We’ve been waiting since we started this newsletter for someone to ask this question, and last week, someone did:

What does NYMEX have to do with my electric bill?

Plenty, in fact. That’s why it’s worth keeping an eye on the NYMEX if your contracts…gas or electric…are coming due for renewal soon.

To understand the relationship between the price of natural gas in Louisiana and the price of electricity in your home town, you’ve got to understand how electric prices are set in a competitive market.

Your electricity is delivered by a transmission and distribution grid that is fed by dozens, perhaps even hundreds, of power plants. They are powered by a variety of sources: coal, oil, natural gas, nuclear, hydro, even a bit of green. They are owned by competing energy providers. The local utility, which operates the grid, only buys enough electricity to meet the demand of the moment.

Of all the power plant fuel sources, natural gas is almost always the most expensive option. Remember this. The price of natural gas is set by the natural gas commodities market, of which NYMEX is an indicator.

Electric demand varies. Throughout each day, and throughout the year, it changes constantly. Demand is highest in mid-afternoon, lowest at night. Demand is higher during the hot summers and the cold winters, and lower during the mild seasons of spring and fall.

As demand increases, more generators can come on line and have the opportunity to sell their electricity. As demand decreases, generators are taken off. Who gets on and who gets taken off is all about price.

The utility acts as gatekeeper. They are required, by law, to meet demand at the lowest possible price. They do this by a sort of reverse auction: all available generators send in bids of the price they’re willing to accept, and the utility picks up the low bids until they have enough generation to meet demand. In this auciton, low bid is always the winner. This process continues at 15-minute intervals throughout the day.

Supply and demand tells us that the price is going to be lower when demand is lower, and rise as demand gets higher. Power plants bid at a rate that allows them to run at a profit. At the lowest demand level (called base load), demand can be met at the low price bid by the least expensive generators (usually coal, nuclear or local hydro.) As demand increases, these least expensive generators get added until all of them are online. The price now rises to the bid level of the next least expensive generators, and they are added to the grid. Demand continues to rise. When all these new generators are online, he price rises again. This cycle continues throughout the day and throughout the year. When demand starts to decrease, they cycle reverses itself.

One thing that makes the electric price auction different from other auctions is that once a bid price has been set, everyone who is online gets paid that amount, including the plants that bid lower. This is called a “clearing price.” The economic theories behind why this approach is used, rather than paying on a per-bid basis, would take about a year’s worth of newsletters to discuss. But it’s great to be a cheap coal plant during peak demand time!

The most expensive power plants come on last and set the top price for the day. These will be…take a look back a few paragraphs…the natural gas plants (green energy makes up such a small part of the current energy picture that it only figures marginally into this pricing structure). And the price that natural gas plants bid is based on the price they paid for the natural gas they are burning.Which brings us back to NYMEX. NYMEX indicates the moment-to-moment price of natural gas, natural gas sets the top daily price for electricity, and the top daily price sets the standard for what you see on a standard-offer electric bill. Competing providers use the standard offer to set their own, competing, prices.

Needless to say, this is a highly simplified version of what actually happens. But it’s a start to understanding why tracking the NYMEX can help you understand your electric bill.

Next thing to consider: your provider may or may not own the power plants that provide the electricity they sell you. They may own all, they may own none, they may own some and buy some generated electricity from others, reselling it to you. More on this next week.

Check the NYMEX for this week

Gustav has come, Gustav has tapered off, and we are very glad to see that the human cost of Gustav was as small as could reasonably be hoped for.

Natural gas prices actually followed the fundamentals for a few days, spiking up as Gustav hit. Felt like old times. But this only lasted until reports of the minor resulting damage came in, after which the downward price trend continued.

This is what we expected. Cost Containment Intl. had a number of contracts that were ready to be signed just as the spike started, and on our recommendation, the customers held off signing until the spike had passed. Then we requoted and expedited. Needless to say, we do not enjoy holding off on contracts, but this is part of the way we are able to provide the best cost savings.

Were risks involved? Certainly. Had Gustav behaved differently, and had the damage been more severe, the current price trend would be in a very different place today. We would be working with clients to determine the best strategy to deal with the new circumstances and to find the best savings in the new market.

For one week, we get to feel like geniuses.

Would we have expedited contracts at the price-spike level if clients had requested it? Of course. As a Cost Containment Intl. customer, your preference is always honored, and many of our customers prefer to avoid risk and go with what they’ve got. There is never a “right” or “wrong” choice, only a risk level to tolerate or avoid. This week they listened, they tolerated risk, and they saved.

What does this mean to you? Cost Containment Intl. will do the analysis and give you our best recommendation, but in the end, every contract is a roll of the dice. If you’ve listened, considered and then followed your gut, you will always be able to sleep easy with the choice you make. Remember, there is no cost and no obligation to find out how much you could be saving right now. Find out what a difference the right plan at the right price can make to you.

Check the NYMEX