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# how to mark a Heat Rate?

Discussion in 'Commodity Futures' started by texrex2002, Jun 28, 2009.

1. ### texrex2002

How do you mark a heat rate to market?

Letâs say I enter into a 10MW 7x24 HR swap for November at 8.

So if I pull my position apart, I have a long power exposure of 30.5 days x 24 hours/day x 10MW = 7,320MWhâs, and a short gas position of 7,320 x 8 = 58,560MMbtuâs.

So now how do I mark it? Do I hold one leg constant? Do I mark both legs?

Lets say I look in the market and see my exact HR trade for 7 now, instead of 8. Holding power constant, I could say that I am short 7,320 MMbtuâs more than I needed to be, so does that become the basis for my loss? 7320 x what gas price? Current?

2. ### texrex2002

Nobody?

I've got a meeting with our risk group later this week to have them explain it to me.

I'll post up what I learn.

3. ### thegazelle

We mark individual legs at the shop I'm at.

4. ### texrex2002

Someone (non-trading person) was telling me that the gas leg didn't get marked, because it wasn't a "real" gas exposure. That's WRONG, and was what was confusing me.

We really do owe the counterparty the gas at settle (or the floating \$ to buy spot, since we use mostly swaps). We use Allegro, so the HR swaps show up only in power, but with an exposure type "Nymex." I think this is what throws many people off.

Anyway gazelle is right, in terms of marking to the implied market HR: marking both legs works.

I've spent the last several hours scribbling some 2nd grade math, and found a couple of other ways to look at it:

It turns out that these 2 are essentially the same in terms of dollars:

a.) Mark both legs of the HR and add them together. OR

b.) Look at the new heat rate, multiply by MWhâs to get gas requirement at new heat rate. The difference in MMbtuâs x today's Nymex (for that flow month) = the mtm movement from day to day.

You can also multiply the _change_ in HR times power volume, which gives you the MMbtuâs âsavedâ (i.e. the MMbtu's you don't have to procure today (becasue you put your heat rate on yesterday) to get the same # of MWh's in an upwards HR move), and then multiply that by that day's Nymex. This gives you the mtm change of the aggregate HR position.

You can also divide the volumes to get the HR at which the trade was actually done at (or just look at the deal sheet), and then apply the above math with the current HR (as seen in market trades, or as implied by gas & power prices) in to find total MTM since the trade date (which when added to any initial value, say \$100 or so, becomes the market value of the position).

Anyway... Just thought I'd share. took me FOREVER to figure this out (but I'm pretty thick).

My heat rate legs always got marked individually in terms of cleared financial ICE and ClearPort contracts. So, for example, the PJM power position for November would mark + \$249 K and the HHNG gas position for November would mark (\$265K). For cleared products the OTC broker inputs the positions seperately, even for heat rates executed as a spread.

The whole kicker, of course, to heat rates the past twelve months or so is that the correlation between Nat Gas and Power has dropped off the face of the earth, and the daily marks for a carried position gets really obnoxious.

OK maybe this is the engineer in me. Firstly the 'heat rate' is the actual measure of efficiency of heat input to power. i.e. a high efficiency combined cycle gas turbine (CCGT) has a heat rate of about 7000btu/kWH or about 49% effective efficiency.

So based on the cost in mmbtu and the wholesale price we can workout the spark spread.

\$3mmbtu with a 7000heat rate = \$3X7000=\$21/MWh

With wholesale price say at \$30/MWh that is a \$9/MWh spark spread.

At \$30/MWh we have an implied heat rate of \$30MWh/\$3mmbtu=10,000mmbtu. Any generator with a heat rate above 10,000 is out of the money.

So I don't think that you can't mark to market the heat rate.

7. ### texrex2002

^ yeah, you can definitely mark them. I just wasn't sure how, i.e. was one leg held constant or not, were they marked individually or just compared to the going market ratio.

After spending time watching some of our heat rates I have come up with a couple of useful (to me) ways to look at them (as described above).

What you're describing sounds like a generators perspective on HR's, which is a good way of thinking about them too.

8. ### texrex2002

We have HR's on for more than 12 months out, and they don't move around that much (all in ERCOT though). Likely because they're big denominations though (cal strips, not just individual months).

9. ### gono

Jesus Christ :eek:

10. ### handle_this

Question becmes how much gas against power is correct at different levels of power prices ????

Anybody... ?

#10     Jul 22, 2009
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