Carbon gains to push up use of low efficiency gas plants

Author: Christopher Rene


LONDON (ICIS)--Bullish carbon fundamentals indicate further coal-to-gas switching is likely across Europe this year, with less-efficient gas-fired plants set to occupy a greater share of baseload generation in Germany.

Underlying fuel costs for power plants will remain elevated throughout the summer with European gas prices buoyed by high demand and relatively empty storage.


The fuel-switching cost is the theoretical EU emissions allowance (EUA) price required to trigger a shift from coal to gas generation.

Carbon prices have been above this cost, incentivising high levels of fuel switching.

EUAs historically have been strongly influenced by the hedging behaviour of utilities.

ICIS Analytics data shows that a typical German utility does 60% of its carbon hedging a year ahead, 20% two years ahead and 10% three years in advance, as well as during the delivery period.

The German hedging-weighted fuel-switching cost has been on an uptrend, surpassing €30/tCO2e for the first time this year on 10 May, nearly double the cost at the start of 2021.

The gains means that Germany’s lowest-efficiency gas plants (45%) are becoming more competitive with the country’s highest-efficiency coal plants (45%). This trend should continue if carbon upside is more pronounced than in the gas market.


Relatively empty storage and expectations of high injection demand for the remainder of the summer has supported wholesale gas prices.

Front winter contracts are set to remain in an uptrend for the near term.

European gas stocks were severely depleted over the winter while replenishment has been sluggish since the start of this quarter as demand was pushed up by below-average temperatures.

Sites were 25% full on 10 May, a three-year low and 46 percentage points down from the start of 2021.

This time last yea sites were 48% full and only 20 percentage points lower than at the beginning of 2020.

High injections will be required for the remainder of the summer to ensure stocks are filled ahead of the winter, particularly in the third quarter .

In the short term weather-driven demand is expected to remain high, potentially restricting injections.

MetDesk models show temperatures are moving below seasonal norms in key markets such as Germany and the UK this week, with the trend set to continue into week 20.

Asian LNG demand could also support gas prices later this summer, with global spreads indicating the region should be more attractive for flexible cargoes than Europe.

The ICIS East Asia Index (EAX) July ’21 held a $0.831/MMBtu premium to the TTF on 11 May, with the Asian product hitting $10/MMBtu during the session. This was the first time the EAX month+2 was this high since 18 January.

Rising demand and possible production issues at Australia’s North West Shelf (NWS) project contributed to recent strength in Asian prices.


ICIS Analystics indicates there is strong bullish feedback from the gas to carbon markets, preventing the required emission reductions to bring additional EUA supply to the market.

Tight fundamentals in the carbon market, combined with an apparent reluctance to sell by participants currently holding the market’s historical surplus, have driven up emissions prices.

Reforms to the EU ETS aimed at cutting carbon emissions by at least 55% by 2030 compared with 1990 levels has galvanised the bulls.

Participants holding the historic surplus will likely to be more willing to bring supply to the market once details of EU ETS reform emerge in mid-July. Additional reporting by Florian Rothenberg