Power producers in western Europe are expected to burn more gas to generate electricity, reducing the amount of coal the continent needs to keep its lights on.
(Bloomberg) — Power producers in western Europe are expected to burn more gas to generate electricity, reducing the amount of coal the continent needs to keep its lights on.
The relative profitability of burning gas has increased as prices dropped, while the cost of coal has stayed relatively high. Gas plants with an efficiency of 55% — meaning that proportion of fuel is directly converted to power — are able to out-compete 40% efficient hard-coal units in some markets, according to Sabrina Kernbichler, a power analyst at S&P Global Commodity Insights.Â
The decline in coal consumption will help Europe meet its climate goals after governments brought back plants burning the most polluting fuel last year to safeguard power supplies after Russia cut gas flows to the region. Coal-fired power generation in the European Union rose 1.5% last year, with renewable energy making up a larger proportion of the shortfall, according to think-tank Ember.
- Chart shows relative profitability of burning coal (dark) and gas (spark) to produce power has flipped for deliveries in July 2023:
Increasing gas use is expected to provide traders with more options for selling their fuel, as inflows of liquefied natural gas persist despite well-filled storages across the continent.Â
At the same time, below-average rainfall in much of Europe in recent weeks has heightened concern that low river levels may lead to a repeat of last year’s struggles to get coal to the stations that need it, potentially accelerating the switch to gas, Kernbichler said.
Europe’s Parched Lifeline Flashes Trade Disruption Warning
Gas prices have dropped below €50 per megawatt-hour to hover near an 18-month low that’s about a sixth of last summer’s peak. Coal prices have declined to $161 per ton, which is about half of the summer high. Those price moves come as carbon permits — required by generators to burn dirty fuels — passed €100 per ton for the first time last week, further taxing polluting generation.
The difference in profitability is most clearly seen in the day-ahead markets and forward prices through to the end of summer, according to Kernbichler.Â
Still, the overarching trend in Europe is a move away from both fossil fuels. Gas use for power in the 10 European markets modeled by S&P is expected to fall by about 15 gigawatts, or 27%, in March to December from the year-earlier period. Hard-coal use is set to fall by 2.5 gigawatts, or 20%.Â
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.