High European power fuel switching potential if gas markets remain weak

LONDON (ICIS)–European coal-fired generation could fall by one-third and gas-fired output rise by almost one-fifth in 2025 if gas prices were to remain at current levels of weakness over the next five years, ICIS analysis demonstrated.

ICIS EU Power and Carbon Analytics modelled a scenario in which gas markets remained at extreme levels of weakness out to 2025. The interactive map demonstrates the rate at which fuel switching from coal to gas could increase in this scenario across European countries relative to the ICIS base case.

Across the 26 European countries modelled, ICIS found that total lignite and coal-fired generation would fall by one-third (72TWh) in the year 2025 with gas-fired generation increasing by almost one-fifth (117TWh) relative to the ICIS base case scenario.

The rate of fuel switching increased steadily year on year between 2021 and 2025 with the years 2024 and 2025 marking the most significant coal generation reduction and gas output increase relative to the ICIS analyst base case, exacerbated by bullish carbon expectations in these years.

Carbon prices were adjusted as part of the study and reduced in 2021 in the weak gas price scenario which cause the marginal uptick in coal and lignite output this year.

From as early as 2022, however, total gas-fired generation across Europe would rise by 7% (56TWh) and coal fall by one-tenth, if gas markets were to remain weak.

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

Over the first half June, gas-fired generation exceeded lignite-fired output for the first time in Germany, often regarded as a European benchmark for the phenomenon due to its vast gas and coal fleets. The rate of fuel switching in European countries in 2019 and 2020 has rapidly increased due to a combination of strength in carbon emission allowance prices and extreme weakness pervading gas markets.

Similarly, in the ICIS analysis Germany would see the most dramatic shift in its power generation mix with coal output falling by more than half in 2024 and 2025 and gas generation increasing to almost 50% higher in the same years.

Other countries with a strong gas fleet as well as significant remaining coal capacity such as Italy and the Netherlands also saw a substantial increase in the rate of fuel switching.

While the recent ICIS analysis was based on extreme assumptions about long-term gas price weakness, the scenario highlights the potential for a continuation of rapid fuel switching in the continent as seen over the past two years. This is due largely to Europe’s extensive gas-fired power infrastructure and emissions market design.

PRICE IMPACT

The price impact of a sustained period of weak gas prices would be overwhelmingly bearish for power markets. There would be downside of an average €15/MWh in annual baseload power prices across the largest six European markets relative to the ICIS base case, as explained in a recent analysis .