Natural Gas Prices and Impact on Electricity Costs

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Natural Gas Prices and Impact on Electricity Costs

By: Jerry D.

You might not know it, but the current cost of natural gas can affect how much your electricity costs, even if you don't burn gas or use power generated from it. That's because the cost of fuel makes up about a third of the generation cost for electricity, and in Texas, most of that electricity is generated via natural gas. Since so much of the industry uses natural gas, your power bill goes up when the price of this fossil fuel does. That can cause some real confusion if you're not sure what's going on, and you may see unexplained price increases.
The Texas Electric Choice Act of 1999 allows retail electricity providers to make changes to their prices twice each year, basing those changes on the current cost of natural gas. This lets the market and customers benefit, because the price of power always reflects market conditions. If you're not happy with the price of your power, you have the option to pick a new supplier if you can find one that will offer you better terms. The Act, simply put, lets Texans choose where their power comes from. That allows you to pick a supplier that generates power the way you choose - helpful for people who are worried about the impact of their usage.
How is the price determined? First, the composite price of natural gas is calcuated according to the NYMEX Henry-Hub natural gas index. For every business day in a ten day period, the closing forward twelve-month prices are averaged. Then, providers take a look at the price that's come up. If that number is more than four percent higher than the price used to set the fuel factor that's being used at the moment, the provider can file for an increase in their prices (it's rare to see a supplier file for a reduction).
Then, the percentage by which the price of natural gas has increased is applied to the current fuel factor, and the new fuel factor is created. It takes either twenty days or forty-five days for the new factor to become effective - depending on whether or not the supplier requests a hearing. When hearings are requested, the fuel factor doesn't affect your bill until the supplier wins the hearing, and the longer time period is the one that applies.
Increases might seem like they're really complicated, but the truth is that they're not. When natural gas gets more expensive, all electricity in Texas does, even if it's not produced by burning natural gas. So, next time your utility bill confuses you, make sure you consider this fact.

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About The Author
About the author: Jerry Dyess has been involved in the Texas Electricity market segment for the past 7 years. He has published many articles on Texas Electric rates.

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