Natural gas is one of the most volatile commodities in the energy market — and for commercial businesses that rely on it for heating, manufacturing, or process operations, that volatility can translate directly into unpredictable operating costs. The right procurement strategy can protect your business from price spikes while still capturing savings when markets are favorable.
This guide covers how commercial natural gas procurement works, the key rate structures available, and the strategies that Hovey Energy's in-house team has used with commercial clients since 2012.
How Commercial Natural Gas Procurement Works
Like electricity in deregulated markets, commercial natural gas buyers in deregulated states can choose their own gas supplier rather than purchasing directly from their local distribution company (LDC). The LDC — your local utility — still distributes the gas through its pipeline network and handles emergency response, but you can choose who supplies the commodity itself.
This separation creates an opportunity: by shopping your gas supply competitively, you can often secure pricing that is meaningfully better than the LDC's standard offer.
The Two Main Cost Components
- Commodity cost: The price of the natural gas itself — expressed in therms or dekatherms (Dth). This is the component competitive procurement targets.
- Distribution/delivery cost: What you pay the local utility to transport gas through its pipeline to your facility. This is regulated and cannot be changed by switching suppliers.
Rate Structures for Commercial Gas Buyers
Fixed Price
A fixed-price contract locks in a set price per therm for the contract term. Your commodity cost is completely predictable regardless of what happens to Henry Hub or other benchmark prices. This is the most straightforward option for businesses that want cost certainty.
Pros: Budget certainty, protection from price spikes, simple to understand.
Cons: You don't benefit if market prices drop below your locked-in rate.
Index / Floating Price
Index pricing ties your rate to a published benchmark — often Henry Hub plus a fixed adder. Your monthly cost floats with market conditions. In a declining or low-price environment, you benefit. In a rising market, your costs increase accordingly.
Pros: Can be lower than fixed pricing when markets are favorable.
Cons: Price volatility exposure, difficult to budget.
Block and Index (Hybrid)
Some commercial buyers use a hybrid approach — locking in a "block" of their anticipated usage at a fixed price while leaving the remainder on index. This provides partial price certainty while maintaining some exposure to market upside.
For most commercial businesses, fixed-price contracts offer the best combination of simplicity and risk management. Index pricing is better suited for businesses with sophisticated treasury functions that actively manage commodity exposure. If you're unsure, Hovey Energy's team can walk you through the options based on your specific usage profile and risk tolerance.
What Drives Natural Gas Prices?
Understanding the key price drivers helps you make better timing decisions for your procurement.
Storage Levels
The EIA publishes weekly natural gas storage reports. When storage is above the 5-year average, prices tend to be lower. When storage is below average — particularly heading into winter — prices typically rise. Monitoring storage levels gives you context for whether current prices are historically high or low.
Weather
Weather is the single biggest short-term driver of natural gas demand. Cold winters drive heating demand and push prices higher. Warm winters reduce demand and depress prices. The same is true in summer — extreme heat increases power generation demand, which consumes natural gas.
LNG Exports
U.S. liquefied natural gas (LNG) export capacity has expanded dramatically over the past decade. When international gas prices are high, U.S. LNG exports increase, reducing domestic supply and pushing domestic prices up. This has become an increasingly important factor in U.S. natural gas pricing.
Production Levels
U.S. natural gas production — primarily from shale plays like the Permian Basin, Haynesville, and Appalachia — has grown significantly. High production levels have generally kept prices lower than historical averages, but production can respond to price signals and create cyclical dynamics.
Timing Your Procurement
Natural gas prices are seasonal. Understanding this seasonality can help you time fixed-price contracts to lock in rates during historically lower-priced periods.
- Spring (March–May): Demand falls after winter, storage typically rebuilds, and prices often soften. Historically a favorable time to lock in fixed-price contracts.
- Summer (June–August): Power generation demand increases but heating demand is minimal. Prices are moderate but can spike during heat waves.
- Fall (September–November): The market begins pricing in winter risk. Prices can rise as storage is drawn down and weather uncertainty increases.
- Winter (December–February): Peak demand season. Prices are typically highest and most volatile. Generally not the best time to lock in long-term fixed contracts.
"We typically advise commercial clients to evaluate fixed-price contracts in spring when markets have softened from winter. The forward curves are often most favorable in Q2 for annual or multi-year contracts starting in the fall."
Contract Length Considerations
How long should you lock in? This depends on your view of the market and your operational flexibility.
12-Month Contracts
Annual contracts give you price certainty for a full budget cycle without committing too far into the future. They're the most common choice for commercial buyers who want flexibility to re-bid at renewal.
24–36 Month Contracts
Longer contracts can lock in favorable rates for extended periods — particularly valuable when forward prices are below historical averages. The tradeoff is less flexibility if prices fall significantly below your locked-in rate.
Month-to-Month
Month-to-month contracts provide maximum flexibility but expose you to full market volatility. Only appropriate for businesses with very stable short-term outlooks or sophisticated price management capabilities.
The Procurement Process
If your business uses natural gas and you've never run a competitive procurement process, here's what it looks like:
- Gather utility bills. Your supplier bids will be based on your historical usage. Typically 12 months of utility bills are needed to run a competitive bid.
- Define your requirements. Determine your preferred contract length, rate structure, and start date.
- Run a competitive bid. Multiple suppliers submit pricing for your account simultaneously. The competitive dynamic drives better pricing than single-supplier negotiation.
- Evaluate options. Compare offers on an apples-to-apples basis — fixed all-in price, contract term, cancellation terms.
- Execute and enroll. The selected supplier processes your enrollment and takes over supply at your next meter read.
- Track your contract end date. Know when your contract expires so you can proactively re-bid before rolling onto default rates.
Common Mistakes Commercial Gas Buyers Make
- Not shopping at all. Staying on the LDC's standard offer without ever running a competitive bid is the most common and most costly mistake.
- Rolling onto variable rates at contract expiration. When a fixed contract expires without renewal, accounts often roll onto a variable rate that is consistently higher than available fixed-rate options.
- Focusing only on rate, not total cost. Administrative fees, swing charges, and other contract terms can significantly affect total cost. Always evaluate offers on a fully-loaded basis.
- Buying at peak season. Signing a new fixed contract in December or January — when winter risk is already priced in — often means paying the highest rates of the year.
How Hovey Energy Helps
Hovey Energy's in-house team runs competitive natural gas procurement for commercial businesses across deregulated markets. We handle the entire process — gathering your utility information, running the competitive bid, presenting options in plain language, managing the enrollment, and tracking your contract for proactive renewal management.
We've been doing this since 2012 with zero regulatory complaints. If your business uses natural gas and you haven't reviewed your supply contract recently, reach out for a free analysis.
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