Dutch gas-fired power plant profitability will not last – traders

Matthew Jones


·         Dutch gas-fired power plants unusually profitable on front year

·         But European coal, Dutch gas and technical indicators all point to a likely reversal

·         Plant owners could still lock in costs and output on the forward market, and look to make a profit by two-shifting

The Dutch clean spark spread for Calendar Year 2018 climbed to its highest point of the year on Monday, reaching €1.41/MWh.

The improvement in the measure of gas-fired power plant front-year profit margins was driven by a combination of bullish coal prices and slightly bearish gas prices which meant the forward profit margin increased steadily since February.

The improving margins could lead plant owners to reconsider plans to mothball facilities at the start of 2018.

But traders have suggested the current combination of drivers may prove to be a short-term phenomenon, with the present level of profitability unlikely to be seen in delivery across 2018.

Clean spark spreads

Clean spark spreads – a measure of the theoretical profit margins for gas-fired plants taking into account the price of carbon emissions – for Cal ’18 began the year at negative -€3.38/MWh and continued in negative territory for the first five months of the year.

But the spread moved to a positive value in May and has continued to climb since, reaching €1.41/MWh on Monday, its highest point of the year.

The trend has been driven by a bullish power price over the past three months, which was in turn largely driven by coal: The Rotterdam Cal ’18 coal future contract at the ICE exchange has recorded a 17% increase since the start of May.

Over the same period, the TTF Cal’18 contract has fallen by 0.5%, ensuring that gas-fired plant producers are able to pay less to hedge their feedstock costs forward for 2018 while selling power output at a higher price.

The clean spark spread for baseload generation may not be high enough to guarantee profitability once the costs of operation, maintenance, repair and overhaul have been taken into account. This is generally put at around €1.00/MWh by ICIS analysts, but would rise as plants grow older.

However, plant operators should be able to make a profit by two shifting – running the plants only between the hours of 08:00 and 20:00 on weekdays – as the clean peak spark spread for Cal’ 18 has climbed to above €8.00/MWh in recent sessions.

This will come as a welcome relief to gas-fired plant owners in the Netherlands, which have struggled in recent years with marginal profitability even during peak periods.

Plants to return?

News of improving spark spreads could lead companies to reconsider plans to mothball capacity in the Netherlands, one trader said.

French energy company Engie, which closed two gas-fired units on 1 January 2017, has announced plans to mothball a further two plants with combined capacity of 792MW by the beginning of 2018.

German utility RWE also announced plans to mothball two plants, of 778MW combined capacity, during the first quarter of 2018.

But, if these companies believe the current profit margins will be seen in delivery, they could postpone these plans.

There is a form of precedent for this. In the second quarter of this year, Rijnmond Power Holdings, which owns a majority stake in the 810MW Rijnmond gas-fired plant in the Netherlands, returned the facility to operation after two years of being in a mothballed state.


Future profitability will be highly dependent on the direction of coal prices, which have been the main driver of the Dutch power curve in recent sessions.

Last week, the Rotterdam Cal’18 reached its highest point to date, closing at $78.22/tonne on 17 August at the ICE exchange. However, the product has gained support from sentiment surrounding higher cooling demand in China, which traders do not expect to last.

“It is a short-term phenomenon. Coal will come back down when temperatures in Asia drop,” one trader said.

Technical analysis on the Rotterdam front year contract using a Fibonacci retracement level shows a resistance at $77.38/tonne. The front year briefly moved past this level last week, but moved down significantly on Monday, which could indicate that the contract will enter a bear run back down to $70.00/tonne, the next major support level.

The TTF Cal ‘18 contract has also begun to move up in recent sessions as a bullish prompt caused by Norwegian outages has filtered through to the curve.

If coal prices begin to fall and gas prices increase, this combination would once again spell bad news for gas-fired plant operators in the Netherlands. matthew.jones@icis.com


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