Dutch Cal’17 clean dark spreads recover as coal prices fall

• Dutch coal plant year-ahead profit margins show signs of recovery

• Premium over gas plant profit margins extends again on back of global coal price decline

• Long-term outlook for gas plants remains poor, coal plants look more positive

Profit margins for Dutch coal-fired power plants for Calendar Year 2017 recovered in week 46 as a recent bull run in coal came to an end.

This fall ensured that coal-fired profitability regained its premium to gas-fired profitability after the gap between the two spreads had narrowed to just €1.94/MWh as recently as 7 November.

Asian coal demand

Dutch Cal ’17 clean dark spreads, which measure the theoretical profit margin for a coal-fired plant including the cost of carbon emissions, fell to €2.75/MWh on 9 November, a decline of 68% since the middle of June.

This decline in coal-fired profitability was driven by bullish coal prices as the impact of Chinese restrictions on domestic output was exacerbated by surging Asian demand. Gains made in the coal market outpaced increases in power prices, reducing spreads for Dutch coal-fired generators.

At the same time, Cal’ 17 clean spark spreads measuring the profitability of gas-fired generation moved into positive territory at the start of November owing to a combination of relatively stable gas prices and increasing power prices.

Cal ’17 clean spark spreads reached €1.48/MWh on 11 November, the highest spread of the year so far. At this price, the most efficient gas-fired plants may be able to provide baseload generation in 2017.

The combined impact of falling coal-fired profitability and rising gas-fired profitability meant the clean dark spread premium over the clean spark spread fell to just €1.94/MWh on 7 November. On 22 June this premium had been as high as €11.77/MWh.

Recent moves

The benchmark European coal Cal ’17 reached $77.60/tonne on 7 November – its highest value for more than four years – but then fell by 15% to $65.75/MWh by 17 November.

This bearish move in coal prices pushed up profit margins for coal-fired generators, increasing the premium over clean spark spreads to €5.32/MWh on 17 November.

If coal prices continue their downward trend, profit margins for coal-fired generators will continue to improve. However, market sources are unsure if the bearish move in coal in recent sessions is likely to continue.

Long-term outlook

The long-term outlook for gas-fired generation in the Netherlands remains poor, with clean spark spreads for 2018 below those for 2017.

The ongoing struggle for gas-fired generation has been highlighted by recent announcements of plant closures.

French energy company Engie is to close or mothball 1.5GW of gas-fired capacity in the Netherlands by 2018 (see EDEM 6 October 2016), while German utility RWE plans to mothball two plants with a combined capacity of 778MW by the first quarter of 2018 (see EDEM 14 November 2016).

With the 1.3GW Claus C and 610MW Claus A plants already in long-term mothball, the decision means that RWE will not have any active large-scale gas-fired capacity in the Netherlands from 2018.

The outlook for coal-fired generation is more positive, with forward prices suggesting that even the least efficient plants should be profitable for baseload generation.

However, the Dutch government is currently deciding whether to close some or all of its coal-fired capacity by 2020 to meet its greenhouse gas reduction targets (see EDEM 26 September 2016). If the government decides to close this capacity, it is likely to boost prospects for gas-fired generators which would be required to fill some of the void.

Similarly, in Germany, some market sources are of the opinion that plant closures have become the primary means of raising profit margins for thermal generation that is able to get through the tougher times and remain open to take advantage of tighter margins (see EDEM 18 November 2016). matthew.jones@icis.com