Weak gas prices primed to trigger coal-to-gas switch in Germany
(Reuters) - A more than 25% slump this year in northwest Europe's benchmark natural gas price has helped push the price of gas-fired power generation below the cost of coal-fired generation and sets the stage for fuel switching by key regional power producers.
Utilities that operate networks of both gas and coal-fired plants, such as in Europe's largest economy Germany, are likely to dial up generation from gas plants and cut back output from coal plants in response to the swing in operating costs.
As gas-fired generation typically emits less than half of the pollution of coal plants per unit of generated electricity, any sustained switch from coal to gas generation could result in significant cuts to power sector emissions, even if electricity output levels rise.
PRICE POINTS
So far in 2024 the price for natural gas futures in the Netherlands gas network - the so-called Title Transfer Facility (TTF) TRNLTTFMc1 - has declined by 26% to around 23.8 euros per megawatt hour (MWh), according to LSEG.
Above-normal gas inventories in key gas consuming markets, along with enduring weak industrial gas use due to soft consumer demand, have weighed on gas prices and sentiment.
As the TTF hub is one of Europe's main gas trading and price-setting regions, gas prices throughout the rest of northwest Europe have fallen by a similar degree.
Regional coal prices have fallen by only 8% to 10% so far this year, so the decline in gas prices has resulted in gas power generation costs falling below the average generation cost for producing power from coal, or the so-called coal-to-gas switching price.
The coal-to-gas switching price is estimated at about 26.8 euros ($29.08) per MWh, according to LSEG, so gas-fired power producers currently have a roughly 3.4 euros/MWh cost advantage over coal-based counterparts.
However, wholesale swings in regional power production from coal to gas are unlikely unless power firms have confidence that average gas-fired generation costs will remain lower than average coal-fired generation costs for an extended period of time.
FORWARD GUIDANCE
So far in 2024 the coal-to-gas switching price in northwest Europe has averaged 29.8 euros/MWh, compared to an average gas-fired cost of 28.3 euros/MWh this year.
That difference is just under 5%, and has not been enough to generate aggressive swings in northwest Europe's power generation mix so far, LSEG data shows.
However, forward prices for natural gas futures indicate that gas-fired prices will be around 11.2% below the coal-to-gas switching price for the next six months.
That should provide power firms with the scope to ramp up coal-to-gas switching, especially in power systems that have the flexibility to adjust both gas and coal-fired output at short notice.
In Germany, this decline in gas-fired generation costs comes just as overall wholesale power prices have declined to their lowest levels since early 2021, after dropping in seven of the past 12 months.
Lower wholesale power costs have in turn spurred German power generators to deploy cost-cutting efforts in order to preserve operating margins, and should lead to increased use of cheaper gas over more expensive coal in power systems.
EMISSIONS IMPACT
German power sector emissions from coal-fired generation are about 12.4 million metric tons of carbon dioxide (CO2) and equivalent gases per terawatt hour (TWh) of electricity produced, data from energy think tank Ember shows.
In comparison, gas-fired generation in Germany emits around 5.5 million tons of CO2 per TWh, or 44% of the volume emitted by coal plants.
Given that German energy producers are already committed to reducing emissions as part of national pollution reduction efforts, the recent swing in power generation costs in favor of gas over coal could help to accelerate those efforts over the coming months.
The approaching end of the peak heating season should also aid in reducing power pollution, as power firms will be able to dial down output from all power plants as heating demand is reduced during the spring.
A key uncertainty is the level of power demand from German industry, which has been suffering from weak consumer interest for the past several months.
New fixed power costs set to kick in this year may spur some factories to crank up output in 2024, and may result in a steady climb in total energy use by German businesses this year.
But if that rise in industrial power use coincides with a decline in general heating demand, Germany's power producers should be able to keep overall power output levels largely flat and allow for a more gas-heavy fuel mix to result in a drop in power emissions.
And even if recovering industrial power demand forces power generators to lift total output, the higher proportion of gas in the generation mix should help keep total emissions in check.
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