Further fuel switching in Europe likely to be limited

Christopher Rene


LONDON (ICIS)–Further coal-to-gas switching across Europe is likely to be limited due to the elevated fuel costs for thermal electricity production, even though gas-fired generation has not been running at maximum available capacity. This is due to gas and carbon hitting prices that would limit the incentive for fuel switching, after a number of factors boosted coal-to-gas switching in the past few years.

ICIS analysis of the German market shows that the prominence of fuel switching has risen in 2018-2021 with a bullish carbon market among the catalysts.


Elevated fuel costs for emissions-intensive electricity production have boosted coal-to-gas switching since 2019.

The German front-month baseload fuel-switching costs, the theoretical EUA price required to trigger a switch from coal to gas, ranged between -€19.75/tCO2e and €54.73/tCO2e since the start of 2020.

In contrast, EUA benchmark prices have ranged between €15.30/tCO2e and €56.65/tCO2e, mostly above the front-year fuel-switching price.

However high supply risk across European gas hubs this year, in conjunction with strong carbon prices, mean that gas plant operators do not enjoy the same competitive advantage over their coal plant equivalents that they did in 2020. Gas and carbon price fuel-switching limits have been tested in recent months.


The fuel-switching gas price limit is triggered when gas becomes too expensive to incentivise a switch from coal-fired electricity generation.

This has played out in recent years where bullish carbon initially boosted fuel switching, leading to higher gas output. Gas generated 59TWh of power in Germany in 2020, 68% more than coal, according to ENTSO-E. In 2019, gas provided 47TWh, 2% lower than coal. In 2018 gas only provided 21TWh, 71% less than coal.

Gas prices have been on a bullish run in 2021 so far with European storage sites depleted and tight supply margins likely to last until next winter. Sites were at an all-time low of 36% fullness on 13 June.

Other bullish factors include pipeline supply disruption amid Norwegian gas infrastructure maintenance in the second quarter, maintenance to key pipelines delivering Russian supply and increasing competition from Asia for flexible LNG cargoes.

Bullish gas limits the competitive advantage gas-fired electricity generation would have initially enjoyed and demand begins to shift back towards coal.

Subsequently, the pressure is shifted back to carbon with higher emissions leading to a stronger demand for EUAs, and a bullish feedback loop emerges.

This cycle happens continuously but evidence of this dynamic can be seen over the long-term.


Carbon also has limits when entering “overbought” territory and deemed above the necessary long-term price signal required to reach the EU’s 2030 climate ambitions within the EU ETS.

If market participants feel these limits are breached compliance players can either use EUAs they currently hold, and which amount to a significant surplus in the market , or close their long positions.

In addition, short-term speculators also have price targets at which profit taking happens.

A recent example was recorded in week 20 when the ICE EUA Dec ’21 slumped to a settlement of €49.68/tCO2e on 19 May, a two-week low, after hitting an all-time high of €56.65/tCO2e on 14 May. The product has not settled above that level since.

Carbon appears to be shifting back towards bullish territory after settling into a period of consolidation period in early June. ICIS Technical Analysis published on 14 June revealed a bullish medium-term outlook for carbon with the next support level set at €54.70/tCO2e. The ICE EUA Dec ’21 hit an intra-day high of €53.97/tCO2e at the time of writing.


The fuel-switching power stack limit is triggered when a country’s gas-fired generation capacity is running at maximum available capacity and coal-fired power plants are then utilised to make up shortfalls e.g.in times of low renewable output or higher power demand.

ICIS analysis indicates that overall gas generation limits have not been breached in Germany, suggesting potential slack in the system for further fuel switching under these parameters.

The ICIS fundamental power model shows that up to 100TWh of gas generation could happen over a year in Germany if the economics via either low and attractive gas/coal price ratio or even higher carbon prices allow for it. Gas generated 59TWh last year.

Low renewable generation during the winter period alleviated the impact of coal-to-gas switching in Germany with thermal plant production filling shortfalls. Renewables generated 58TWh of electricity in the first quarter of this year, 23% below 2020 levels and 12% below the 2018-2020 average.

Gas generated 17TWh of electricity in the first quarter of this year, 22% above last year’s levels and 78% above the 2018-2020 average. Coal output across the first quarter was 12TWh, 22% above 2020 levels but 24% below the 2018-2020 average.

Additional reporting by Florian Rothenberg 


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