How to Convert Natural Gas Prices into Power Generation Costs
Apply generation efficiency and exchange rates to natural gas prices to calculate fuel costs per unit of electricity. Understand why US gas benchmarks, Korean LNG import costs, fuel costs, and electricity tariffs differ.
Fuel costs for gas-fired generation depend on both the gas price and the amount of fuel required to produce electricity. At the same gas price, a less efficient plant has a higher cost per unit of electricity. Imported LNG also requires checking liquefaction, shipping, regasification, exchange rates, and contractual price-adjustment lags.
Connect gas and electricity units first
Gas prices are often quoted per unit of energy, while electricity prices are quoted per unit of electrical output. The link is the heat rate: the fuel energy needed to generate one unit of electricity. The EIA’s explanation of spark spreads describes subtracting gas fuel costs from electricity selling prices. A lower heat rate means less fuel is needed to generate the same amount of electricity. Align Btu with MMBtu and kWh with MWh in calculations; simply multiplying a price by the plant’s efficiency percentage produces an incorrect result.
Do not substitute an overseas spot benchmark for Korean import prices
A natural gas benchmark within the US pipeline network and the delivered price of LNG shipped to East Asia do not represent the same product terms. LNG import prices depend on reference benchmarks, adjustment intervals, long-term contracted volumes, spot purchases, and other factors. Assuming Korean generation costs will fall immediately because a particular overseas gas price declined this month overlooks those lags. Check average import prices and contract composition in company materials, then apply the exchange rate for the relevant currency. Even when dollar prices fall, a simultaneous weakening of the won can reduce the decline in won costs.
Do not read the spread after fuel costs as net income
The difference between electricity selling prices and fuel costs does not establish a power plant’s final profit. Maintenance, staffing, plant depreciation, and financing costs remain, and electricity-market settlement arrangements vary by region. The EIA’s explanation of electricity prices also distinguishes fuel costs from power-plant and transmission and distribution network costs. Avoid treating every reduction in fuel costs as additional profit without knowing a generator’s operating hours and compensation structure. Consumer electricity tariffs also reflect policy and tariff design, so analyze them as a separate stage from wholesale electricity prices.
Worked example
Hypothetical example: At a gas price of $10 per MMBtu and a plant heat rate of 7 MMBtu per MWh, fuel costs are $70 per MWh. At KRW 1,300 per dollar, this is KRW 91,000 per MWh, or KRW 91 per kWh. If gas falls to $8 and the exchange rate becomes KRW 1,400, the cost is 7 × 8 × 1,400 ÷ 1,000 = KRW 78.4/kWh. Won fuel costs decline approximately 13.85%, less than the 20% decline in the dollar gas price.
What to check
- Have you checked the gas price’s region and delivery terms?
- Have you aligned whether the heat rate is expressed per kWh or per MWh?
- Have you considered contractual price-adjustment lags and exchange rates?
- Have you separated nonfuel costs from the spread after fuel costs?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.