Affordability matters
With inflation on the rise and high interest rates adding to economic pressures, affordability has become the number one issue among Canadians. Among affordability concerns, the cost of the energy to heat and power our homes is a crucial one.
What impacts the cost of natural gas?
Like any good or service, the cost of natural gas in Canada is based on supply and demand. When lots of people are using the natural gas supply, the price tends to go up. In periods of lower usage, we work to build up our reserves to help limit price increases in the next period of high demand.
Below are a few examples of scenarios that impact supply and demand:
- Higher usage for heating during colder fall and winter months
- Lower usage in warmer spring and summer months
- Increased global demand for liquefied natural gas (LNG) exports
- Lots of natural gas in storage and reserves
- Lowered quantity of natural gas reserves at the end of high-usage periods
- Changes or improvements to existing natural gas infrastructure
We’ll go into more detail on this later in this article.
Understanding your gas bill
Despite changing economic conditions, natural gas continues to be one of the most affordable energy choices available. Even so, when you get your gas bill after a cold February, it might be tough to feel like you’re saving. In this blog, we’ll help you break down the different charges on your natural gas bill. We’ll also provide some deeper context on the factors that impact the price of natural gas itself. Finally, we’ll share some tips for saving on your gas bill year-round.
The four components of your natural gas bill
In Canada, your natural gas bill is typically made up of four main components – the first is called a fixed charge and remaining three are variable charges that depend on the amount of a gas used: a delivery charge, a carbon tax charge, and a gas commodity charge.
The cost of each component can vary depending on factors like your specific utility company and your consumption patterns.
Fixed charge
The fixed or customer charge isn’t affected by the amount of gas you use. It’s the cost charged by the utility company to recover the cost of building and maintaining their system infrastructure, including administrative costs like billing and metering.
It’s calculated by taking the full cost of the pipeline plus a reasonable rate of return, and dividing it out over the expected life of the asset. That cost is then spread across all the users of the system. In this way, all existing and future users of the distribution system pay their share for using it.
The customer charge on the bill is approved by provincial regulators to ensure that customers are charged a fair price while still allowing the utility to earn a reasonable rate of return.
Delivery charge
This portion of the bill covers the cost of transporting the gas from the wellhead all the way to the end consumer. Unlike customer charges, delivery charges depend on your gas usage. Costs are incurred because it takes energy to compress and move the gas along the pipeline system.
Delivery costs can usually be further broken down into three components:
- transmission costs – moving the gas over long distances
- storage costs – storing and drawing gas from inventory to be used now or later
- distribution costs – moving the gas to the consumer’s service address.
Like the customer charge, the rate for delivery costs must also be approved by provincial regulators.
Carbon tax charge
The third component of your natural gas bill is the carbon tax charge. All provinces in Canada must use either the federal backstop or an equivalent provincial system for a price of carbon. In 2023, the federal price of carbon is $65/tonne, which is equivalent to 12.39 cents/m3 or about $3.21 per GJ. The price of the carbon tax is expected to rise to $170/tonne by 2030, which would increase the carbon tax charge for natural gas to 33.29 cents/m3 or $8.65/GJ.
Gas commodity charge
The gas commodity charge on your bill reflects the price that your utility pays to acquire the gas from natural gas producers or marketers. The commodity price that the utility pays is passed on directly to customers without any mark-up.
Unlike the other components, the commodity price isn’t regulated by provincial regulators or governments. As we mentioned earlier in this article, the price of natural gas is impacted by supply and demand fundamentals. For this reason, the commodity charge is the component of your gas bill that causes the most fluctuations from month-to-month.
Natural gas supply and demand
It should come as no surprise that changes in supply and demand impact the commodity price of natural gas. Like most markets, the price goes up when supply the scarce or when demand is high. Conversely, when a market is over-supplied or in low demand, the price responds accordingly by decreasing.
Factors that influence price can include weather, economic activity, production, storage levels, and gas exports. While recent events might make you think gas prices are higher, the graph below shows that gas prices have fluctuated similarly over the past 10 years.
Factors that impact demand
On the demand side of the equation, factors like weather and economic activity impact gas consumption and in turn, impact the price of gas. As outside temperatures start to drop around October each year, natural gas consumption starts to increase, peaking usually in December and January to provide heat in homes and other buildings.
We often see seasonal trends in the price of gas where they are lower in the summer and higher in the winter. Severe weather like extreme cold can place an upward pressure on prices.
Economic activity is another factor that can impact prices. For example, increased demand for natural gas in industrial processes like manufacturing, farming, or the production of other natural resources can make gas cost more.
Factors that impact supply
Things like rate of production, quantities of gas in storage, and exports all have an impact on the natural gas supply. When the supply is abundant and demand is low, the price goes down.
It would seem that higher gas production results in more gas supply, driving prices down. However, this ignores the impact of storage. In a typical year, natural gas is injected underground throughout the summer when demand – and therefore prices – are at their lowest.
As winter approaches, high storage levels allow operators to hedge against higher prices in the winter. It also provides some buffer to absorb unforeseen demand spikes. If gas storage levels are not filled up to typical levels prior to the winter, this can create upward pressures on the commodity price.
Finally, gas exports and more recently LNG demand, can also play a significant role in altering the supply balance. Russia’s invasion of Ukraine and the loss of Russian gas from the global supply chain is a recent example of this phenomenon at work.
The emergence of the United States as the leading supplier of LNG has increased the global competition for North American gas. As Canada sends more gas down to the US to be liquefied, the overall supply of gas decreases, which resulted in higher commodity prices.
Comparing natural gas prices with other energy sources
Aside from natural gas, electricity, propane, and heating oil are also common energies used in homes throughout the country. But how do these other energy sources stack up from an affordability perspective?
It can be difficult to quantify given how different forms of energy are used in different applications. For example, a single home may use electricity for lighting and electronics, propane for cooking, and heating oil for home heating. Adding to the complexity is that different forms of energy are often measured in different units.
We often see the amount of natural gas used measured in either m3 or GJ. Meanwhile, petroleum products like propane and heating oil are often measured in litres while electricity is often measured in kWh. All these factors together can make comparisons between the different forms of energy difficult.
However, based on actual energy output, natural gas is the most affordable when compared to electricity and oil-derived products like propane and heating oil.
Maximizing your savings
Even with its affordability advantage, the best way to save on natural gas is by finding ways to use less of it. Below are just a few tips that gas customers can follow, however, it’s always best to contact your local gas distributors. They often provide additional energy saving tips and may offer programs and rebates to help you save even more.
Keep your gas appliances well-maintained
Ensure that all your heating equipment is running as efficiently as possible. Clean or change your furnace filter regularly, eliminate obstacles from your vents and baseboards, and do regular maintenance on your furnace to ensure that your equipment does not need to run harder than necessary.
Add insulation
Insulating and draft proofing your home is a great way to save on gas heating. Doing so will help keep cool air outside and warm air inside, which reduces the amount of time that your furnace needs to run. Some low-cost activities include caulking and weatherstripping around windows and doors, adding insulation to your walls, or installing more energy efficient windows.
If you don’t own your home, or new windows are not in your budget, you can install a clear film on the inside of your windows to create a simple insulation barrier.
Keep the temperature down
Maintaining a slightly lower temperature in your home during the colder seasons can save you a lot of money. Many utility companies recommend setting the indoor temperature to no more than 20°C when you are awake at home during the winter. When you are asleep or leaving the house, set the temperature down to 17°C to save on additional energy costs. Better yet, take all the guesswork out by installing a smart or programmable thermostat.
The cost of comfort
If you’ve read this far, you should have a better understanding of how the charges on your gas bill are broken down, and how you can save on heating in the colder months.
Nobody likes expensive bills, but it helps to understand how the price of gas can fluctuate and how our infrastructure works to protect consumers from massive changes. We’re lucky that Canada has one of the most abundant natural gas supplies in the world, and an infrastructure that delivers affordable energy to so many Canadians.
If affordable energy is important to you, it’s time to speak up. Write your elected officials and let them know natural gas belongs in our energy mix.
