How Natural Gas Prices Affect Electricity Costs

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.

So, how is that price arrived at? First, a composite natural gas price will be calculated, using what’s called the NYMEX Henry-Hub natural gas index. The closing forward twelve month prices are averaged for every business day over a ten day period. Then, the price that’s been arrived at will be examined. If it’s over four percent higher than the price that was used to set the current fuel factor, the provider might file for an increase in their prices. It’s unlikely that the prices will be reduced from the current levels, but they may increase.

The percentage increase in the price of natural gas will be applied to the current fuel factor, creating a new fuel factor. A new factor becomes effective in either twenty or forty-five days, depending on whether or not a hearing has been requested by the electricity provider. If a hearing is requested, the longer period is when the factor becomes effective, and if the hearing is successful, then the prices go up, affecting your utility bill.

While increases may seem confusing, they’re really quite simple. If natural gas costs more, so does all Texas electricity, even that which is not produced using natural gas. Next time you see something confusing on your bill, keep this in mind. It might help to explain a few things.

Author: Jerry Dyess has written article for the Texas Energy market for the past 7 years. Get more information on Texas Power rates.