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Fracking And My Electric Bill: Does the Natural Gas ‘Boom’ Affect What I Pay?

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Summary:

The US shale gas boom has increased the supply of natural gas, which in turn has brought gas prices way down. Since gas is a fuel that runs power plants, its price affects your electric bill – depending on where you live.

Fracking

We’ve all been hearing about the controversy over natural gas extraction from shale via hydraulic fracturing, or fracking – it creates jobs, it pollutes ground water, it’s good for the environment because gas is cleaner than coal, it’s bad for the environment because gas is still a fossil fuel…

…No matter what side you’re on, the increase in domestic supply brought natural gas prices to record lows last year: while gas cost over $4 per million British thermal unit (MMBTU) in spring 2011, it cost only half as much last spring. It’s now on the rise again as low prices put a damper on supply, to over $4 per MMBTU recently.

But how does this affect you? Most power generators own plants that burn natural gas – what they have to pay for that gas affects what you pay them for your electricity, but it’s of course not that simple. How much you actually “feel” the impact of gas price fluctuations on your electric bill depends on your utility: different electric companies have different ways of incorporating the fuel cost into their pricing.

Electric rates and natural gas prices: a strong connection?

Electric Rate Comparison(1) New York and Texas utilities pass the cost of fuel through to consumers pretty much directly – that is, if the price of natural gas is higher this month than last, fuel costs were higher for the electric companies so each kilowatt hour you used this month cost more than it did last month.

Consolidated Edison or ConEd, New York’s main provider of standard service – what you pay if you don’t actively choose a retail provider - changes its supply charge every day based largely on fuel costs. On the graph below, you can see how much the latest natural gas price influences this charge: it fluctuates wildly, and it’s no coincidence that the time when the supply charge was lowest in recent history (April 2012), US natural gas prices were lowest, too: less than $2/MMBTU.

Utilities providing standard service in other States have a much longer “procurement cycle” – one, two or even three years. Check out Maryland utility Baltimore Gas & Electric (BGE) on the graph: despite all the wobbles of the gas market, BGE’s prices have been pretty flat over the past few years because the procurement is on a 2 year cycle – BGE buys only 25% of the supply every 6 months, so if that purchase is particularly cheap or expensive, the effect is pretty muted. If gas prices spike, you won’t see it reflected directly in your electricity bill because the rates are still riding the low price wave of previous months – or the other way around: if the gas price drops like it did last spring, you’re still stuck paying higher rates for several months or even years. Similarly, Massachusetts utility National Grid has a one-year procurement cycle, so half the supply is purchased every half year. That also produces flatter prices than NY’s fluctuations, but not quite as flat as Maryland’s

The US’ newfound fracking boom may, or may not, take you on a wild ride depending on your utility’s procurement pattern. New Yorkers and Texans can claim more than others that they feel the effects of the fracking controversy: with gas prices up and down, so are their electric rates.

Of course it’s not just natural gas prices that determine overall electricity rates – transmission bottlenecks and seasonal demand changes also affect them, as does the cost of other fuels. That said, consumers in States with retail choice can lock in an electric rate at any point to get the best of both worlds: low prices and no variability!

By Lisa Zelljadt, you can find me on Google+

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