Why does incremental usage matter? – TMT

February 23, 2021 – Why does incremental usage matter if you have a fixed rate for natural gas? In this video, Senior Energy Advisor Calvin Cornish, CEM explains why you may be at risk of higher prices even if you have a fixed natural gas rate.

Video Transcript

Thanks for tuning in as we wrap up this month’s theme of answering frequently asked questions. This week’s question: How can I be at risk of higher prices if I’ve already locked in a rate?

The short answer: monthly and daily balancing. The slightly longer answer is this week’s Two-Minute Tuesday.

What is incremental usage?

In an effort to manage risk and reduce cost volatility, the overwhelming majority of gas users regularly lock in fixed rates for some — if not all — of their anticipated usage. The key word there is anticipated.

The difference between your expected usage and actual usage is balanced on a monthly basis. This incremental usage shows up on your bill as a buy or sell based on market rates at the end of the month.

In a typical month, this variance should be minimal; however, large deviations in volume or price can have a noticeable impact. In extreme cases like the Polar Vortex or Winter Storm Uri, the increased volume combined with spiking rates can result in monthly balancing that doubles your supply cost.

Daily Balancing

So, what about daily balancing? When a utility calls a critical day like most did last week, suppliers are subject to very tight daily restrictions, where any deviation from those can result in massive penalties from the utility.

These penalties are in place to protect system stability and ensure that suppliers will purchase and deliver enough gas to meet daily needs, even if they are taking a loss.

A Note on Contract Language

This is where supplier-specific contract language comes into play. Most contracts protect clients against these penalties. Unless you make a huge change, such as shutting down operations without giving notice, you are covered.

As for the extraordinarily high prices incurred on these days, that language varies by supplier and product. It may be very specific, allowing for critical day adjustments. In many cases, it may simply say something like “…price based on a market rate reflecting supplier’s actual costs.”

If you’re not sure about the specifics of your current agreement, react out to your energy advisor.

 

For more information on Critical Days,  check out our recent blog post on how critical days affect your natural gas bills.

As always, thanks for watching, and if you found it useful, please like, share, or comment below.

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