Neighborhood Energy explains What is 'Basis'?

No, it is not a musical instrument or player, many will answer it as defining a starting point. In energy jargon and specifically for natural gas, it does have a starting point however we need to include a finish. Technically, basis is the difference in price between a forward (futures) market and a cash (spot) market. It is the most important factor in determining electric and natural gas rates in New England. Although there are several types of basis costs, I will focus on locational basis that defines the delivered price of natural gas. And why is this important? Because it provides context in the difference between the cost of gas at the Henry Hub (starting point for gas in Louisiana) and getting the commodity to New England (finish) via the Algonquin pipeline.

In an earlier blog, I shared that that natural gas was trading at levels unseen since 1995 because of high inventories caused by the pandemic. The electric rates reflected the lower cost in both the Henry Hub and basis because over 60% of the electricity generated in New England uses natural gas. Although the lower gas rates, we are seeing electric rates inching north. The reason is a higher future price for natural gas AND basis. Note in the table below how the basis price for New England deliveries are higher during the winter months. It was a whopping $8.00/therm in 2013 and 2017 while juxtaposing it with the milder winters in 2016, 2018 and 2019 that were still at $1.90/therm. A far cry from $0.55 to $0.65 averages from third party supply.

So how does this affect natural gas third party decisions going forward? First, do not rely on the Henry Hub as an indication of market status. The true measure in New England is the Algonquin Citygate spot. Second, the unpredictability of Mother Nature coupled with pipeline constraints are the drivers to provide your business with budget certainty through third party supply.

Your Friendly Neighborhood Energy!