Gas Coal Competition in the EU Power Sector (June 2, 2014)

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

Clean spark and dark spreads in GermanyA 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.

International Gas Prices – May 12, 2014

NBP: the downward trend continues

NBP and Coal pricesNBP prices are continuing with the downward trend that got under way in early December, and have fallen from €30/MWh (US$11.9/MBtu) on 3 December 2013 to €18.9/MWh (US$7.7/MBtu) on 6 May – a decrease of 37%. The average for the month of April stood at €20.7/MWh (US$8.4/MBtu), 10.8% down on March. The tense situation in Ukraine does therefore not appear to be having any significant effect on NBP – apart from a couple of one-off peaks on 3 March (8.8%, Ukraine placed its military on combat alert) and 7 April (6%, start of fighting in eastern Ukraine). The market context is the reason for this downward trend: 1/ demand is slightly below seasonal norms; 2/ European Data as of 9 May NBPstocks (which stood at 41.7 Gm3 on 6 May) are the highest they have been at the same period since 2010; 3/ the LNG market is continuing to shrink – Asian prices are at US$14/Mbtu; 4/ there are no significant pressures affecting the oil market (average Brent prices were US$107.5 in March and April). This situation is pushing down listings which are now at around €20/MWh (US$8.1/MBtu) over the summer and €26/MWh (US$10.5/MBtu) for next winter. There is still a great deal of uncertainty over the results of the negotiations that got under way in early May between Russia and Ukraine in relation to the delivery price of Russian gas and payment terms (prepayment in June has been mentioned). Disruptions to the gas trade with Ukraine and even all of Europe are possible in June. This would doubtless affect prices.

First estimates – Press release (May 6, 2014)

Global natural gas activity showed very mixed results in 2013, according to CEDIGAZ in its latest survey: The 2013 Natural Gas Year in Review

PARIS, 6 May 2013. In an economic and geopolitical climate still unstable, the world gas expansion moderated for the second consecutive year, according to the first estimates for 2013 released by the International Association CEDIGAZ today.

Natural gas consumption only rose by 1.3%, down from an average growth of 2.8% per year in the previous decade. Natural gas still suffers in particular from severe competition with coal in the power generation sector. Inside the EU-28, actual consumption was estimated down 1.9% to 460 Billion cubic metres (Bcm). This poor performance brought European consumption to levels not seen in more than 15 years. In the US, rising gas prices compared to 2012 has often made coal more competitive and penalized gas consumption in the power generation sector, causing it to fall by 10.5%.