Natural Gas is Calling the Shots


I always find it interesting when non-energy publications try to tell an energy story. The results are usually mixed. Earlier today, this short article about nation-wide electric price increases in the first six months of 2014 says just that. However it leaves out the meat of the story, the meat being why electric prices were so high. The answer lies in how the electric markets work.


Natural gas is the price setting fuel for electric generation in many parts of the US, particularly on the East Cost. This just means that because it is the main fuel source consumed, the price of electricity moves with the price of natural gas. Historically, wholesale natural gas prices are lower in the “spot” (a.k.a. cash) market where prices are determined shortly before the commodity is needed (say less than a month or even on a daily basis.) Electricity generators know this all too well and so they do not hedge very much of the supply. As a result, when natural gas prices spike as they did this past winter, the increase in natural gas costs are passed along to the electric market in their bidding process.

For consumers, this materializes in a price spike from both ends: heating costs and electric prices soar at the same time. With so many variables, it can be difficult to understand why these two seemingly-unrelated spikes would occur in unison but it’s actually because they are inherently related. Natural gas is calling all the shots.