German gas-fired output to fall as power front-month clean sparks slump

Author: Roy Manuell


Gas plants fell out of the money for front month delivery

Gas-plant profitability for December unlikely to change

Gas to continue eating into coal and lignite share of power mix in 2020

LONDON (ICIS)--German gas-fired power plants will be out of the money in December for the first time since April.

This indicates that the share of gas in the German power mix will likely take a hit before the end of the year at the expense of other forms of thermal generation.

ICIS clean spark spreads, a measure of gas-fired profitability including the cost of EU carbon allowances, indicated that plants of 50% efficiency fell out of the money for front month delivery at the beginning of November.

Lignite and coal-fired power generation profitability also fell out of the money in November for December delivery in Germany but to a lesser degree than gas.

Since April, gas had been more profitable than hard-coal and lignite assets for rolling front month power delivery in Germany. This was due to relative strength in carbon prices and a glut of LNG into the continent which crushed gas prices. As more polluting fuel types, lignite and coal-fired generators must purchase significantly more carbon allowances than gas-fired plants.

However, gas prices for delivery in December retain substantial premium, as temperatures are typically significantly colder than in October and November. This has pressured front month clean sparks spreads.


The current outlook for gas-fired profitability in December is unlikely to substantially change.

Carbon, having traded between €24.60/tCO2e and €26.00/tCO2e over the last week, is expected by ICIS analysts to continue trading within this range. However, if the December ’19 contract were to breach the support level of €24.60/tCO2e, there may be downside.

This might see the margins of 41% efficient coal-fired assets leapfrog above 50% efficient gas plants for December delivery. Coal was marginally less profitable than gas on 7 November, according to ICIS calculations.

There may however be a degree of downside in gas prices. Traders had loaded weather-related risk premium into continental gas contracts for December delivery to account for potential cold snaps. However, with current forecasts indicating that recent unseasonably mild temperatures are set to continue, this premium may drain from the German NCG gas December prior to its expiry, giving a boost to gas margins.

“With a currently strong polar vortex a lot of risk premium is falling away. Any cold spell would probably be short lived,” one trader said.

Conversely, the bullish potential of a significant reduction of Russian supply via Ukraine remains priced into gas winter contracts. With talks due in November, volatile movements either way can be expected.

“In any case, don’t expect gas to climb back into the money for December 2019,” the trader added.


Participants told ICIS that they expect gas generation margins to improve during the first quarter of 2020.

High continental storage levels and abundant LNG supply into Europe are expected throughout the winter. This would maintain pressure on prices, barring a sustained cold snap in the first quarter of the year.

A bearish outlook for coal however may also haul it back into the money, dependent on carbon price movements.

Despite gas falling out of the money in December, demand for gas from the power generation sector is still expected to rise in the longer term.

Gas remains firmly in the money for 2020 delivery, substantially more profitable than coal generation, and has closed the gap on lignite-fired margins in recent months.

Gas-fired output accounted for 8% of German power generation in 2018. This has already risen to one-tenth in 2019. ICIS analysts anticipate the share of gas in the German electricity generation mix to climb close to one-fifth by 2023.

Bullish carbon forecasts will also support gas-fired margins relative to more polluting coal and lignite. ICIS analysts anticipate the rolling front December EUA to rise as high as €28/tCO2e by the end of 2021, €32/tCO2e by 2022 and €36/tCO2e by 2023.