A conservative way to play a potential rise in the prices of natural gas, coal, and even oil is to invest in renewable power. In an environment of rising fossil-fuel prices, renewable power generation assets benefit the most. Why is that? The majority of the power generated globally comes from fossil-fuel-based inputs such as coal, natural gas, and oil. If the price of natural gas rises, for example, natural-gas-fired power plants would face higher costs. Those higher costs would of course be passed on to consumers in the form of higher electricity prices. Since prices are set at the margin, the highest-cost kilowatt-hour sold sets the market. Certain types of renewable power plants benefit the most here as they have fixed costs and no fossil-fuel-based inputs. When electricity prices rise, renewable power plants benefit from the higher prices.
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Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.