A Few Bad Days Can Significantly Increase Your Natural Gas Spend

Many natural gas customers may notice high natural gas bills in upcoming months as frigid winter temperatures take hold. This can result in constraints on the pipeline which may cause price increases in the cost of natural gas, even if they are in a fixed contract.
The natural gas industry in the United States has been rapidly changing because of technological advancements in drilling and hydraulic fracturing which has enabled less expensive extraction of natural gas from shale formations. The availability of abundant, low-cost natural gas has created a boom for natural gas. However, with increased use of natural gas, new challenges have arisen.

Unlike other fossil fuels, natural gas cannot typically be stored on-site and must be delivered as it is consumed, therefore supply and demand must remain balanced. Natural gas pipelines are basically enormous high-pressure plumbing systems that can be problematic to manage. Managing the pipeline becomes critical when demand on the system is either too high or too low.

In a critical situation, when a customer uses more gas than contracted, the utility charges penalties to encourage customers to use less gas, which will keep the system functioning more efficient. This mechanism is known as an Operational Flow Order and is called in order to balance the system.

Operational Flow Orders

As cold weather causes the demand for natural gas to increase, the utility may be forced to call an order to protect the operational integrity of the pipeline. When an OFO is issued for operational balancing, the utility is saying that suppliers must carefully match (balance) what they put in with what comes out on a daily basis within a specific tolerance. This simply means what goes in must equal what goes out.

Some factors that can lead to OFOs are:

  • Failure of a transmission, distribution, gas storage or gas manufacturing facilities
  • Transmission system pressures or other unusual conditions that jeopardize the system
  • Transmission, storage and supply resources are being used at or near their maximum rated deliverability
  • Necessity to maintain the overall operational integrity of all or a portion of our system
  • Inability to fulfill firm contractual obligations

What this means to customers?

When customers deviate from their contracted volumes, suppliers must go back to the wholesale market to balance the quantity of natural gas being consumed. Suppliers, in this circumstance, are exposed to high market rates and incur increased costs, which they in turn pass on to the customer. Suppliers may charge customers for any usage over their contracted amount during this time period regardless of usage bands.

How your business can protect itself?

Not every customer will be subjected to an OFO day. The costs are handled differently depending on the supplier and utility. Some suppliers have built-in precautions for certain rate classes, so they don’t need to pass on costs to some of their customers, while other suppliers will pass these costs on.

Patriot Energy Group can help clients navigate their contract language and see if they are susceptible to potential OFO increases.

Your utility bills can fluctuate wildly in cold weather months. Protect your business by getting ahead of these potential extra costs that can impact your company’s bottom line.

* Daily Cost Calculations
OFO Day with Overage: (Contract Therms x Contract Rate) + (Imbalance Therms x Imbalance Rate)
100% Swing Day: (Contract Therms + Imbalance Therms x Contract Rate)
Therms/Day is based on a fractional portion of the monthly contract quantity.

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