INTERACTIVE: Gas-fired plant profit margins hit by coronavirus lockdown measures

LONDON (ICIS)–April clean spark spreads expired at multi-year lows in week 14 as the short-term outlook for European gas plant profit margins collapsed in anticipation of a demand squeeze by the coronavirus outbreak.

European gas fundamentals changed dramatically in March. Prior to the pandemic hitting Europe, gas prices were locked in a downtrend with global LNG supply the key trigger.

The spread of the coronavirus in the region, and subsequent lockdown measures to contain the outbreak, has distorted the rhythm of power and gas fundamentals at the start of the summer period. Falling April clean sparks spreads hint at the erosion of demand for gas-fired power generation this month.

COLLAPSING SPARKS

There will be limited opportunity to earn profit from running gas-fired generation in April, ICIS assessments show. All European clean spark spreads for 49.1% efficiency expired at multi-year lows, trading 47-143% below their 2015-2019 averages.

German, Dutch and UK April clean spark spreads expired in negative territory at the end of March, having started the month positive. Italy was among the exceptions although the clean spark shed 72% during the first and last trading sessions of last month.

Sparks were affected by the global sell-off across commodity and equity markets last month, including a brutal bear slide on the European carbon benchmark which plunged 33% since the start of March.

The greatest fall in price came on 18 March in which participants slashed 16.44% from the carbon value which pulled it €10/tCO2e below its 200-day moving average.

Losses on carbon outpaced those recorded on the European gas benchmark the Dutch TTF, with the TTF month+1 product crashing 31% during March.

This combined with the overall drop in gas offtake into the power and industrial sectors has squeezed gas plant profit margins for the second quarter of the year.

This reflects that traders priced in a fall in gas demand for April, partly driven by lockdown measures across Europe, which could also filter into May.

WANING GAS PLANT USAGE

As lockdown measures across Europe are extended into April, there is an expectation that power demand will be subdued and gas-fired generation will follow. Thermal output has higher marginal costs than other sources in the generation stack which leaves gas with less room to compete with cheaper sources such as nuclear and renewables.

Analysis of gas-fired production indicators across Europe in week 12, when lockdown measures were in place or about to be implemented, show week-on-week falls in several countries including Italy, Germany and France. Italian and French generation was down 15%, with Italian containment happening at an earlier rate than other countries, while France has relied more heavily on nuclear output while demand profiles flattened.

UK gas plant usage bucked the European trend, spurred on by sub-average temperatures in late April. Elsewhere, Dutch figures were flat. But gas-fired generation in both countries is expected to fall in line with the wider European trend as lockdown measures continue and temperatures turn warmer.

LNG AND GAS OUTLOOK

The appetite for global LNG sellers to deliver gas into Europe could wane further in the second quarter with combined European storage levels more than 50% full.

This combined with soft power sector demand due to the coronavirus could limit Europe’s gas consumption further.

A sharp contango on the Dutch TTF curve will encourage shippers to front-load injections during the first half of summer which could mean the storage sites near capacity well before the end of the season.

This will keep a lid on European clean spark spreads with muted demand expected overall. However with gas markets still likely to bear further weakness CCGT margins could once again improve.

In France and the UK alone, terminals are expected to receive 24 vessels combined before 16 April which will lead to further front-end selling, potentially lifting gas profits going forward.

Prices for both front month East Asia LNG contracts across the key markets in northeast Asia continued to see declines on Wednesday.

The downward pressure was propelled by low demand from key buyers, including India and Pakistan.

The EAX month +1 premium to the corresponding TTF contract was $0.45/MMBtu on 1 April, almost half of what it was before India declared a sting of force majeures on 25 March. Qatari volumes which were originally headed to India will probably head to China while US LNG supply will continue to feed into Europe.

Additional reporting by Arun Toora