Suppose you are the CFO of a small Independent Power Producer in western PA (which is part of the PJM Electricity Grid (PA Jersey Maryland)). Your main business is to purchase natural gas and convert it to electricity for sale on the grid. You recently looked into PJM Western Hub futures contracts and natural gas futures that trade on the CMEGroup exchange.
Assumptions:
Natural Gas Input 60,000,000 MMBtu's / Six Months
Megawatt Hours Generated 9,000,000 MWh / Six Months
Price of Power Futures (N9) Sold $19.00 $/MWh
Price of NG Futures Purchased $2.00 $/MMBtu
a) What is the heat rate of your power plant in MMBtu/MWh?
b) If the spot price of NG is also $2.00, what is the minimum spot rate for electricity at which the plant should generate electricity?
c) What is the spark spread implied by the futures market contracts in $/MWh?
d) Ignoring the basis, how much profit can you "lock in" given current future prices (in $/MWh)?