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CO2 price for coal-to-gas switch exceeds 2020 forecasts

24 Oct 2013 17:25:14 | edcm

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The carbon price needed to make natural gas-fired electricity generation as profitable as coal-fired generation is 10 times higher than the current and more than four times the price the European Commission forecast for 2020, ICIS analysis shows.

Until profit margins for gas-fired electricity increase, CO2-intensive coal burn – which requires producers to buy more EU allowances (EUAs) – will remain attractive to utilities able to choose which type of plant to switch on.

German Chancellor Angela Merkel said last week that boosting the carbon price by back-loading the sale of some of the scheduled supply would re-order where power plants rank in terms of competitiveness. This would improve the economic odds for modern, flexible gas-fired power stations which stand no chance against coal-fired generation at the current low carbon price, she added ( see EDCM 16 October 2013 ).

But ICIS calculations based on Wednesday’s gas, coal, power and CO2 closing prices* show the carbon price would need to be above €48/tonne of CO2 equivalent (tCO2e) to make the switch worthwhile in Germany.

Other estimates vary from €40/tCO2e (consultancy Wood Mackenzie) to €35/tCO2e (energy consultancy Nomisma) and €15-20/tCO2e (agency Fitch Ratings).

All estimates point to a carbon price that the commission does not expect for at least the next 17 years. The commission forecasts EUAs to reach €10/tCO2e by 2020, €14/tCO2e by 2025 and €35/tCO2e only in 2030 ( see EDCM 9 October 2013 ).

There is a range of 2020 price estimates by analysts. Nomisma estimates €13/tCO2e, while ICIS analytics firm Tschach Solutions predicts €8/tCO2e, €9/tCO2e and €24/tCO2e, according to three different scenarios.

This means that even back-loading is not likely to lift carbon prices enough, assuming no change in gas and coal prices. “Even with broad support, the plan is not likely to lift the permit price from its current level... to the €15-20/tCO2e that we believe would be necessary to make natural gas-fired plants competitive with coal-fired plants at current fuel prices,” Fitch said in July after the European Parliament passed back-loading.

Dark spreads premium increasing

The profitability of CO2-intensive coal-fired generation over gas has increased in the last two years on the back of a decline in coal and carbon prices. According to ICIS data, the benchmark coal front year averaged $124/tonne in 2011 while only $90/tonne in 2013 so far. The benchmark carbon front year averaged at €4.5/tCO2e in the year to date, versus €13/tCO2e in 2011.

“Gas-fired plants, which generate roughly 50% less CO2 than coal-fired, have much weaker utilisation rates and cash flows, partly due to high gas prices. Some were temporarily shut down or even decommissioned due to losses,” Fitch Ratings said earlier this year.

Norwegian utility Statkraft, for instance, closed its 510MW Robert Frank natural-gas-fired electricity plant in Germany due to poor profit margins for gas-fired generation ( see sister publication EDEM 8 May 2013 ).

“Producers such as RWE and PGE are better placed in the short term because of their more profitable coal- and lignite-fuelled fleets, while those more reliant on gas, such as E.ON, are more exposed to weaker cash flows,” the agency said.

As the premium of profit margins for coal-fired over gas-fired generators increasingly grew in the year to date, the carbon price needed to incentivise the switch has increased in the year to date, the analysis also shows, rising from €44/tCO2e to €48/tCO2e.

“The more coal is convenient compared to gas, the higher the necessary CO2 price is,” said Nomisma’s carbon analyst Matteo Mazzoni. Silvia Molteni


*For the calculation ICIS used the German front month dirty spark and dark spreads – calculated with a 49.13% efficiency for gas and a 35% efficiency for coal; a carbon utilisation factor of 0.973 for coal plants and of 0.3746 for a gas plant.

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