data from Platts, though I don't know what specifically) - simple trade being to buy NG futures when peak demand is high and spark spreads are wide...???
... I'm not sure if this is technically correct; my thinking was that there must be a threshold where it is more efficient for a Power plant to buy NG and bring it in, rather than produce it the electricity from their inefficient fuel???
TBH I've been concentrating on other things, so haven't had the chance to go through it properly - I got the idea from an ex Enron guy I met a few weeks ago, and now I can't remember what he specifically said
I'm sure there's a trade here though; to buy NG futures when the demand for electricity exceeds what is readily available in the market, as the next most liquid resource (in terms of producing power) will be NG. Or to buy NG simply when it is more efficent to produce electricity than fuel, as specified by the spark spread.
Thanks for the reply - can you enlighten me on where I should be looking for some info on this? I am keen to understand how some of these energy markets work; NG, electricity; coal; and emmission contracts - any hints?
jamescummins
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Yes, I know sparkspread.com - I'm just a little hesitant to subscribe for a couple of thousand dollars before I know if my idea has any "legs".
I should add that I'm not looking to trade the SS exclusively; I have never traded in the energy markets properly - my thinking was that it might be possible to take positions in NG from looking at the SS and electricity contracts (and probably some data from Platts, though I don't know what specifically) - simple trade being to buy NG futures when peak demand is high and spark spreads are wide...???
Hi,
I will add my 2cents, and please feel free to rip it to shreds
spark spread essentially represent the cost of making electricity from fuel (nat gas). You can get as complicated as you like and introduce other fuels, and take account of the emmissions, but once you do that, you are competing in a market with firms and quants that specialise in exactly that, have better market access, and will respond far quicker to any mispricing generally. You get issues like which emissions contract? euas cers, there are all sorts, and there are hundreds of links and factors relating them. Enough waffle, since I very much doubt if most people are interested!
If you are saying your strategy is that when electricity is 'expensive' relative to nat gas, then cool, trade the spread. But that is not an overly complicated trade, so I may be missing the point - that is just relative value, same as if you think nat gas is out of sync with oil etc...
The problem with trading sparks is that the value opportunity is dependant on the individual power station, and a whole host of factors you dont know... Power plants may well not be buying spot gas, they almost certainly are on longer term deals that are hedged, so in that sense the market price is not a huge factor (I know I am massively simplifying, but I am not sure how much detail this forum wnats!!)
As a relative value trade, why not, if electricity is expensive gas is cheap, or vice versa, take a spread position on. Taking on just a nat gas position on the basis of the spead position I would say is unduly risky because the correlations are highly variable.
Anyway, clearly I have had too many beers, and should have written this earlier in the day!! If there is anything specific you want a response to, assuming you have bothered reading this far, then let me know, and I will have a look at work.
Cheers,
James
cer/eua/spark
James
who are you trading for in london?
James
who are you trading for in london?
Yes, I know sparkspread.com - I'm just a little hesitant to subscribe for a couple of thousand dollars before I know if my idea has any "legs".
I should add that I'm not looking to trade the SS exclusively; I have never traded in the energy markets properly - my thinking was that it might be possible to take positions in NG from looking at the SS and electricity contracts (and probably some data from Platts, though I don't know what specifically) - simple trade being to buy NG futures when peak demand is high and spark spreads are wide...???
Hi,
I will add my 2cents, and please feel free to rip it to shreds
spark spread essentially represent the cost of making electricity from fuel (nat gas). You can get as complicated as you like and introduce other fuels, and take account of the emmissions, but once you do that, you are competing in a market with firms and quants that specialise in exactly that, have better market access, and will respond far quicker to any mispricing generally. You get issues like which emissions contract? euas cers, there are all sorts, and there are hundreds of links and factors relating them. Enough waffle, since I very much doubt if most people are interested!
If you are saying your strategy is that when electricity is 'expensive' relative to nat gas, then cool, trade the spread. But that is not an overly complicated trade, so I may be missing the point - that is just relative value, same as if you think nat gas is out of sync with oil etc...
The problem with trading sparks is that the value opportunity is dependant on the individual power station, and a whole host of factors you dont know... Power plants may well not be buying spot gas, they almost certainly are on longer term deals that are hedged, so in that sense the market price is not a huge factor (I know I am massively simplifying, but I am not sure how much detail this forum wnats!!)
As a relative value trade, why not, if electricity is expensive gas is cheap, or vice versa, take a spread position on. Taking on just a nat gas position on the basis of the spead position I would say is unduly risky because the correlations are highly variable.
Anyway, clearly I have had too many beers, and should have written this earlier in the day!! If there is anything specific you want a response to, assuming you have bothered reading this far, then let me know, and I will have a look at work.
Cheers,
James
jamescummins
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James
who are you trading for in london?
Sorry to disappoint, but I am not trading for anyone... I am not even in London to be more presise currently, am working in denmark. Why, just out of interest??
jamescummins
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On a slightly different note though, I would be a buyer of the spark spreads currently if I was actively trading it. Not short term, but longer term, there is massive value there.
Here is my reasoning briefly for anyone remotely interested...
Spark spreads are currently such that they dont cover the margins for new gas fired plants, and the power forward curve has very little risk of price spikes built in to it. Should the US have a particularly hot summer, or should gas prices rise further (both of which are looking reasonably likely in my view), then the power price is almost certain to spike. The spread is a relatively cheap way of gaining exposure to this, with a limited downside - the skew of the market is such that I dont see it being likely that the spread will significantly weaken.
Even with slower consumption growth from a weakend economy, I would think we are still likely to see new demand peaks. All this is bullish for me, but particularly PJM and MISO.
The next question would be how to go about actively taking on a position in this. And that all depends on how much size you are risking, and what your situation is. If you can, I would just be going long one of the power indices - a lot more diversification in many ways, and reliable pricing that is not subject to the same issues as building the spread yourself.
Anyway, I'd be interested to know if anyone is actively involved, and if so what there view is. I think this area offers more value for lower risk than the vast majority of other commodities....
Here is my reasoning briefly for anyone remotely interested...
Spark spreads are currently such that they dont cover the margins for new gas fired plants, and the power forward curve has very little risk of price spikes built in to it. Should the US have a particularly hot summer, or should gas prices rise further (both of which are looking reasonably likely in my view), then the power price is almost certain to spike. The spread is a relatively cheap way of gaining exposure to this, with a limited downside - the skew of the market is such that I dont see it being likely that the spread will significantly weaken.
Even with slower consumption growth from a weakend economy, I would think we are still likely to see new demand peaks. All this is bullish for me, but particularly PJM and MISO.
The next question would be how to go about actively taking on a position in this. And that all depends on how much size you are risking, and what your situation is. If you can, I would just be going long one of the power indices - a lot more diversification in many ways, and reliable pricing that is not subject to the same issues as building the spread yourself.
Anyway, I'd be interested to know if anyone is actively involved, and if so what there view is. I think this area offers more value for lower risk than the vast majority of other commodities....
