In addition to electricity procurement, Applied Energy provides natural gas procurement using its fast, efficient reverse auction program. Natural gas auctions can be held in all 50 states, not just the 18 states where electricity is deregulated. Even if your gas usage is small relative to your electricity usage, significant savings can still be made using our auction system. Here’s what you need to know:
Natural Gas Market Structure
Natural gas prices can be measured at different stages of the supply chain. The main components are the “Wellhead” price (the cost of the commodity itself), the “Basis” cost (explained below) and the local distribution cost. Local distribution cost is charged by the local Utility, and this is not included in the auction process.
According to the Energy Information Administration, wellhead prices represent about 34% and Basis accounts for roughly 19% of residential gas prices. The balance – nearly half the price – is local distribution. The estimate for commercial contracts is similar.
“Basis” is an important concept in the pricing of natural gas. Its correct definition is the “location differential” for Nymex deals, but it has come to mean a combination of the following:
- Transport via pipeline, including a small amount of gas used to pump the main gas supply
- Suppliers and brokers profit margins
- Risk/liquidity premiums depending on the state of the market, customers’ credit and other factors.
You can buy the Basis and the Commodity separately.
Balancing and Swing Tolerance
It’s important to note that the price is fixed ONLY for the quantities you commit to use whne you sign the contract. Any usage above or below the forecast requires the Supplier to buy/sell in the spot market at the prevailing rate, so there will be a “balancing” charge on your monthly bill.
You can reduce your risk bu paying a premium for a “swing tolerance”. Contracts are typically sold with 0% Tolerance; 10% Tolerance; and 100% Tolerance, is the most expensive and is used when budget certainty is of the utmost importance.
Differences between Electricity and Natural Gas Procurement
Natural gas prices are more volatile than electricity prices, because gas is only responsible for a portion of total electricity generation, but overall the price correlation is high over time
Electricity has no storage (inventory) component. Because gas can be stored, it used be consumed for ‘peak’ generation, but now that gas prices have dropped dramatically, it’s also used for base load generation.
Because gas is such an important fuel, market watchers follow gas storage figures closely – inputs and withdrawals – which are released weekly by the Energy Information Administration. Net inputs imply lack of demand and so lower prices, and vice versa.
Seasonal Effects of Storage On Prices
During a winter that is relatively warm, there will be a lot of gas supply, but not much demand. Suppliers have to get their gas out of storage by March each year or they incur a penalty according to the pipeline tariff, so they will have to lower prices to make sure it was sold.
On the other hand, if a summer was fairly hot and the hurricane season caused supply interruptions, supply would be constrained and prices would rise up significantly.
It is critically important to work with an energy consultant who tracks market conditions and can help you make the right market timing decision.
A typical auction has 5-8 suppliers participating, depending on the utility area involved, rather than the 10-15 suppliers commonly involved in electricity auctions. Nevertheless, effective auctions can be held with 3-4 suppliers, so any number above this will generate real competition.
Gas auctions enable competition for:
- Fixed price contracts with varying term lengths, usually 12, 24, 36 and sometimes 60 months plus ‘basis’.
- ‘Indexed’ contracts where the price of the gas ‘commodity’ varies with an index – usually the Nymex index, but the “basis” is usually fixed.
- Indexed contracts can be linked to hour ahead, day ahead or monthly indexes. ‘Nymex plus basis’ contracts are monthly.