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Gas to remain dominant in German power mix – analysts

(Montel) Natural gas will continue to dominate Germany’s thermal power mix as coal-fired generation struggles to be profitable, analysts told Montel this week.

High carbon prices, as well as a gas supply glut, have pushed coal-fired power generators out of the market in the first half of the year, a trend that analysts expect to continue in the months ahead.

“It will be hard for coal to be profitable again at CO2 prices around EUR 30/t,” said one analyst.

Others agreed. “Gas seems to be the preferred fuel for many years ahead given market prices for coal, gas and EUAs,” said Sigurd Lie, senior analyst at Norway’s StormGeo.

In the first half of the year, Germany’s RWE, with 11.1 GW of coal-fired capacity - of which only 1.6 GW are hard coal -, saw its lignite output fall 29% over the period and hard coal 58%, while output at its gas plants rose 50% to 3 TWh.

“During certain weeks this summer, the extremely low gas prices and higher CO2 prices resulted in gas-fired power stations often generating electricity more cost-effectively than hard coal or lignite power plants,” RWE CFO Markus Krebber said on Wednesday following the company’s half-year results presentation.

“But this is just a snapshot. Next winter, things will be entirely different. […] A view shared by many analysts,” Krebber added.

European carbon prices have more than trebled since 2018 thanks to reforms, such as the market stability reserve, aimed at slashing a surplus of permits. 

Earlier in July, the benchmark reached a 13-year high at EUR 29.95/t. The contract last traded EUR 0.29 higher lower at EUR 26.27/t, on Ice Futures.

Some analysts disagreed with RWE’s Krebber. 

“I do not see higher carbon prices as a snapshot but rather as the new normal until the mid-2020s given the current regulatory setting, including the market stability reserve,” said Marcus Ferdinand, head of power and carbon analytics at Icis.

“Therefore, I expect the situation with gas replacing hard coal and even lignite that we have seen recently to occur more often and for longer periods in the future,” he added.

Paolo Coghe, president of consultancy Acousmatics, shares this view. “I think EUR 30 is the new normal for carbon, and if this doesn’t change, then it means [there are] not good times ahead for coal and lignite generators,” he told the latest Montel weekly podcast.

RWE needs a power price of around 49 EUR/MWh for its lignite units to break-even – based on fixed cash costs of EUR 22/MWh and the variable costs of CO2 prices – the company’s CFO Krebber said on Wednesday when announcing the company’s H1 results.

“And when I look at the forward curve it is still above EUR 49, so I don’t see the point that it is loss-making,” Krebber said.

German spot-prices have averaged at around EUR 38/MWh this year so far, while the Q4 last traded at EUR 44.82/MWh, and the Q1 2020 at EUR 50.25/MWh.

Further out, the front-year last traded at EUR 48.35/MW, with the contracts rising above EUR 49/MWh from 2022.


Reporting by:
Julia Demirdag
12:10, Friday, 16 August 2019