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You Are Not Alone: Explaining Heat Rates

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You are not alone if you are not familiar with what a Heat Rate is. This is a tough one to explain. But, here goes nothing.

What is a Heat Rate?
A heat rate is a measurement used in the energy industry to calculate how efficiently a generator uses heat energy. In the marketplace, heat rate is expressed in mmbtu/mwh or how many million BTUs* of heat is required to produce a megawatt (mw) of electricity. That figure tells us the Heat Rate or the efficiency of the generating facility. Types of fuel include coal, natural gas and oil to produce the majority of electricity.

(*Don’t know what a BTU is? Click here to check out our past blog that explains it.)

How does a Heat Rate fit into the wholesale electricity equation? It’s quite simple actually! Read more below. 

Wholesale electricity = Heat Rate x Natural Gas
$/mwh = mmbtu/mwh x $/mmbtu

A customer choosing a Heat Rate product receives pricing based on what the going heat rate is in their specific location.

Why would a customer choose a Heat Rate product?
A Heat Rate is a partial hedge in a market place so people that have a bigger appetite for risk may want to lock in the heat rate only and float the gas. The customer who locks gas in as time goes on can lock it in through a certain percentage, or let the gas price settle against index three business days prior to the end of the month. A Heat Rate product makes much more sense when gas prices are very high, and the downside reward is greater than the upside risk. What you would be betting on is that gas prices would fall over time.

I hope you’re still with me after explaining Heat Rates. Whew!

Already a customer? Contact your Direct Energy Business contact person with questions. This is a tough concept to grasp, trust me.

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