In summer, gas-fired power plants may push even lignite out of the market; Uniper already responds

Low gas prices on wholesale markets for the summer months are set to drive a significant fuel switch in German power generation, away from coal combustion and towards natural gas. Natural gas prices are so favourable that gas-fired power plants could even displace lignite-fired plants.

The current commodity market crisis linked to the global COVID-19 pandemic is substantially accelerating the shift to natural gas as a bridging fuel in the energy sector in Central and Western Europe. According to calculations by Bloomberg's BNEF, the costs for gas-fired power generators are expected to fall even below those of lignite generators this summer.

This is a relatively unprecedented situation – lignite-fired power plants have long ranked among the cheapest sources, mainly because lignite is not purchased on wholesale markets but is generally mined directly at or near the power plant. As a result, unlike other types of power plants, lignite-fired plants are immune to fluctuations in wholesale fuel prices. In recent years, however, the profits of lignite plant operators have increasingly been reduced by emissions allowance costs.

At present, however, this is no advantage, as commodity prices are falling – the price of natural gas at TTF, one of Europe's main trading hubs, has dropped to as low as 2,35 EUR/MWh on the spot market and 3,8 EUR/MWh for next-month contracts. Speculation that prices could fall into negative territory is not uncommon. At the very least, the level of European gas storage facilities, which are around 71% full, may support such a development (storage facilities would normally reach this level of fullness around August of the given year).

According to BNEF, a number of hard coal and lignite-fired power plants may even see very low or no utilisation of their installed capacity. During this May, these plants were already recording almost half the generation seen in May last year.

Uniper already resumes generation at the 1,4GW Irsching power plant

A tangible sign that combined-cycle gas power plants will return to the market is the recent decision by German company Uniper to resume generation at the Irsching power plant from 1 October this year. The plant operator apparently made the decision because it succeeded in securing profitable purchases of natural gas and sales of electricity through forward contracts, thereby securing profits from operations from October.

Although the highly modern Irsching power plant has been in operation since 2010 (the second unit since 2011), it has not operated at all for most of that time. Its complete closure was previously discussed, but both units were subsequently called upon to ensure grid stability in southern Germany. Power plants in Germany are financially supported for providing this service.