Commercial energy / Buyer guidance
Henry Hub and electricity: fuel exposure versus a delivered power price
Understand the gas benchmark, heat rate and retail-contract bridge without converting Henry Hub directly into an electricity offer.
Begin with the correct commodity
Henry Hub is a natural gas location and benchmark, not an electricity tariff. A business electric invoice is normally expressed in electricity units such as kWh, while a gas benchmark can be expressed in dollars per MMBtu. They cannot be compared by placing the two numerical prices beside each other. The missing information includes conversion efficiency, location and the product being purchased.
The CME Henry Hub contract specification identifies the traded gas product. A retail buyer does not acquire that product simply because its electricity supplier refers to gas prices in a market update. Ask whether the discussion concerns spot gas, a particular futures delivery month, regional wholesale electricity or an executable retail offer.
Draw the bridge before calculating a sensitivity
A useful worksheet has four columns: gas benchmark; delivered generator fuel; wholesale electricity; retail contract. Regional gas basis and transportation separate the first two. Generator heat rate and the regional power market separate the next two. The last step adds the retail product's shape, risk allocation, fees and exclusions. Some costs are fixed at signing; others can vary under the agreement.
The bridge also explains why two business electricity rates can respond differently to the same Henry Hub movement. The businesses may be in different regions, use power at different hours or have contracts priced at different times. A statement that gas went down is insufficient to establish what either business should pay.
Worked example: compare the sensitivity of two heat-rate assumptions
Illustrative example, not actual generator performance or a market quote: gas costs $4 per MMBtu. At a heat rate of 7 MMBtu/MWh, fuel cost is $28/MWh. At 10 MMBtu/MWh, it is $40/MWh. If gas rises to $5, the respective fuel costs become $35 and $50/MWh. The increases are $7 and $10/MWh, equivalent to 0.7 and 1.0 cents/kWh.
Neither calculation establishes the power-market clearing price or a customer's bill. It holds heat rate constant, excludes nonfuel costs and assumes those example generators are relevant. For 200,000 kWh, the first sensitivity alone would be $1,400, but using that number in a budget requires proof of the account's actual exposure. It must not be described as a saving available from switching suppliers.
Questions for a supplier's market explanation
- Which gas location, price date and delivery months are being discussed?
- Is a regional basis adjustment included, and what record supports it?
- Is the proposed electric rate fixed, indexed or fixed with named pass-throughs?
- Which contract line would change if the gas benchmark changed tomorrow?
- Does the comparison preserve the same start date, term, usage and inclusions?
Ask for the price schedule and contract language alongside any market chart. Preserve a dated quote rather than relying on an indicative market comment. The complete offer-comparison guide helps separate a headline energy rate from fees and risk.
Sources and limits
CME Henry Hub specifications identifies the benchmark instrument. EIA electricity pricing describes fuel among several price factors. All heat rates and prices above are deliberately chosen teaching assumptions.