Will Natural Gas Take Merchant Stocks for a Ride Again This Year?
Merchant stocks’ correlation with natural gas
US power generation is dominated by natural gas, as gas-fired generation has become more economical in the last few quarters. Consequently, merchant power companies have significant exposure to natural gas due to market-driven wholesale power prices.
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This means a 1% change in natural gas prices could result in a roughly 0.3% change in merchant power stocks.
By comparison, regulated utilities are remotely exposed to natural gas prices, as they have less exposure to market-driven power prices. Power prices of regulated utilities are finalized by regulators through a formal rate case procedure.