Refinitiv: Cheaper gas and high carbon allowance prices are pushing coal-fired power plants out of the market

As a result of falling wholesale natural gas prices and still very high carbon allowance prices, natural gas-fired power plants are pushing not only hard coal-fired power plants but also lignite-fired plants out of the electricity market. European natural gas storage facilities are nevertheless being filled, easing concerns about the state of the market next heating season. However, voices in the market warn that the battle is not yet won and that it would be unwise to be lulled by the positive developments so far.

Lower output from lignite-fired power plants

The wholesale price of a natural gas contract for delivery next month recently fell to a two-year low, dropping below 25 EUR/MWh at the most liquid European trading hub, the Dutch TTF.

According to analysts at Refinitiv, the sharp drop in natural gas prices is currently pushing even lignite-fired power plants out of the market. Refinitiv statistics show that last week, for the first time in around 3 years, the balance of deliveries shifted in favour of gas-fired power plants. The shares were almost even, at 51% versus 49%.

Over the past month, German lignite-fired power plants delivered the lowest volume of electricity since May 2020, when they supplied 5.3 GWh, compared with 4.2 GWh in 2020.

"We can clearly see gas-fired power plants moving down the merit order and overlapping with lignite-fired plants. At the current allowance price, our model shows that this situation will persist through the summer," market analyst Francisco Gaspar Machado said.

Carbon allowance prices have fallen in recent weeks and recently dropped below 80 EUR/t, after trading at around 100 EUR/t at the beginning of March this year. However, compared with market prices in mid-2020, the price is more than three times higher: at the time, it typically stood at around 25 EUR/t.

Healthy natural gas storage levels

European gas storage levels are rising despite the developments mentioned above. They are now above 70% full. Although sentiment across the EU regarding commodity prices is improving, Europe is not out of the woods yet. Commenting on the outlook, Czech Minister of Industry and Trade said that the trend is positive, but that reducing consumption remains crucial. The market shares this view, and this is one reason why futures contracts for the coming winter season have not fallen below 40 EUR/MWh.