The fall in the price of NBP which began in December (-45%!) is continuing (an 8% fall in May compared with the previous month) and even picked up the pace in June: an 8% fall between 30 May and the current €16.4/MWh (US$6.5/MBtu) listings. This means that the price of NBP is approaching the competitive price for coal – an estimated €14/MWh (US$5.6/MBtu) based on a level of €55/tonne for coal (€61/tonne in 2013) and €5.4/tonne for CO2. This price correction can be attributed to several factors, including the extension granted until 10 June to find an agreement on the Ukrainian crisis, but mainly to the UK market context. Demand is moderate (71 Gm3 over a sliding year as opposed to 80 Gm3 12 months ago), temperatures are rising, stocks are high as they are on the continent, and sales of LNG have been sustained since the end of March (40/50 mcmd – 20/25% of demand). Overall, the LNG market is unaffected by tensions, with prices in Asia of under US$13/MBtu, as opposed to US$20 in February. The shoring up of Norwegian deliveries at the end of May via the “Langeled” gas pipeline should also be mentioned among the economic factors. The imminent closure for maintenance (11 to 26 June) of the Interconnector, which is currently used to transit 30 mcmd to the continent, is also a factor pushing prices down (down to €14/MWh, or US$5.6/MBtu?). And the downward trend of oil price indexation in contracts (which encourages spot gas prices to respond in a more marked way to supply/demand balance) should also be highlighted. This is a structural movement in Europe (ENI/Gazprom agreement in May based on the market, 60% of spot prices referenced in France) that is in the process of affecting Asia.
By avoiding pushing too much volume, Gazprom/Russia and Statoil/Norway not only avoided a price war in 2011-2013 but managed to reset spot prices at a level that is acceptable to them.
Higher prices were leading to permanent demand destruction. Russia is not willing to boost European gas demand for power generation at a price that it considers too low. As even with no growth in demand, Gazprom’s volumes are rising to mitigate the decline in European gas production.
So why has Gazprom provided additional volumes to Europe at the expense of prices, that went down by 40% since end-2013? Higher prices were also leading to the development of alternative supply. With the Final Investment Decision (FID) in December 2013 for Shah Deniz 2 in Azerbaijan and a long list of potential LNG projects in North America, Russia could see the threat of new suppliers/competitors entering the European market after 2020e.
According to a new report by CEDIGAZ, the International Centre for Natural Gas Information, gas has lost its attractiveness against coal in the EU power sector. Its demand by the sector decreased by one third during the past three years and its prospects are very weak in this decade. The Association warns that unprofitability of CCGTs and the retirement of old coal plants due to stringent air regulation may lead to the closure of one third of the current fleet and poses a serious security of supply issue that has to be addressed urgently.
The European paradox: despite the numerous advantages of gas over coal, the evolution of gas, coal and CO2 prices dictates a preference for coal
A confluence of factors – including flat electricity demand, the fast development of renewable energy sources (RES), falling wholesale electricity prices, high gas prices relative to coal and low CO2 prices – has eroded the competitiveness of natural gas in the EU power sector. Gas demand lost 51 billion cubic meters in the past three years, the equivalent of the total annual demand on the French gas market. By contrast, coal-fired power stations operated at high loads, increasing coal demand by the sector by 10% between 2010 and 2012. The relationship between coal, gas and CO2 prices is a key determinant of fuel switching and will remain so. 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, increased by 42% between 2010 and 2013. The recent fall in gas prices (a decline of 29% for European spot prices in the first four months of 2014) does not fundamentally change the situation. As coal prices have also declined, coal is currently three times cheaper than natural gas on an energy equivalence basis. With a weak carbon price, coal is preferred to natural gas. Our analysis of future trends in coal, gas and CO2 prices suggests that coal competitive advantage may well persist into the coming decade unless structural reforms of the EU ETS allow an increase of CO2 prices. National policies also play a key role in shaping the competition between gas and coal. The three largest EU coal consuming countries – Germany, Poland and the United Kingdom – have mixed approaches on the role of coal in their electricity mix. The analysis of their national energy policies clearly shows that the path to a low carbon economy can be achieved differently and at a different pace according to national specificities and trade-offs between the objectives of sustainability, competitiveness and security of supply. Countries with domestic reserves view coal as a means of increasing their security of energy supply especially in light of the current Russia-Ukraine crisis.