Definitions H

Heat rate

Sometimes the heat rate means the number of btu's of fuel required by a power plant in order to generate one kilowatt-hour (kwh) of electricity. However the definition varies, and this is not what heat rate means when companies are buying hedges in the futures market.

There, the heat rate of a power plant is the price per kilowatt-hour (kwh) of electricity divided by the price, per btu, of its fuel. If the plant was 100% efficient and sold its electricity at cost the two dollar values would be comparable, and the heat rate would be the number of btus required to generate one kwh of electricity.

The electricity market overall has no one fuel, of course. The market heat rate is defined relative to natural gas, which is often the marginal source of power. A TXU filing says,

The wholesale market price of power divided by the market price of natural gas represents the market heat rate. Market heat rate movements also affect wholesale electricity prices. Market heat rate reflects the efficiency of the marginal supplier (generally natural gas-fueled generation facilities) in generating electricity. …

EFH Corp.’s market heat rate exposure is derived from its generation portfolio and is potentially impacted by generation capacity increases, particularly increases in lignite/coal- and nuclear-fueled capacity, as well as wind capacity, which could result in lower market heat rates. EFH Corp. expects that decreases in market heat rates would decrease the value of its generation assets because lower market heat rates generally result in lower wholesale electricity prices, and vice versa. EFH Corp. mitigates market heat rate risk through retail and wholesale electricity sales contracts and shorter-term market heat rate hedging transactions.

Some points of reference:

  • If all the gas in the market were generated from gas, and if the gas plants were 100% efficient, and if the gas plant operators made no profit, then the market heat rate would just be the actual number of btus necessary to generate a kilowatt.
  • If gas were always the marginal source, and gas plant efficiency and profits were constant, the market heat rate would be constant.
  • Profit and inefficiency drive up the heat rate for any given plant, and source makes the numerator and denominator not really comparable when looking at the whole market. Think of heat rate as measure anchored to btu/kwh for an ideal gas plant, but which then moves up for higher profits or inefficiencies, and down if cheaper sources (like subsidised wind) push the wholesale price down.

High-frequency trading

1 Aug 2009. Economist p64.

“Rise of the machines”

“High-frequency traders attempt to uncover how much an investor is willing to pay (or sell for) by sending out a stream of probing quotes that are swiftly cancelled until they elicit a response. The traders then buy or short the targeted stock ahead of the investor, offering it to them a fraction of a second later for a tiny profit.

Another popular HFT strategy is to collect rebates that exchanges offer to liquidity providers. High-frequency traders will quickly outbid investors before immediately selling the shares to the investor at the slightly higher purchase price, collecting a rebate of one-quarter of a cent on both trades. Other tactics include piggybacking on sharp price movements to increase volatility, which increases the value of options held by traders. The speeds are mind-boggling. High-frequency traders may execute 1,000 trades per second; exchanges can process trades in less than 500 microseconds (or millionths of a second).”

Home equity line of credit

A line of credit taken out by the borrower using the equity in their home as collateral.

From the glossary:

“Home equity line (HELOC): Also referred to as a second mortgage, this loan makes it possible for consumers to borrow against their equity in their homes for a specified term and up to a pre-set maximum sum. It is the borrower's equity in the property and the HELOC'S maximum loan-to-value that determine the maximum amount.”