Why natural gas prices can hurt unregulated power companies
Analyzing the US power sector for the week ending December 19 (Part 3 of 7)
Importance of natural gas prices
After coal, natural gas is one of the major sources of electricity generation in the US. Natural gas is procured by power producers on short-term contracts or spot contracts. So, volatility in natural gas prices affects power companies.
Natural gas decreases more
Natural gas suffered another poor week. Gas prices dropped sharply during the week ending December 19. Natural gas futures fell by 8.7% last week. They closed at $3.802 per MMBtu (British thermal units in millions) on December 19. Gas prices fell for the fourth week in a row.
Natural gas prices fell by more than 20% in the last month.
Falling natural gas prices aren’t healthy signs for unregulated power players in the US. Profits for unregulated power players are linked to the gas market. So, a fall in gas prices reduces unregulated power companies’ profit margins.
In the last month, we saw unregulated power companies—like NRG Energy (NRG), Calpine Corp. (CPN), and Dynegy Inc. (DYN)—fall sharply when gas prices tumbled. However, for the week ending December 19, unregulated power companies’ share prices moved separate from natural gas prices.
Last week, there was risk on the nature of the US markets. Also, there were brokerage upgrades for some of the unregulated power companies. These were some of the reasons why unregulated power companies’ share prices were among the top gainers for the week. However, gas prices continued to fall.
Limited impact for regulated utilities
Unlike unregulated power companies, regulated utilities—like Southern Company (SO)—aren’t exposed to falling gas prices’ risks. Electricity prices in regulated states are set by government agencies. The prices are based on a mark up to the cost of electricity production. Regulated utilities’ profitability is fixed. It’s a function of its total costs and investments.
Since regulated utilities form a major part of the weighting in the Utilities Select Sector SPDR (XLU), it isn’t affected much by natural gas prices.
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