German coal power generation set for record monthly low in August

• Germany likely to see record low hard-coal generation in August
• Gas production eats away at coal’s share on high carbon, bearish gas
• September spark spreads indicate trend likely to persist

LONDON (ICIS)–Germany is set to generate the lowest amount of electricity from hard-coal plants in a month in August, ICIS analysis indicated.

Attractive clean spark spreads have enabled gas-fired generation to ramp up in August, driving hard-coal out of the German mix.

Given the current spark spread outlook for September, the trend of gas eating into hard-coal’s share of power production in Germany is likely to continue.

German coal plants have produced 1.9GW so far in August, accounting for a measly 6% of the country’s electricity.

The second lowest month in terms of total hard-coal generation was in June when 3.6GW was produced at coal stations, making up 7% of the power mix.

Gas-fired generation has surged in recent months and could be set to produce the most power in an August.

The 4GW produced from gas-fired sources in the first three weeks of August is already at the same level or higher than in any other August since 2011, excluding 2018 when 4.7GW was produced.

Given that Germany is due low wind production over the next week, according to ICIS analyst forecasts, it is likely that gas-fired output will ramp up and surpass last year’s level. The 4.9GW produced in 2011 is also within reach.

BULLISH CARBON, BEARISH GAS

Rampant carbon prices have driven hard-coal generation into relatively unprofitable territory.

Carbon prices are €6.00/tCO2e higher year on year and are over four times higher compared to 2017.

As hard-coal generators have to purchase more carbon allowances to produce power than gas-fired electricity producers, the carbon upsurge has driven hard-coal out of the generation mix in favour of gas-fired production.

With gas stocks above 90% in Germany and LNG sendout across continental Europe relatively strong, there remains significant bearish pressure in continental gas markets, despite currently cheap prices. Two LNG vessels are due at Dutch terminal Gate by the end of the month.

Utilities have felt the changes and ICIS recently reported a slump in coal generation at RWE in 2019 with the company citing market fundamentals in its second quarter financial report.

Given the fundamental outlook for carbon and gas until the end of August, it is likely that gas will continue to erode hard-coal power generation in Germany, and render August the lowest ever month for German coal power output.

SEPTEMBER SPREADS

This trend is also set to continue into September. ICIS analyst clean spark and clean dark spreads – which measure gas-fired and coal-fired profitability when including carbon costs – indicate that gas-fired generation will remain significantly more profitable than hard-coal power in September.

Expectations for robust carbon emission allowance prices and bearish gas fundamentals will ensure that this continues at least until the winter approaches and gas demand ramps up across Europe.