Sustained gas market slump would crush European power curves

LONDON (ICIS)–If gas prices remain at current low levels over the next five years, European coal and lignite-fired power generation would fall sharply, reaching roughly 60TWh below the ICIS analyst base case in both 2024 and 2025 across six major power markets.

Gas-fired power generation would also rise by 80TWh across France, Germany, Italy, Poland, Spain and UK.

Meanwhile, wholesale electricity prices would drop by an average of €15/MWh, according to the model-based study.

European gas markets have been hit by oversupply over the past year due to consecutive mild winters, a global LNG glut, and more recently, a slump in demand stemming from the coronavirus. The consequent gas price weakness has in turn spilled over onto power prices.

ICIS analysts modelled a scenario in which gas markets remained weak out to 2025 as valued at their currently perceived price floor, around the level at which US LNG exports into Europe could theoretically remain profitable. The results were compared with the ICIS analyst base case scenario.

ASSUMPTIONS

The low gas price scenario was constructed by assessing the US Henry Hub curve out to 2025 at the end of May and adding in the costs of liquefaction and transport to find an assessment of a potential TTF price floor. ICIS then used existing year-ahead spreads to TTF for the other European gas markets.

While the bearish gas price assumption represents an extreme scenario, it was employed to demonstrate the extent to which market forces, in this instance gas prices, could reduce coal and lignite-fired generation and power prices.

The ICIS carbon price assumptions for the period were also adjusted in line with the gas fuel price changes and impact on emissions. The original update has a full explanation of assumptions.

FUEL SWITCHING

The results of the analysis showed a dramatic rate of fuel switching from coal and lignite-fired generation to gas. The total gas-fired generation increase across the six countries steadily ramped up from 36TWh in 2022 to 79TWh by 2025, relative to the ICIS analyst base case.

Conversely, combined coal and lignite-fired generation decreased by 27TWh in 2022 to a total of 60TWh in 2025.

In 2021, due to the lower carbon price assumption in the weak gas price scenario, gas generation marginally fell and coal and lignite increased relative to the base case.

Germany saw coal and lignite output alone fall by almost 50TWh by 2025. The country generated around 150TWh from the two carbon-intensive fuel sources in 2019. Due to Germany’s vast and underutilised gas fleet, the weak gas price environment would enable more of its current 30GW capacity to generate gas-fired power. Output therefore increased by around 33TWh by 2025 in the low gas price scenario.

Italy and the UK (with 47GW and 35GW of gas-fired capacity installed respectively) would also see gas output rise significantly by between 15-20TWh by 2025.

France with 11GW of gas-fired capacity and Poland (4GW) have far fewer spare generation assets and would see a more muted generation increase.

PRICE IMPACT

The findings demonstrate the significant price impact of a sustained weak gas price environment. Compared to the base case, prices would steadily fall by an average of €2/MWh in 2021, €7/MWh in 2023 and €15/MWh in 2025 with Spain, Italy, France and the UK the experiencing the greatest downward price pressure.

Spanish prices would fall to a discount to Germany. The Italian premium to Germany would be squeezed from around €5.50/MWh in 2021 to €1.50/MWh in 2025.

Poland would be the outlier with prices only slumping by €6/MWh due to its greater reliance on coal and lignite-fired generation.

Germany and Poland, which both have large fleets of coal and lignite-fired plants, would see power imports ramp up particularly in the years 2024 and 2025 when the carbon price is forecast to reach its most bullish. Germany’s net imports would rise to 77TWh in 2025 – a 50TWh jump from the 2020 base case.