Through 2020, Gas And Coal Will Compete For European Power Generation

Through 2020, Gas And Coal Will Compete For European Power Generation

Feb 7, 2017

Natural gas usage will struggle against cheaper coal in European power generation up to 2020 due to its pricing mechanisms, but the market should still plan for import growth from the next decade, experts at a German industry meeting said on Feb. 7.

Current gas fundamentals in the region are bearish again after a brief resurgence of gas-fired power in 2017 but with Europe's domestic production declining quickly, there should be no let-up in building infrastructure, they said.

"The market can be relaxed about meeting demand over the next few years because of supply pressure," said Kirsten Westphal of Berlin-based think-tank SWP.

"But it must safeguard future infrastructure investments at a time when no one gives long term perspectives," she said.

Gas made some inroads into power generation in fourth-quarter 2016--gas arrving via pipelines and, increasingly, LNG arriving on board ships--having declined in the past five years.

The conference heard that the brief recovery came after gas was squeezed out by rival renewable energy, the favored sector in Europe's drive toward decarbonizing much of its energy by the middle of the century.

Data from German industry group BDEW showed that gas edged up to 12% of German power generation in mainland Europe's single biggest gas market, a gain of 2 percentage points.

But the trend did not last.

Largely index-linked to firmer crude oil, gas prices rose again when OPEC decided on output curbs.

Coal prices, meanwhile, buckled under Asian and Australian supply growth, and carbon prices, intended to curb coal generation under EU climate protection policies, remain at historically low prices near 5 euros per tonne.

"Current prices are not favorable for fuel switching [gas over coal], as coal prices are easing," said Peter Fraser, head of gas, coal and power markets at the International Energy Agency (IEA).

He said CO2 prices needed to "quadruple" to discourage coal burning.

Thomson Reuters data showed burning gas for power in March is negative, at a 3.8 euros-per megawatt-hour (MWh) loss, while burning coal generates an 8.85 euros-per MWh profit margin. This picture remains in place up to 2020, albeit with variations in individual annual contracts.

But IEA data shows that the region's domestic production is set to fall 20% between 2014 and 2025, especially as Dutch production falls steeply, creating supply uncertainty and incentives to lock in forward volumes.

Even if Europe's demand was to stay flat, this should move the security of supply to the forefront of thinking, regardless of demand variables, speakers said.

"We can see net import demand rising. ... by the middle of next decade, things could get tight," said Jens Hobohm, head of energy economy at Switzerland-based Prognos, a forecasting company.

"This, and also the certain arrival of LNG, necessitates investments into grids and storage."