Wide profit margins keep coal burning through summer
UK coal stocks held by electricity generators fell to their lowest level in almost a year at the end of February, as profitability of coal-fired power generation continued to outstrip profit margins at gas-fired power plants.
But although summer has traditionally been the time when gas takes over as the main fuel, plummeting coal prices are likely to tip the scales in favour of coal this year, as power units that have opted out of the European large combustion plant directive (LCPD) run harder to capture the attractive clean dark spreads.
UK National Grid data showed on Thursday that coal stocks declined by 12% month on month to 10.9m tonnes at the end of February - the lowest level since the end of April 2011, as UK power generators burned more coal to take advantage of the profitable clean dark spreads.
ICIS data shows that the UK clean dark spread for Summer '12 out-turned at £15.13/MWh on 30 March, compared with the corresponding clean spark spread at £2.35/MWh.
Figures so far
National Grid data, collected by ICIS at 4pm each working day, show coal-fired power generation accounted for around 45% of UK's total power generation in April so far. Gas-fired generation produced 26% of the total on average, while nuclear power generation contributed a 21.5% stake.
In the same month last year, coal-fired generation produced 26.5% of total power generation - a share maintained throughout summer.
According to market participants, the shift towards coal this year is partly the result of the profitable clean dark spreads, but also the consequence of the upcoming carbon price floor for electricity generators.
"LCPD plants are running harder in order to capture the spread before the carbon floor price kicks in next year," Nick Campbell, energy market analyst at Inenco told ICIS.
Because of the wide profit margins for coal-fired power generation, the plants, with a combined capacity of 6GW, are eating into limited running hours under the EU large combustion plant directive (LCPD). They now look set to close before the directive's cut-off point at the end of 2015 (see sister publication EDEM 12 March 2012).
With abundant supply and low Asian and European demand, coal prices are unlikely to recover before the end of summer, when China might return to the international market, traders said.
At the same time, the ICIS fuel-switch price - the level at which gas could become more efficient to burn for Baseload power generation - is around 20p/th below the current NBP day-ahead levels.
On Wednesday, the indicative medium-efficiency switching level was assessed at 40.51p/th, 18.09p/th below the NBP Day-ahead at 58.60p/th.
There is no finite fuel-switch price, as this value depends on the efficiencies of coal- and gas-fired plants within a utility's portfolio, as well as the relative costs of gas, coal and carbon. In theory, once the NBP closes below the fuel-switch price, gas-fired generation becomes more economic to operate.
Looking ahead, Campbell said coal will most likely retain the larger share of total power generation this summer, compared to last year, although the differential - the percentage share each fuel holds in the total generation mix - could begin to tighten in Q3 '12. In the UK, National Grid's summer outlook drew similar conclusions for the summer months (see sister publication EDEM 17 April 2012
"There could be potential weakness in the UK gas spot market as supply outstrips demand created by high year-on-year storage levels, lower gas off-take by industry and continued lower gas burn by less efficient plants," he said. "The question of how much this differential tightens will be based around the coal market, which itself is showing weakness with no natural disasters and higher gas burn in US," Campbell said.
Indeed, high availability of US and Colombian coal offered into Europe and Asia pushed coal financial coal prices to levels last seen more than 19 months ago. Of course, physical prices have not fared much better, with DES ARA prices dipping well below the $100.00/tonne mark.
Things are not about to change. European market participants suggested the CIF ARA benchmark Year 2013 contract could fall further as banks scramble to sell to minimise their losses in case option volume with strike price of as low as $90.00/tonne is exercised.
Meanwhile, Asian markets are pinning their hopes on an uptick in Chinese buying in the second part of the year, although demand is likely to fall short of expectations as the country's economic growth slows. MV
Other Related Stories
17 Sep 2014 07:00