Power–Gas–CO₂ Correlation Structure
Power, gas, and CO₂ prices move together through the merit order: correlation structure drives hedging and risk.
Thermal power prices depend on fuel and CO₂ costs, so price moves are often correlated across these commodities.
Portfolio risk depends not only on individual volatilities but on cross-commodity correlation and common factors.
Hedging generation or supply portfolios requires modelling these joint dynamics rather than each curve in isolation.
This chart shows normalised indices for power, gas, and CO₂ driven by a shared factor. Use the controls to change factor strength and horizon and see how cross-commodity correlation emerges.
A common factor (merit-order logic) drives power, gas, and CO₂ together. Betas control how strongly each curve reacts, while idiosyncratic noise breaks the link.
For hedging a generation or supply book, the question is not only “what is power vol?” but “how much of that vol is shared with gas and CO₂?” Correlation structure tells you how far a fuel or CO₂ hedge will follow power through the cycle.