Falling gas prices in Europe are driving a switch from coal to gas in power generation

Falling gas prices in Europe are driving a switch from coal to gas in power generation. This trend is likely to prevail in the coming months according to S&P Global. A similar situation last occurred in mid-2021.

Falling natural gas prices and rising emissions allowance prices in Europe have made operating many gas-fired power plants more profitable than older hard coal plants since mid-February. A similar market situation last occurred in June 2021.

According to Sabrina Kernbichler, S&P Global’s lead energy analyst, gas prices at the German THE trading hub have now fallen to a level at which gas-fired power plants with 55% efficiency can compete in the market with coal-fired units operating at 40% efficiency.

“This trend... is set to continue in the second and third quarters, based on current forward prices for gas, coal and emissions allowances,” Kernbichler said.

The situation could ease ahead of next winter; however, based on current price signals, gas-fired units with 55% efficiency will still be able to replace older hard coal units with 38% efficiency. Combined-cycle gas plants with 59% efficiency will be competitive with newer coal-fired plants operating at around 40% efficiency.

In Germany, around 60% of installed hard coal capacity has an efficiency of 40% or less, according to S&P Global. Around 55% of installed gas-fired capacity in Germany that came online between 2000 and 2022 is likely to have an efficiency of 55% or higher.

The gap between the profitability of gas-fired power plants (the clean spark spread, or CSS) and hard coal plants (the clean dark spread, or CDS) has narrowed significantly in recent weeks, according to S&P Global data.

For example, the gap in March so far between the next-month CSS for German gas-fired power plants with 50% efficiency and the CDS for coal-fired plants with 45% efficiency is just 15.4 Eur/MWh.

Trends in the CDS profitability indicator for hard coal plants with 45% efficiency and the CSS indicators for gas-fired power plants with 50% efficiency. Source: S&P Global

By comparison, the gap between the corresponding prices averaged 26.7 Eur/MWh in February and 319.5 Eur/MWh in August, when European gas prices and electricity prices reached record highs.

German gas-fired power plants with 50% efficiency remain uncompetitive with modern coal-fired plants operating at 45% efficiency.

Gas prices have room to fall, while coal prices are likely to rise

Gas prices also have further room to fall: traders expect the next-month TTF price to drop below 40 Eur/MWh and remain low until mid-second quarter or early third quarter. Coal prices, by contrast, have the potential to recover, traders say.

“Given the fall in gas prices, switching to another option makes sense. I’m seeing a lot of [coal] cargoes destined for Europe being redirected to Asia at low prices because of strikes,” said a US coal trader.

The trader added that a shortage of coal on the market would push prices up, as end users look for domestic supplies.

Gas’s share of power generation rises at coal’s expense

The share of hard and lignite coal in Germany’s total fossil fuel mix for power generation fell to 69% in the first half of March, compared with 73% in both January and February and 76% for March as a whole last year.

By contrast, gas’s share of the fossil fuel mix for power generation, which also includes fuel oil, rose to 30% in the first half of March. It was 26% in January and February and 22% in March last year.

So far, however, this has only slightly increased total electricity generation from gas, because the share of fossil fuels in power generation fell in the first half of March as electricity consumption declined and the share of renewables increased.