March 20, 2023 - Further losses across key European natural gas hubs have provided an incentive for quicker coal-to-gas switching in power production, with the trend likely to prevail in the coming months, an analysis by S&P Global Commodity Insights showed March 17.

"The gas industry has managed to significantly increase its market share in the very competitive power market," a Europe-based coal trader said.

Strong Summer Switch

A US-based coal trader said: "Tumbling gas prices and a record rally for carbon have seen gas power plants in Europe become cheaper to run than coal since mid-February. The last time coal-to-gas fuel switching was on the cards in the region was June 2021."

Indeed, German THE hub gas prices have now fallen to a level where 55%-efficient gas plants can outcompete 40%-efficient hard coal units in the day-ahead market, according to S&P Global lead power analyst Sabrina Kernbichler.

"The trend... will continue, based on current gas, coal and carbon forward prices through Q2-23 and Q3-23," Kernbichler said.

Coal-to-gas switching could ease as the market heads into Winter 2023, yet 55%-efficient gas-fired units will -- based on current fuel switch price signals -- still be able to replace older, 38%-efficient coal units in the merit order. Moreover, CCGTs with a high efficiency of 59% will be competitive with newer 40%-efficient hard coal plants.

In Germany, about 60% of installed hard coal capacity has an efficiency of 40% or lower, according to S&P Global. About 55% of installed gas-fired capacity in Germany -- which came online between 2000 and 2022 -- likely to have an efficiency of 55% or higher.

Sparks Versus Darks

The gap between clean spark spreads (CSS) and clean dark spreads (CDS) has narrowed considerably in recent weeks, S&P Global data showed.

For instance, the gap between CSS for German front-month 50%-efficient gas plants and 45%-efficient coal plants stands at just Eur15.4/MWh so far in March.

To compare, the gap for corresponding prices reached an average of Eur26.7/MWh last month and Eur319.5/MWh in August, when European gas and power prices hit record highs.

German 50% gas plants remain uncompetitive against modern 45%-efficient coal plants.

While gas prices have a downward potential -- with traders expecting the TTF front-month price to slide below the Eur40/MWh mark and stay low until the middle of second quarter or start of third quarter -- coal prices have the potential to rebound.

"Taking into consideration the decrease of gas prices it makes sense for the switching," a US-based coal trader said. "I see lots of Europe-destined [coal] cargoes diverted to Asia at cheap prices due to the strikes."

The trader added that an unavailability of sufficient cargoes in the market is set to push coal prices higher, with end-users seeking domestic supply.

Space For Fossil Fuels Narrows

The combined share of hard coal and lignite in Germany's total fossil fuel generation mix has eased back to 69% in the first half of March, compared with 73% in both January and February and with 76% in all of March 2022.

In turn, the share of gas-fired generation in the fossil fuel mix -- which also includes fuel oil -- rose to 30% in the first half of March. This was up from about 26% in January-February and from 22% in March 2022.

That said, this has only slightly lifted outright gas-fired generation so far, as the space for German fossil generation has narrowed to 26 GW over first half of March.

This was down about 3 GW year on year and about 2 GW month on month amid continued power demand destruction in combination with robust renewable dispatch, according to Kernbichler.