Implications of a Shift Toward Natural Gas Power Generation

A nice piece of anecdotal color out today from Steve Mitnick (of Olivery Wyman via MW) on the transition of operators from Coal to Gas.

Highlights:

• There are more utilities with natural gas divisions that are providing tangible earnings streams when regulated utilities are not. (i.e., Exelon and Progress Energy recently set plans to shut down coal plants and open up NG plants)
• One challenge facing natural gas verses coal is price volatility, which NG producers and power companies are increasingly focused on
• Mitnick forecasts NG supplying 30% of U.S. power generation (Coal supplies about 45% of, while gas currently supplies about 23%)
• He foresees a tidal wave of pipeline development down the road and definitely storage will become increasingly important.

Implications:

• More hedging needs for natural gas from less price-sensitive commercial operators may likely create more opportunities for price-sensitive speculators
• Understanding how this will impact the volatility of the commodity may be a source of alpha generation going forward...