What do we mean when we say that natural gas and electricity are commodities? It basically means an electron of electricity is the same as any other electron of electricity. A molecule of natural gas is the same as any other molecule of natural gas. Neither natural gas or electricity have physical properties that can be differentiated from one generator or supplier to another.
However, that’s not the end of it. Commodities can be differentiated, based on their delivered cost to end users. Competitive commodity markets try to provide consumers with comparative best value.
Canada’s natural gas market is largely deregulated. This means that consumers across most provinces have two choices – they can have gas supplied by their local utility or they can buy from a supplier, who then delivers it to them through their utility.
Utility rates for consumers are traditionally set quarterly, and tend to fluctuate more slowly, based on broader market trends. Suppliers buy gas at competitive market hubs, such as AECO in Alberta, Dawn in Ontario, or Sumas at the BC border. The primary natural gas hub for Canadian prices is AECO in Alberta, which acts as the benchmark. Other hubs across the country are connected to AECO, with pricing changes at one hub potentially affecting prices at the other hubs. Prices move daily at these hubs in response to changes in supply and demand. Suppliers can buy gas for their customers daily, paying that day’s price for the gas. This is called an Index contract.
Gas consumers can also enter into forward contracts, in which their supplier buys gas at that hub for a fixed cost over a fixed period. This helps reduce the risk of increasing costs if prices rise at the natural gas hub. However, it can also result in paying more if the market price declines in that time period. Savvy consumers can approach multiple suppliers at the same time to get a range of contract prices. This encourages suppliers to provide their lowest pricing possible, allowing consumers to get the best rate.
Consumers that buy natural gas at a hub typically have to also pay for transportation to get the gas delivered to their local utility. For some gas consumers, this can be as substantial as transporting gas from the AECO hub in Alberta out to Ontario or Quebec. Transportation can also be arranged through suppliers, using a competitive bidding process.
Electricity markets tend to be more insular and more highly regulated than the natural gas market. While natural gas consumers across Canada may buy their gas in Alberta, electricity consumers are limited to acquiring supply in their own province. Consumers in most provinces are restricted to accepting the default utility prices.
While electricity markets are regulated in all provinces, two provincial jurisdictions provide for consumer choice based on market pricing: the Alberta Electricity System Operator (AESO) in Alberta, and the Independent Electricity System Operator (IESO) in Ontario. Both AESO and IESO use a competitive hourly market to balance supply from a wide range of generators to match consumer demand. In Ontario, most large consumers can pay the market price for the electricity they use each hour, as a default through their utility. In Alberta, consumers need to sign a contract with suppliers to access the hourly market price, which typically comes with a management top up fee.
As with natural gas, consumers in Alberta and Ontario can also sign forward contracts, guaranteeing their price for the upcoming year. Electricity bills are typically consolidated by either the utility or by the supplier so, consumers only receive one bill with both utility distribution costs and the supply contract costs.
Consumers who decide to take control of their energy costs pay attention to commodity prices. Energy commodity markets give consumers price and delivery choice