Natural gas prices fall, but gas-fired power plant gross margins fall even further

Gross margins for gas-fired power plant operators have fallen sharply as a result of declining electricity consumption and are now negative for April across most of Europe. The reason is expectations of lower electricity consumption in European countries in the coming weeks, according to analytics portal ICIS.

The current situation surrounding the spread of COVID-19 and related developments on commodity markets is also affecting the gross margins of gas-fired power plants in Europe. Falling electricity prices (both for spot contracts and contracts for the following month), low carbon allowance prices and electricity consumption are pushing gross margins into negative territory.

At the beginning of March, margins were still positive, but they have since fallen to multi-year lows. As the table below compiled by ICIS shows, margins are significantly below their long-term average.

According to calculations by analytics portal ICIS, the average April gross margin for combined-cycle gas power plants in Germany, for example, stood at around -3 EUR/MWh. Margins were also slightly negative in the United Kingdom, where natural gas dominates power generation. Only in Italy did the April gross operating margin remain positive – it was negative in Germany, the United Kingdom, the Netherlands and France.

The decline in commodity prices also affected natural gas, which was trading at record-low levels in both daily and forward contracts. However, this decline did not offset negative developments in carbon allowances and electricity consumption, and margins therefore continued to fall. The Prague-based PXE exchange was also hit by a significant decline, with the April gas delivery contract trading at 7,38 EUR/MWh at the end of March.

Under current market conditions, gas-fired power plants are therefore struggling to compete with sources with lower operating costs, chiefly nuclear and renewable sources. However, some coal-fired power plants, particularly lignite-fired plants, are also very likely to be more profitable thanks to low carbon allowance prices.

As long as electricity consumption remains lower due to the pandemic, margins will likely remain negative. Once it subsides, however, a swift return to positive values can be expected, also in view of anticipated lower natural gas prices this year.