German gas plant profitability over coal to be short lived

18 August 2016 10:16 Source:ICIS

Gas-fired plants are set to be more profitable in Germany than some coal plants next month, but this unusual situation will probably be short-lived, according to traders.

As gas is a more expensive fuel than coal, German gas-fired plants have long been unable to be profitable by generating baseload because wholesale electricity prices in the country are low.

But early in August, the front-month baseload clean spark spread turned positive, reaching its highest level since ICIS records started in 2013. A clean spark spread is a measure of gas-fired power generation profitability that takes into account the cost of emission certificates.

Later in the month, the September Baseload clean spark spread surpassed the equivalent clean dark spread, which measures coal-fired generation profitability, for coal plants with lower efficiency. Gas price weakness coupled with coal market strength led to the turnaround.

Gas weakness

ICIS assessed the September ‘16 contract traded on the German NCG natural gas hub at €11.95/MWh on 16 August, almost a four-month low. The downward trend kicked-off during the second half of July.

“First and foremost, contracts are pressured by an excellent supply picture. Even reduced production in Norway and maintenance at Nord Stream cannot counter that,” one trader active on the German hub said.

The Nord Stream pipeline that transports Russian gas into Germany at the Greifswald beaching point was closed between 9-17 August for annual maintenance. Before the start of the works more than 120 million cubic metres (mcm)/day were imported via that point.

As of Wednesday, Nord Stream inflows started to ramp up again, putting additional pressure on the prompt, which has had a knock-on effect on the near curve.

On 15 August a net 117mcm/day was imported from Norway, down from 140mcm/day one session earlier. This was due to maintenance at several Norwegian gas infrastructures, including the Kollsnes processing plant that started on 13 August and will end on 27 August, cutting throughput by a rate of up to 39mcm/day.

“On the prompt, we have an enormous oversupply with Rough [volumes coming to continental Europe], full storage sites on the continent and especially cheap deliveries from oil-linked contracts,” a second trader active on the market said.

European coal prices meanwhile have been on an upward trend recently, supported by high demand in Asia.


“I don’t see why it should be long-lasting,” a power trader at a European energy supplier said about gas-fired plants being more profitable in Germany than coal plants with baseload generation. Other power traders shared this view.

While an outage at UK’s Rough gas storage means more gas is available to fill continental European storages currently, it might lead to more constrained supply at continental hubs in the winter, traders said. This is because the Rough outage is likely to mean higher gas demand in the UK in the winter as the country can draw on less gas from storage.

Considering this, some market participants were surprised that data about good continental European storage levels apparently caused gas prices to fall. Expectations of LNG cargo arrivals to Europe might be easing concerns that the Rough outage could cause continental European gas prices to increase in the winter.

“If in Germany if we won’t have a carbon price floor like in the UK, then I think coal-fired plants will still be better off in years to come compared to gas-fired plants,” Christian Tode, research assistant at German EWI institute said. A carbon price floor would decrease the advantage of coal plants because they are more polluting than gas-fired generation.

The fuel switch is likely to be short-lived also due to coal price expectations. Coal prices are likely to shed value in the near term, traders have said. and

By Laura Raus Marcello Kolax