From heat rate to a generator offer

Step 1

Translate efficiency into marginal fuel cost

A thermal generator's heat rate measures fuel energy consumed per unit of electrical output, commonly Btu/kWh or MMBtu/MWh. The unit conversion changes the number by a factor of 1,000: 7 MMBtu/MWh equals 7,000 Btu/kWh, because one MMBtu is 1,000,000 Btu and one MWh is 1,000 kWh. A lower heat rate means greater conversion efficiency. Multiplying heat rate by delivered fuel price gives a marginal fuel-cost estimate. Adding variable operations and maintenance gives a compact short-run production-cost model.

Units provide the first audit:

Fuel price must be aligned to the generator's location and delivery terms. A benchmark hub price may omit basis, transport, imbalance, and timing effects. Heat rate can also vary with output, ambient conditions, degradation, and start state. A single value is an approximation, not a complete operating curve.

Step 2

Calculate and compare two units

The figure exposes an optional emissions-cost term so you can inspect a broader cost formulation. For the required $28.50/MWh calculation, use only fuel and variable O&M. Any emissions price, allowance opportunity cost, or other adder must be identified separately rather than silently folded into the number.

Step 3

Stress the cost and separate it from the offer

Fuel exposure is proportional to heat rate. For Unit A, a $1/MMBtu increase in delivered gas raises the simple marginal-cost estimate by $7/MWh. The higher-heat-rate Unit B rises by $9.50/MWh. This differential sensitivity can change unit ordering as fuel conditions move.

An offer is a market submission governed by the applicable tariff, protocols, mitigation rules, and resource constraints. It need not equal the simple marginal production-cost estimate. Relevant omitted considerations can include:

• start-up and no-load costs, minimum run time, minimum output, ramp limits, and multi-period commitment tradeoffs;
• fuel-delivery constraints, imbalance exposure, emissions allowances, consumables, and output-dependent efficiency;
• opportunity costs, including foregone value in another interval or product, where permitted and appropriately reflected;
• uncertainty about fuel, availability, load, renewable output, and dispatch; and
• market-specific offer formats, mitigation, make-whole payments, and other rule-defined treatments.

This is not a license to infer strategic intent from the gap between cost and offer. First confirm measurement conventions, operating constraints, and market rules.