Natural Gas Hedging Works for Customers

Lessons on America’s Power Supply Formula
October 3, 2017
D.C. Energy News, Inside and Out
October 10, 2017

Earlier this year, PACE reported on the importance of natural gas hedging as a tool for keeping power prices stable and affordable. With debate continuing about the role of natural gas in our country’s power generation portfolio, we think it’s timely to revisit the topic.

Last month, we asked two experts to share their views on why using natural gas makes our nation more safe and secure, and why allowing utilities to hedge natural gas purchases makes good business sense and protects consumers.

You can see a short excerpt from our conversation here:

Natural gas is now cemented as part of our nation’s electric generation portfolio, a trend that will continue for decades to come. Coal may edge it out, percentage-wise, this year and next, but it will be a very close horse race.

Even though the last decade of innovation and discovery have increased the domestic supply, and we are all benefiting from a remarkable period of lower prices, history advises that natural gas prices, like those of any commodity, are likely to fluctuate over time. So, it’s become commonplace in the energy industry, just as for any business that depends on commodities, to hedge natural gas contracts.

Hedges are actions or investments to reduce the risk of unfavorable price movements of an asset. This is primarily done with financial instruments that create a floor and ceiling price. Occasionally, parties enter into physical hedges, meaning that actual product is delivered, although this is increasingly rare for electric utilities.

As PACE explained earlier this year,

“Historically, hedging has allowed utilities to navigate the volatility of changing factors such as weather without creating constant sticker shock for their customers. Whether a mild winter and low electricity use combine to create a glut of natural gas, or whether a harsh winter drives up prices, utilities that combine hedging with smart forecasting are better able to stabilize their power prices.”

Unfortunately, interest groups whose true mission is cutting off the use of natural gas for power generation have chosen to start attacking utilities’ hedging practices. In future posts and video content, we’ll continue to explore this regrettable tactic and explain why it goes against the interests of consumers and businesses across the country.