Correlation Between Natural Gas & Electric Prices
The prices of natural gas and coal-based electricity may at times show some correlation because they are both part of the energy sector. There are times when their prices will show divergence instead of correlation because the prices of coal and natural gas can be affected by different environmental factors.
Supply and Demand
Supply and demand are what drive prices, so any overall increase in demand for energy will cause both gas and coal to go up in price. Conversely, any overall increase in energy supply will drive gas and coal prices down. In that sense the prices of the two energy sources are correlated.
Winter
During the winter months in temperate regions, people tend to need more heat from natural gas and stay indoors using electricity more. The two prices will be correlated because of an increase in demand for both.
Shortages
Divergence in the two prices can occur if there is a shortage in one and no increase in demand for the other. In the mid-2000s, there was a natural gas shortage in the world that caused the price to spike, but coal remained stable so there was no correlation.
The Effect of Renewable Energy Sources
As more renewable energy sources come onto the market they will likely drive demand for natural gas and coal down, causing a correlation between the two. The price of electricity might also drop if it is based on renewable energy sources.
It Is Multifactorial
The fact is that sometimes there is a correlation between the prices of natural gas and electricity, and sometimes there is not. There are many factors that determine the correlation and predicting them is a very complex task.
