Natural gas is a clean burning and efficient natural hydrocarbon gas mixture that is commonly used as an energy source for heating, cooling, and even electricity generation. Due to its abundance in the US and technological advancements in the extraction process, increased production has led to reduced prices and wider usage than ever before. It now actually accounts for 38% of all United States electricity generation*!
With over 5.5 million commercial customers in the US (as of 2018*), natural gas is one of the most common heating sources for buildings. While heating is the most typical use, natural gas is also used frequently for manufacturing processes, cooking, and Combined Heat and Power (CHP) Systems.
While electricity supply consists of multiple components, natural gas has two main ones: Basis and NYMEX. These are consistent across the board, but the percentage each occupies of your natural gas supply price varies from state-to-state.
The basis portion of gas supply is the cost for the transmission & distribution of moving the gas from its production point to distribution facilities (Henry Hub) and then to the Local Distribution Companies (LDC) who dispense it through the pipelines to a user’s building. This transportation cost makes up for both the cost of moving the gas through the pipelines as well as reserving space inside the pipeline for it. Basis usually makes up over 50% of the entire supply price.
Included in the basis pricing, the supplier’s margin constitutes a nominal fee that is associated with added volumes and NYMEX hedging. This fee is added to provide protection for the supplier for the risk involved in hedging volumes in pieces under 10,000 Dth per contract per month.
Basis Swing Provisions
While the supplier’s costs for keeping the entire gas load balanced, called ‘swing provisions’, is usually wrapped into the basis price, things are different when extra gas is needed for a building. When this is the case, it is priced at either the current cash market cost or at an already agreed upon natural gas index price. The opposite is the case when less gas is used as the leftover supply is sold and credited back to the user at the cash market price or an already declared index price.
If you are a client who has gas usage fluctuations, you could be hit with higher costs from the swing provisions. To remedy this, you can pay a premium upfront called swing tolerance versus paying for the extra volumes each time more is used. Swing tolerance pricing can be based on either a daily or monthly volume usage.
Like any commodity, natural gas futures are traded, which significantly impacts the cost. Natural gas futures are traded on the New York Mercantile Exchange (NYMEX) commodity futures market on a minute-by-minute basis from 9am to 2:30pm every day. These market participants are essentially trading pieces of paper that represent ownership of the actual commodity. In short, the NYMEX portion of your natural gas supply is the cost for the actual natural gas commodity.
The official delivery location for futures contracts on the NYMEX is the Henry Hub, which is located in Erath, Louisiana. If you’re interested in seeing the NYMEX live trading, check it out here.
While basis and NYMEX are vital to understanding what makes up the natural gas supply, they are not the only factors that determine the price you pay. This is influenced by your actual usage, supply and demand fundamentals, the cost related to converting the paper contract purchased by a supplier into a value (physical premium), and the costs associated with the fuel loss that occurs during transport. Contact us today to discover how we can help you avoid significant costs on your natural gas bills!
Similar to electrical supply, there are a variety of methods you can employ to avoid unneeded costs for natural gas. To learn more about purchasing strategies for electricity and natural gas, take a look at this post.