UK and German sparks vs darks: German CCGTs in money for February

• German gas-plants to price out coal during February peak hours, opening a rare window of opportunity for beleaguered CCGT operators
• UK gas plants to extend recent dominance so little need for CCGTs to resort back to two-shifting pattern
• Carbon price support the decisive factor splitting UK and German outlook for fossil-fuelled plants

UK

Gas-fired power generation will continue to play a dominant role in the UK electricity mix in February and beyond according to pricing on today’s forward market, ICIS calculations show.

Gas-fuelled power made up nearly 38% of the UK mix in January up to the end of Tuesday, according to National Grid data. If this continues, January will have had the highest monthly share of gas burn for 17 months. And the pattern shows no sign of letting up.

ICIS calculated the UK February ’16 clean spark spread including carbon price support (CPS) for a combined-cycle gas turbine (CCGT) of 49.13% efficiency at £3.94/MWh at Tuesday’s close, £5.41/MWh above the clean dark spread for the equivalent delivery period for a coal plant of 35% efficiency, which was firmly negative.

Both figures include the UK’s CPS charge on top of standard EU emission allowance (EUA) requirements for greenhouse gas pollution.

Clean peak spark spreads with CPS for delivery that month were around twice as high as baseload. But given baseload sparks are in the money relative to baseload darks, gas-fired generation is likely to continue running outside the peak times of 07:00-19:00 London time. This means little need to two-shift – ramping up for peak hours and down for off-peaks.

NBP oversupply

Falling gas prices at Britain’s NBP hub have helped boost spark spreads. In fact, the NBP February delivery price was at a nine-year low on Monday.

Colder conditions could halt the decline in gas prices, but there were no indications of this at the time of writing, at least not in the first half of February.

A mild winter so far has depressed gas demand for heating. This has left gas stocks in Britain 61% full, about 10 percentage points more than the same time last year. The consequence of this is that gas demand and prices should remain subdued into the summer as there is less need to inject into storage. This could boost spark spreads further.

ICIS calculated the Summer ’16 clean spark spread with CPS at £3.67/MWh at Tuesday’s close, £5.69/MWh above the equivalent clean dark spread with CPS.

Clean spark spreads have become increasingly competitive against clean dark spreads in recent months. This is in part due to falling gas prices, but also because of an increased carbon top-up charge. The UK doubled the CPS to around £18.00/tonne CO2 equivalent last year.

To give an impression of the strength of the shift, a year ago, the February ’15 clean spark spread with CPS expired £8.41/MWh below the clean dark spread with CPS of £10.87/MWh, according to ICIS calculations.

Germany

German spark spreads have been improving in recent months, but traders remain pessimistic about the possibility of a significant shift in favour of gas-fired generation in the near future.

Gas-fired generation at some German plants is set to be more profitable than coal at peak periods in February, but the same is not true for baseload operation.

The clean peak spark spread for gas plants of 52.11% efficiency was €6.95/MWh at Tuesday’s close, €3.71/MWh higher than the clean dark spread for a coal plant of 35% efficiency.

The spark also held a premium against the higher 40% efficiency coal plants, meaning a small window of opportunity will be open for beleaguered CCGT operators in Germany.

Falling gas prices have helped improve spark spreads in recent months. ICIS calculates its German sparks using the Dutch TTF over-the-counter number, which has long acted as a mainland European benchmark.

While the TTF has been weak, Germany’s NCG has also plummeted. The February ’16 contract closed at €13.40/MWh on Tuesday, down 33% from the February ’15 product a year ago.

Sceptical

However, traders remain sceptical about the possibility of gas-fired generation becoming more financially appealing than burning coal round the clock in Germany.

ICIS calculated the German February ’16 clean spark spread for baseload delivery at -€1.03/MWh at Tuesday’s close, €4.27/MWh below the clean dark spread for the same delivery period.

However, spark spreads may continue to improve as the outlook for wholesale gas prices remains bearish. Dutch gas prompt prices are likely to remain under pressure throughout February as the Netherlands has greatly expanded its storage capacity and has ample gas in reserve to meet remaining winter demand.

In addition, the German government introduced increased subsidies for combined heat and power (CHP) plants at the beginning of 2016. CHP plants are more efficient, therefore collectively narrowing the margin between darks and sparks.

Meanwhile, Germany’s power mix contains a high proportion of coal use and there are potential supportive factors for coal-fired generation.

Standard EUAs have been highly volatile so far in 2016 and had lost around 27% of their value by Tuesday’s close since the start of the year. Any further drops in EUAs could boost darks spreads as pollution from coal-fired generation becomes less costly to cover.

Although carbon prices are expected to rise in the long-term due to regulation changes aimed at tackling EUA oversupply, traders are currently wary of going long in a bear market.

If wholesale coal prices fall at a faster rate than power prices, then dark spreads could also rise.

The US dollar-priced coal market is fundamentally bearish in the long-term, although any pick up in the oil price could be supportive. European traders will also be eyeing exchange rates because if the euro weakens against the dollar, this could make coal a less appealing fuel source for the continent. ben.lee@icis.com and doug.grant@icis.com