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Falling gas prices are negative for unregulated power players

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Natural gas prices fall

Natural gas prices fell by 9.9% for the week ending on January 30, 2015. Natural gas futures closed at $2.69 per British thermal units in millions, or MMBtu, on Friday. Natural gas is in a severe bear market. Gas prices are down by more than 50% in the last year.

Two weeks ago, gas prices surged by more than 11% when colder temperatures gripped some parts of the US. However, it seems that the uptick was temporary. Gas prices fell by nearly 14% in the last two weeks.

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How gas prices affect power companies

Lower natural gas prices negatively affect unregulated power companies that operate in the US. Natural gas prices are related to wholesale electricity prices. So, a drop in gas price leads to lower profitability for unregulated power companies.

Calpine (CPN) and NRG Energy (NRG) operate as pure unregulated power companies. If gas prices remain low, unregulated power companies’ earnings will be affected. In fact, during the last few months, unregulated companies have consistently been the top weekly losers in the power utility sector.

In contrast, the regulated power companies and the Select Sector Utilities Select Sector SPDR Fund (XLU) performed well during this period.

Regulated power companies—like Duke Energy (DUK) and Dominion Resources (D)—get guaranteed returns over and above the costs of service. State regulatory bodies determine the profits that are allowed for these companies. As a result, natural gas price fluctuations don’t affect regulated companies.

For the latest industry updates, visit Market Realist’s Energy and Power page.

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