Correlation with natural gas
NRG Energy (NRG) is the largest merchant power player in the United States. It has a generation fleet dominated by coal. However, NRG is exposed to commodity prices due to its heavy merchant operations.
Merchant power prices are market-driven and largely influenced by energy commodities. NRG Energy and natural gas (UNG) has a correlation coefficient of 0.3.
Merchant power prices remain grounded
Since most of the power in the United States is generated from natural gas, power prices are increasingly influenced by energy commodity prices. Interestingly, the surge in natural gas prices this year couldn’t lift up merchant power prices. This added to the merchant power players’ concerns.
Wholesale power prices have remained low and are likely to worsen the problems of independent power producers. A lower load forecast and a large amount of new gas-fired combined cycle generation have pulled power prices even lower.
Weak merchant power prices seriously dented NRG Energy’s top line in the last few quarters. Renewables penetration and regulations are some of the added issues of merchant power players. Falling load growth and increasing capacities, particularly at competitive prices, are likely to keep power prices stagnant. Energy demand management is expected to increase during peak demand periods, thereby denting independent power producers’ profits.
In the absence of a growth in power demand, an increasing supply of power may not bode well for merchant power players. So the current bleak picture of merchant power players (AES) (DYN) (CPN) may become bleaker in the near future.