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The Anatomy of Electricity and Natural Gas Prices

Posted November 8, 2017 | By Direct Energy Business

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electricity and natural gas prices 

When shopping for electricity and/or natural gas for your business it’s important to understand the anatomy of the price you’re offered.

When given various quotes from energy suppliers, don’t make the mistake of making an apples-to-oranges price comparison. A price that appears too good to be true, might just be depending on what’s included.

But before you start shopping, you should understand the variables of market pricing. If you are in tune with current and anticipated market conditions, the better position you’ll be in to make the right decision for your business.


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What Drives Energy Prices?

Market cycle transitions are gradual during normal market conditions. There could be peaks and valleys – but for the most part prices remain within an anticipated range.

However, there are a variety of factors that can intensify volatility and cause dramatic price swings within certain amounts of times.  Those factors include:

  • Weather
  • Extreme Weather
  • Government Regulations
  • Outages
  • Source Fuels
  • Geopolitical Events


Related Content: For more on these factors, view our Understanding Energy Prices page


The Anatomy of Your Price

Not every supplier explains how their electricity and natural gas price quote was derived. That, in turn, makes it difficult for business owners and decision-makers to quickly identify the best offer.

In general, there are three core items that make up a price:

  1. Price of energy supply: quoted in cents or dollars
  2. Amount to be supplied: how much energy you’re expected to use
  3. Duration of service: “term” or “delivery period” with start and end dates

Electricity Pricing Offers:

For an electricity offer, your price is quoted in cents per kilowatt-hour (kWh) or dollars per megawatt-hour (MWh).  To know for sure what’s included in that price, be sure to ask for a breakdown.

Common components of an electric price offer are:

  • Energy
  • Capacity
  • Ancillary Services
  • Losses
  • Transmission
  • Renewable Portfolio Standards (RPS)

The energy component usually accounts for half of your price. Other components vary by market.

Natural Gas Pricing Offers:

For a natural gas price, your offer is quoted in either dollars per dekatherm (DTH), therm (Th) or dollars per million British thermal units.

Common components of a natural gas price offer are:

  • Commodity
  • Basis
  • Fuel or Losses

By understanding the components of calculating your price, you’ll be better prepared to ask about what is, and is not, included in your offer.

Understanding prices is just one of the key ingredients you’ll need to make the best decisions on electricity and natural gas.

Download our latest eGuide: The 6 Key Ingredients for an Effective Business Energy Strategy now. 

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