This article details how natural gas prices per therm or cubic foot are determined, and the market factors that affect the price of natural gas.
What is Natural Gas?
Natural gas is a material found underground, formed over thousands of years through the compression of plant material. It is a non-renewable resource, which means the price of natural gas is very heavily-affected based on available supply, delivery, and geopolitical issues. But it is also a very important resource, with over 61% of all US homes using nautral gas in 2009.
What is a Therm?
Natural gas prices are normally based on the cost per British Thermal Unit (BTU), or per therm as it is may be listed on your gas bill. A therm is much larger than a BTU, with one therm equaling approximately 102,700 BTUs.
Gas Prices per Cubic Foot - CCFs and MCFs
Other gas bills are measured in cubic feet, or the amount of energy it takes to heat one cubic foot. Some utilities measure the cost of natural gas by thousand cubic feet, or MCFs. 1 MCF equals 100 cubic feet, equivalent to about 10 therms.
Other utilities measure natural gas in CCFs. 1 CCF equals 100 cubic feet, approximately equivalent to 1 therm.
- 1 cubic foot is equivalent to about 1,027 BTUs
- 1 therm is equivalent to about 100 cubic feet = 1 CCF
- 1,000 cubic feet = 1 MCF, or equivalent to about 10 therms
1 MCF, or 1,000 cubic feet is equivalent to about 10 therms. This is approximately enough natural gas to provide an average American home with space heating, water heating, cooking, and more for four days.
Though the units of measurement may be a little confusing, whether your utility or supplier measures your natural gas in therms or cubic feet (MCFs and CCFs), you will not be charged more just because your unit of measurement is larger.
How Have Natural Gas Prices Evolved Over Time in the US
Since the 1990s, the price in natural gas has fluctuated highly based on supply problems caused by weather, infrastructure, and other limitations. Longer term price however tends to be based more on access to alternative resources.
Prices in the United States have been relatively stable since about 2008, when advances in natural gas extraction have helped to keep costs down.
Average natural gas prices per therm were about $1.32 in 2013, with a low of about $0.92 per therm in December and January, and a high of about $1.64 per therm in August.
There are great regional differences in natural gas prices based on infrastructure and proximity to natural gas reserves.
The Cost of Natural Gas per Therm or Cubic Foot on Your Bill
The cost of natural gas per therm or cubic foot is based on delivery of natural gas to your home, supply of the resource itself, and taxes.
Also known as distribution charges, delivery charges are based on all the costs associated with delivering natural gas to the consumer, as well as purchasing and maintaining pipelines and other transmission infrastructure. Depending on your utility, these costs may be a fixed rate per MCF (or 1,000 cubic feet).
Unlike electricity which is normally generated relatively near consumers, natural gas is pumped in from sometimes distant locations. For example, Consumers Energy customers in Michigan receive natural gas from:
The cost to deliver natural gas to your home depends on a number of factors, including:
- Pipeline Capacity and Infrastructure
- Nearby storage
- Equipment and technical issues
These costs reflect the real market cost of natural gas multiplied by the amount used by the consumer. These charges also include costs associated with customer service.
Natural gas taxes are rolled into your monthly bill and are the same no matter your utility. These are often charged based on the number of therms you consume, and they include local city and state taxes.
The sales tax is a tax paid to the state. It applies not only to natural gas, but to the sales of any goods and services.
Energy efficiency charges
Most states have energy efficiency programs for electricity as well as for natural gas. In order to pay for these programs, gas customers are charged an extra percentage of their gas bill. The charge paid in the gas bill will go to funding energy efficiency. For example, customers willing to renovate their homes and improve it's heat isolation can receive money to help with this expense. Energy efficiency programs also fund Research & Development for renewable energy or energy efficiency.
Revenue based charges
The utility companies and energy suppliers are themselves taxed on the sales of electricity and natural gas to customers. Many local municipalities impose taxes on the utility company's revenue.To pay for this tax, they charge the customer. These costs are recovered through a tariff surcharge and may vary depending on the municipality.
Other state surcharges
Other surcharges can include charges to incentivize education and outreach, energy assistance for people with low-income, with medical problems, or assistance for elderly people, just like for electricity.
Your natural gas bill may also include miscellaneous charges, including things like:
- Storage service charge
- Environmental regulations cost recovery
- Cost adjustment for estimated bills
If your utility estimates natural gas usage you may receive charges or deductions on your bill based on differences in consumption. Strategies for estimation include:
- Using consumption records for the same month in the prior year
- Meter Readings every other month with estimation in between
The Typical Natural Gas Bill
Your utility may charge fixed and non-fixed costs within both delivery and supply sections of your bill.
For example, Peoples Gas in Illinois splits up December 2014 natural gas delivery charges for Rate 1 Heating Sales customers as follows:
|Fixed - covering infrastructure and labor||$26.90 per month|
|Variable - based on natural gas consumed||$0.18885 per therm|
The variable costs on your bill change based on the amount of natural gas you consume each month. The below chart depicts Peoples Gas variable prices per therm in December 2014 for Rate 1 Heating Sales customers.
For customers using natural gas to heat their home, 70% of the the average bill goes toward supply charges.
Different states split up and regulate monthly fixed costs differently.
Variable & Fixed Rates
Often American utilities put consumers on a default variable natural gas rate per therm. This means that the price of natural gas consumed changes based on market costs. Costs associated with delivery and supply may change as well, but normally these changes must be approved by your state government if you are using your local utility. Your natural gas bill will often show the price of natural gas per therm or cubic foot averaged over the monthly period. Time of Use plans also vary during the day based on times of high and low demand, where high demand times have a much higher price per therm or cubic foot.
Fixed rates are less common, and normally involve a contract between the supplier and the consumer which locks in a natural gas rate per therm for the entire period of the contract, usually based on present natural gas market costs. This protects consumers from fluctuations in price, and offers the chance to keep a good rate at the start of the contract.
Alternative versus Local Utility Gas Providers
In states which have been deregulated, the cost of natural gas varies if you choose your traditional local utility, or whether you participate in a gas choice program. Historically, before energy market deregulation, Americans could not choose electricity or gas suppliers. Based on where you live, each community had one option. Now with deregulation, many Americans can choose their own alternative energy supplier - and profit from big savings. In many states, your local utility has rates that are regulated by your state government, while your alternative supplier is not regulated.
Alternative Suppliers: How Do they Work?
If you choose to switch to an alternative gas supplier, your local utility will still take care of delivery, or the service and costs associated with getting natural gas from the wellhead source to your home. Your new alternative gas supplier will cover all costs and services related to supply, including customer service and the cost of natural gas consumed. This is where you can save on your natural gas bills. Normally, after the switch you will receive two natural gas bills - one for delivery charges from your local utility company, and the other for supply charges from your new alternative supplier.
Market Factors that Affect the Cost of Natural Gas per Therm or Cubic Foot
More complicated than electricity, the price of natural gas for consumers is made up of many components.
The cost of natural gas is first based on the cost of the average wellhead price, which is the price of crude natural gas in its initial form. It must be processed afterwards before it can be consumed in homes, which involves removing certain gases from the mixture. This is called gas production, and its associated costs also affect the price of natural gas to the consumer.
Natural gas is also traded on the New York Mercantile Exchange (NYMEX) Henry Hub commodity market in spot and future contracts before being sold to consumers. Transactions here affect the prices paid for natural gas in all of North America.
Finally, the residential cost of natural gas per therm or cubic foot in the United States is based on factors related to consumer demand and weather, as well as supply and delivery costs.
Demand Related Costs
The residential price of natural gas per therm or cubic foot is heavily affected by demand, but sometimes in surprising ways.
Seasonal weather patterns affect residential prices for natural gas, but not in the way you'd expect. Because there are high fixed costs to produce natural gas, prices are actually lower in the winter when demand is highest. In the summer, when demand is much lower, the fixed costs of producing natural gas are spread over many fewer therms, so the cost per unit is actually higher when demand is the lowest.
Weather has a large impact on the price of natural gas in other ways. Major weather events can affect extraction, for example, as offshore drilling platforms shut down during extreme weather. This reduces available supply and increases prices.
Imports and Exports
The United States exports natural gas, to countries including Canada, Mexico, Japan, and China. Higher export rates reduce local supply in the US, which can cause price increases. In addition, higher import rates help to reduce the cost of natural gas in the United States. The largest US import sources include Canada, Mexico, Trinidad, Qatar, and Yemen.
Reductions in Residential Gas Prices
Because it is a limited, non-renewable resource, the price of natural gas will inevitably go up as availability decreases. However, shifts to new extraction methods and different fuel sources have, for now, actually lowered the cost of natural gas per therm or cubic foot paid by consumers.
Improvements in extraction technology have increased the amount of gas that can be taken from a single deposit, leading to lower prices. Advancements include things like hydraulic fracturing, which has greatly reduced the market spot price of natural gas since 2008. This in turn affects consumer prices.
As the supply and production of natural gas become more limited and affected by demand, there has been a shift in North America toward shale gas. Consumers who live in counties above shale gas deposits pay on average 30% less for their natural gas.
Other Fuel Alternatives
The gradual shift toward renewable and green energy alternatives to natural gas has a positive impact on the cost of natural gas, as it spreads out demand to other energy sources. As adoption of new fuel alternatives has taken off slowly in the United States, this has not had a big impact yet on residential gas prices per therm. It could however be important in the future.
Natural gas storage helps to keep the price of gas per therm down since it allows providers to store extra gas to use later during times of higher demand, cutting down on infrastructural stress and supply limitations. Storage is usually done underground in unused fields. Communities with nearby storage capabilities may save more on their natural gas than those without.
Did You Know?Depending on where you live in the US, you may have a choice of natural gas supplier. Call us at 347-410-8789 to find out more about your energy options, or check out the rest of our site for more information