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Will Merchant Power Stocks Be Less Volatile This Year?

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Part 6
Will Merchant Power Stocks Be Less Volatile This Year? PART 6 OF 10

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.

Considering prices for the last one year, merchant stocks NRG Energy (NRG), Dynegy (DYN), and Calpine (CPN) have a correlation coefficient near 0.3.

Will Natural Gas Take Merchant Stocks for a Ride Again This Year?

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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.

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