Photographer: Ty Wright/Bloomberg

Europe's Gas Plants Spark to Life With Fuel at Lowest Since 2010

  • Gas prices are forecast to fall further, increasing profit
  • Gas is starting to replace coal as fuel in power generation

Natural gas-fired power plants in Europe’s two biggest electricity users are earning utilities money again.

German gas-fired plant profitability at times of peak demand turned positive on Dec. 7, rising to the highest since February 2012 on Thursday, while gas units that generate around the clock in France have been profitable for seven weeks, the longest stretch in four years, according to data compiled by Bloomberg. That came after benchmark European gas prices fell 12 percent in 2016, extending last year’s 31 percent drop.

“More gas plants are in the money at current power and gas prices,” said Omar Ramdani, head of analysis at RheinEnergie Trading GmbH in Cologne. “If it pays off for a gas plant to produce several hours and not a whole day, it is looking positive right now.”

While gas produces about half the emissions of coal when used to generate electricity, making it a greener option to back up intermittent wind and solar output, the fuel has struggled to compete against more profitable coal, forcing utilities from EON SE to Statkraft AS to close gas units. The price of the cleaner fuel in Europe will probably fall further as cold weather ends and oil’s slump feeds into long-term contracts, Societe Generale SA said last week.

“We’re now in a situation where the most efficient gas is replacing the least efficient coal plants,” Marcus Bokermann, director of market strategy at Vattenfall AB’s asset optimization and trading business, said Jan. 17. “There’s still a long way to go until least efficient gas pushes out most efficient coal but we have started. This has impact on overall emissions in Europe.”

The month-ahead German clean spark spread, a measure of gas plant profitability that takes account of fuel, power and emission costs, for the peak hours of 8 a.m. to 8 p.m. fell 3.5 percent to 6.07 euros ($6.58) a megawatt-hour on Friday, after reaching 8.45 euros on Thursday. In France, the measure for baseload plants that operate 24 hours a day rose to 5.72 euros a megawatt-hour on Friday.

Nuclear Competition

Engie SA doubled the output of four of its French gas-fired plants in 2015 from a year earlier, including a unit in Fos-sur-Mer brought back after being idled, Le Figaro reported Jan. 21. Gas prices are low enough that stations in France will compete with nuclear to provide the lowest cost generation, according to Bruno Brunetti, senior director of electricity at Pira Energy. France gets about 75 percent of its power from reactors.

“It is starting to be ugly as we head towards nuclear reactors ramping down in the short term” as gas gets cheaper, he said by phone from New York.

So far this winter, Europe’s gas consumption has been about 6 percent below normal, said Meredith Annex, an analyst for Bloomberg New Energy Finance in London. Rising spark spreads may change that, she said.

“If there’s a driver for gas demand in Europe, it will come from the power market,” Klaus Schaefer, chief executive officer of EON SE’s Uniper unit, said Jan. 20.

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