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.
*Please note: This video was posted during Winter Storm Uri when many utilities had called critical days.*
Hi! Thanks for tuning in as we wrap up this month’s theme of Frequently Asked Questions. This week’s question is: How can I be at risk of higher prices if I’ve already locked in a rate?
The short answer is monthly balancing. The slightly longer answer is this week’s Two-Minute Tuesday.
What is monthly balancing?
In an effort to manage risk and reduce cost volatility, the overwhelming majority of gas buyers lock in a fixed rate for some — if not all — of their anticipated usage.
The key word there is anticipated. The difference between your expected usage and your actual usage is balanced on a monthly basis. This incremental usage shows up on your invoice as a sell or a buy at market rates at the end of the month.
In a typical month, the variance should be minimal. However, large deviation in volume or price can result in a noticeable impact. In extreme cases like the polar vortex or Winter Storm Uri, the combination of high usage and high pricing can result in incremental volumes that double your monthly gas cost.
What about daily balancing?
When utilities call critical days like many did last week, suppliers are subject to very tight daily restrictions where any deviation can result in major penalties. These penalties are in place to protect the system’s stability and ensure that suppliers will purchase and deliver adequate gas — even when they’re doing so at a loss.
This is where supplier-specific contract language comes into play. Most contracts protect clients against these penalties, and unless you make a huge change like shutting down your operation without notifying the supplier, you’re completely covered.
As for the gas purchased at extraordinarily high prices on those days, that varies by supplier and product. The monthly balancing contract language may allow for adjustments specifically to critical day gas. But in many cases, they have general language, such as “market pricing reflective of supplier’s actual cost.” That leaves them a lot of flexibility on how to recoup those high costs.
If you’re not sure about the specific language in your current agreement, reach 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 bill.
As always, thank you for watching. And if you found this useful, please like, share, or comment below.