An option on the spark spread, i.e., the difference between power prices and prices of fuels and emission. It gives the right, but not the obligation, to the buyer (holder) to purchase the price difference (spark spread) between electricity and natural gas after accounting for the power plant efficiency (the emission factor). This option can be used by power consumers and power plant operators. Power consumers can guarantee a stable cash flows stream (option premium) typically from an institution with higher credit rating. Whereas power plant operators may use this option to hedge against adverse power and fuel market movements.

The spark spread, from a generator’s perspective, constitutes the difference between spot market prices for electricity and natural gas, expressed in equivalent terms through the nominal heat rate of a given gas-fired plant. However, and in addition to linking spot electric power prices and gas prices, spark spread options are instrumental tools for linking spot and forward markets for gas and electricity.