in the EU Power Sector [June 2014]

A complete analysis of the Gas/Coal/CO2 dynamics in the EU power sector

Despite its many assets, a confluence of factors – including flat electricity demand, rising use of renewable energy sources, falling wholesale electricity market prices, high gas prices relative to coal and low CO2 prices – has eroded the competitiveness of natural gas in the EU power sector. The share of natural gas in the EU electricity mix has decreased from 23% in 2010 to 20.5% in 2012. By contrast, coal-fired power stations have been operating at high loads, increasing coal demand by the sector. This thorough analysis by CEDIGAZ of gas, coal and CO2 dynamics in the context of rising renewables is indispensable to understand what is at stake in the EU power sector and how it will affect future European gas demand.

  • Coal is likely to retain its cost advantage into the coming decade
    The relationship between coal, gas and CO2 prices is a key determinant of the competition between gas and coal in the power sector and will remain the main driver of fuel switching. A supply glut on the international coal market (partly because of an inflow of US coal displaced by shale gas) has led to a sharp decline in coal prices while gas prices, still linked to oil prices to a significant degree, have increased by 42% since 2010. At the same time, CO2 prices have collapsed, reinforcing coal competitiveness. Our analysis of future trends in coal, gas and CO2 prices suggests that coal competitive advantage may well persist into the coming decade.
  • But coal renaissance may still be short-lived
    Regulations on emissions of local pollutants, i.e. the Large Plant Combustion Directive (LCPD) and the Industrial Emissions Directive (IED) that will succeed it in 2016, will lead to the retirement of old, inefficient coal-fired power plants. Moreover, the rapid development of renewables, which so far had only impacted gas-fired power plants is starting to take its toll on hard coal plants' profitability. This trend is reinforced by regulation at EU or national levels, such as the introduction of carbon taxes and the end of subsidies to hard coal mining. In 2013, coal consumption decreased in several key coal consuming countries with the exception of Germany.
  • National policies play a key role in the gas vs. coal contest
    National policies and measures/taxes play a fundamental role in shaping coal and gas competition at national level. While environmental constraints favour natural gas, coal has been preferred for its competitiveness and security of supply. The latter is being reinforced by the current Russia-Ukraine crisis. In the three EU largest coal consuming countries – Poland, Germany and the United Kingdom – energy policies are highly contrasted and result in a quite different future for coal.
  • Security of power supply will have to be addressed
    The fast expansion of renewable power undermines the profitability of all conventional power plants. But intermittent power still requires an almost one-to-one capacity back-up. A new market design will be needed for thermal power plants with low load factors to make economic sense.


Sylvie Cornot-Gandolphe has a long and proven experience in global gas and energy markets. A renowned expert, she is the author of several reference publications on gas and coal markets. Her latest publications include CEDIGAZ report on “Underground Gas Storage in the World – 2013 Survey”, a report on Global Coal Trade (IFRI, February 2013), a report on the impact on the US shale gas revolution on Europe's petrochemical industries (IFRI, November 2013). She is co-author of Alexandre Rojey's publication on Natural Gas (Editions Technip, 2013).

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