Gas set to surpass coal in German power mix this year

Author: William Peck

2019/04/15

LONDON (ICIS)--German gas-fired power output is set to exceed hard coal across 2019, according to the ICIS Power Horizon model.

This would be the first time this has ever happened and is due to an influx of LNG collapsing European natural gas prices.
Weak gas improving power margins

A boom in global LNG capacity additions meant that over the gas winter, northwest European LNG sendout increased 94mcm/day year on year to reach an average of 131mcm/day.

Taken as a share of total gas supply to Europe, LNG increased from 8% in winter 2017/18 to 17%.

The winter was also mild in key Asian and European demand markets. In Germany, temperatures averaged 5.2°C between October and March according to CDC data, 1.8°C above the seasonal norm.

According to an average of past ICIS Day-ahead and Weekend deliveries and forward contract assessments at the end of March, the TTF Year ’19 was on track to deliver at €16.42/MWh, which would be the lowest annual gas price since 2016.

Coal is around 20% more expensive this year, while the cost of EUA carbon certificates is four times higher. These have supported power prices in Europe, improving margins for gas-fired generators.

In Germany, 49.13% efficiency clean spark spreads – a measure of profitability for gas plants – are on track to exceed 35% efficiency clean dark spreads – the equivalent coal-plant measure – for the first time since 2010.
ICIS Power Horizon model

The ICIS Power Horizon model forecasts prices for the 28 EU power markets out to 2030, based on the optimal dispatch of generation assets.

It offers ad-hoc scenario analysis of prices, the power mix and carbon emissions.

In order to assess the switching rate between coal and gas plants in Europe, ICIS analysts ran different spreads through the model, testing the response of generators.

The results showed German gas plants ramping up by 1.4GW year on year to reach an average output of 6.5GW across 2019 as a whole. Coal output is set to fall by 2GW to reach 6.3GW this year.

Coal correlation

ICIS analysis showed the correlation coefficient between the TTF and coal front months was 0.96 out of 1 between January and March, far higher than the correlation to other commodities.

It was also much higher than the year before, with the same contracts showing a correlation of only 0.18 in the first quarter of 2018.

The correlation coefficient between the TTF front month and Brent crude oil futures was -0.1 in the opening three months of 2019, indicating no correlation between the two fuels.
Outlook

The forecasts are a relatively big change from a model run just a few weeks prior, which had German gas output but remaining more than 1GW below coal-fired generation.

This shows how quickly things can change in European power markets, with front-end gas prices falling 14% and coal just 6% over this period.

Thinking about how this year’s German power mix could differ from the current snapshot, the gas share could still be understated.

LNG overcapacity is likely to continue into next year as more projects come online, leaving open the possibility that vessel arrivals could increase further. At the very least, the historical trend is for European sendout to rise in the April and May shoulder months before the start of the northern hemisphere summer.

Meanwhile, a reported rise in Chinese industrial activity amid positive global economic signals could see the country’s power demand return to strong growth, a supportive factor for coal prices.

The gas curve is priced as though the European power supply picture will return to a more normal level by the fourth quarter of the year.

But German clean spark spreads have under-delivered clean dark spreads by an increasingly unprecedented margin as this year has progressed. Other things being equal, the gas near curve will fall further relative to coal.