Condominium Managers need to understand Natural Gas pricing

Condominium Managers may be surprised to learn the impact of natural gas prices on operating expenses.  If your budget only contains an expense line item for oil or propane how then does natural gas come into play?  The answer in New England is electricity.  Two thirds of Massachusetts electricity production and more than half of New England’s electric power is generated by natural gas. When the cost of natural gas goes up so do electricity costs.

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Rowes Wharf and Harbor Towers are both condominiums that use large quantities of electricity and therefore large amounts of natural gas

The relationship between the price of natural gas, the cost of electricity, and the wholesale purchasing market is a challenge to understand.  It is, however, well worth the effort to develop an ability to make informed decisions around this critical commodity. The federal Energy Information Administration tells us that the projected demand for electricity is will increase by 28 percent by 2040 1 Increased demand for electricity combined with a finite supply of energy will produce higher rates for electricity. It’s critical therefore that an effective property manager understands pricing in the electricity market.

The complexity of pricing lies with the market structure.  The players consist of competing electric generation plants, retail suppliers, brokers, and buyers. As a core concept, constant changes in supply and demand dictate natural gas pricing and the subsequent cost of electricity 2.  The supply of electricity, by its nature, is difficult to store and is generally consumed in less than a second after being produced. Consequently it is not possible, under normal operating conditions, to stock pile electricity, ration it, or have customers queue for it. .  On the demand side of the equation, changing weather patterns create wide fluctuations in the need for natural gas and it consequent influence on pricing.

At the center of this market is ISO New England – a Regional Transmission Organization assigned by the Federal Energy Regulatory Agency to ensure that an adequate electric supply is available to meet demand. This quasi-governmental agency controls the New England power grid.

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NStar and National Grid, our major regional transmission utilities, are consumers in this market. They hedge against price spikes by buying power in advance and locking into a fixed price. Starting January 1st, 2014 NStar increased prices by 22% based on advanced price contracts of natural gas for New England.  They operate on a three month cycle at which time pricing contracts will change.  With the passage of the Electricity Restructuring Act of 1998, Massachusetts consumers have the ability to shop for a competitive energy supplier in much the same way as these major utilities.

As a condominium manager delving into this market, it is wise to seek the advice of an Energy Consultant to assist in the bidding process.  I have worked with SSES (Single Source Energy Solutions). This firm has been critical in assisting me to develop an advantageous purchasing strategy and reviewing bid offers.

The process begins by releasing your kilowatt usage and Interval data to selected bidders.  Interval data- often referred to as Demand data – is a measure of your highest required power usage. This usage information is organized into a format suitable to solicit bids from multiple power suppliers. A bid date is established to ensure that all pricing is received simultaneously in a market which changes on an hourly basis. Just prior to bid day, your energy consultant should evaluate the market based on their experience to ensure that the most favorable conditions are in place to receive bids.

On bid day, each supplier will offer a variety of pricing options along with different agreement terms such as minimum and maximum purchase, pass through costs, and billing practices.  These terms should be understood before signing a Power Purchase Agreement with the chosen supplier.

(1) http://www.eia.gov/forecasts/aeo/MT_electric.cfm#growth_elec

(2) http://en.wikipedia.org/wiki/Electricity_market

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