Renewables produce over 50% of German power in H1 2020

• Renewables generate 55% of German power

• Gas eats into coal and lignite share

• Market to remain bearish

LONDON (ICIS)–Renewables have produced more than half of German electricity during the first half of 2020, data from research institute Fraunhofer has showed, as strong wind and solar generation ate into the low power demand environment caused by the coronavirus outbreak.

Wind power alone generated more than coal and lignite-fired output, while gas-fired power plants produced almost double the total of coal-fired assets.

With demand likely to remain lower year on year for the rest of 2020 due to the continued gradual reopening of the German economy, the share of renewable generation is likely to remain high.

Bearish gas market fundamentals and relative strength in carbon futures will ensure that gas margins remain strong compared with coal and that the recent high rate of fuel switching continues over the second half of the year.

RENEWABLES DOMINANCE

German renewable generation has dominated the country’s power mix in 2020 with the share of output totalling around 50% or more of total power production in each month during the first half of the year and above 2019 levels in every month aside for June.

While from March onwards, a period of lower seasonal demand due to the coronavirus enabled renewables to capitalise, in January and February before any pandemic measures were enacted, German renewables generated significantly more power than levels seen over the last five years.

With demand likely to remain below 2019 for the remainder of 2020 due to the expected gradual nature of the recovery, the share of renewables in the German power mix is likely to remain high and retain a strong downward pressure on 2020 prices.

A recent ICIS analysis modelled a scenario in which power demand in 2020 would be 6% below previous expectations. The price impact would be significant with German prices €4/MWh below the prior base case outlook.

FUEL SWITCHING

The rate of fuel switching from coal to gas in 2020 has also ramped up as a combination of weak continental gas markets and strong carbon prices have strengthened the margins of gas assets relative to coal plants.

Gas has generated almost twice as much power as hard-coal during the first half of 2020 and just two percentage points less than lignite.

In contrast, gas and coal generated a similar total in 2019 and lignite generated twice the amount of both.

ICIS Analytics clean spark spread and clean dark spread calculations indicate the margins for gas plants of 50% efficiency will remain substantially more profitable than those for coal assets of a 40% efficiency in 2021, meaning that the high rate of fuel switching is likely to continue.

With the outlook for gas markets weak for the remainder of 2020 due to high LNG supply relative to previous years, low demand and storage levels at multi-year highs, it is likely that power prices will continue to feel significant downward pressure from both high renewable and a high gas-fired generation share.