Energy Consulting: Understand Natural Gas and Electricity Pricing
Energy Consulting: Understand Natural Gas and Electricity Pricing
Last modified: August 8, 2022
Have you been searching for the best way to reduce your energy costs? Because, if so, one way to do this is to partner with a third-party that offers energy consulting. This makes sense for many businesses and industries: It allows you to understand what affects energy price and the crucial connection between natural gas and electricity. You can then make smarter choices about energy procurement long term.
In this article, therefore, we’ll take a close look at how the markets work, pricing trends, and how they affect your energy procurement.
How Do We Generate Electricity Using Gas?
Currently, most production of electricity relies on gas. So how does gas generate electricity? Usually via turbines. If you like detail, here are three types of natural gas power stations:
- Open Cycle Fast Turbines – These turbines use gas as their primary energy source. The gas, when fired up, produces hot air to turn on the turbine, which then produces electricity.
- Combined Cycle Gas Turbines – The beginning cycle is the same as above. The gas generates electricity. However, the hot air the gas produces also heats water to create steam, which another turbine uses it to produce more energy. This type of turbine is more energy efficient but also more costly to build than the former.
- Combined Heat and Power – As with the last two power stations, gas powers the turbine. However, the heat and steam from this type of turbine powers chemical services plants and oil refineries.
It’s worth noting that the U.S. natural gas system is not entirely reliable for the production of electricity, as witnessed in Storm Uri during February 2021. The storm brought snow and damaged power lines. When the power went down, natural gas production stopped at source in many areas because, apart from instrumentation freezing, they lacked electricity to continue. And electricity then failed in many more areas because the turbines lacked their primary fuel source of natural gas, as above.
After the event, FERC was adamant this could not be allowed to happen again and issued recommendations. But it does highlight the interdependency of natural gas and electricity.
What Factors Influence Electricity Prices?
Electricity fluctuates in price for a number of reasons across a range of factors.
One of the benefits of energy consulting is that your advisor keeps an eye on all factors, helping you understand not only supply and demand, seasons, and weather conditions, but also more complicated issues like power plant costs, your contract, and stock market movement.
Let’s break down the 10 main factors individually.
1 Supply and demand
Supply and demand increases prices across all markets. But what does it mean for energy procurement and its costs?
Plants and other power generators run for long periods and meet “normal” everyday demands. Smaller generators can easily be turned on and off to suit demand. But in all other cases, if they keep running and there’s too much supply, prices go down, and when there’s too much demand, prices rise due to the shortage.
It’s obvious that there will be seasonal variations in demand. More heat reduces our demand on the systems. More cold increases it. This seasonal variation feeds into the supply and demand price fluctuations mentioned above.
3 Weather conditions
Seasons and weather conditions sound the same – until the energy consultant draws your attention to yet another point you need to consider in the complexity of pricing!
In any season, rain, snow, and wind can affect electricity prices. We’ve already mentioned the extreme weather during Storm Uri.
In addition, however, when it rains, hydro-powered turbines come online and provide some of the power that natural gas turbines would usually provide. This increases supply and lowers prices. And, similarly, in periods of high wind, wind turbines spring into action, offering another increase in supply beyond demand, thus reducing prices.
Because fuel like natural gas and oil is often used to power electric turbines and other electricity generators, if fuel price increases, so does electricity.
So far, so good. Energy consulting keeps all this information up front in your decision-making process. Let’s move on to the more complex issues.
5 Power plant costs
The costs may differ depending on the power plant in your vicinity. That’s because each power plant has its own prices, financing options, and construction.
For instance, upkeep within the facilities, maintenance costs they have to cover, and certain operating costs also affect the price for procuring energy.
Regulations imposed by states contribute to electricity pricing as well. Some states regulate electricity prices, while others use a combination of regulated and unregulated prices for generators, transmission, and distribution, for example.
7 Transmission and distribution system
Transmission and distribution is about more than getting electricity from A to B. These systems have construction and operating costs. If a pipe breaks, maintenance costs get distributed across its clientele.
The cost of operating these distribution systems also includes cyber security. This is a newer cost, because technology has increased the virtual faces open to sabotage from malicious actors.
8 Current events
We don’t just mean the war in Ukraine. Current events such as oil spills that diminish the supply against our demand can affect the electricity prices you pay today.
Any damage to delivery systems such as roads, pipes, generators, and fuel supply lines affects our electricity pricing.
9 Stock market forecast
The price of natural gas in the United States is often used as a baseline for energy procurement pricing. Therefore, it’s important to stay up to date with the energy market forecast and watch for upward and downward trends. This is a crucial part of the energy consultation arrangement – and one that your business or industrial plant will find worth its weight in gold (or saved costs!).
10 Contractual obligations
Energy is often priced with all of the above in mind. However, there’s one more factor you might need to consider with your energy consultant: the contract with your chosen energy procurement company.
Understanding current prices, timing, and contract term – along with all of the above – ensures you choose a contract that’s best for you.
You Don’t Have to Sort This Out Alone!
We can help you. Smart energy procurement starts with energy consulting. At Rapid Power Management, we take pride in helping you understand the facts of the energy market. We customize solutions to meet your needs and always find a way to lower your energy bills. Try us today. We’re not just another broker! Send us a bill to analyze.
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