Europe’s Energy Crunch

Europe’s Return to Cheaper Gas Might Be on Verge of Squeezing Out Coal

European gas prices are at about 15% of last summer's peaks, when the continent was facing a serious threat of blackouts and energy shortages in the aftermath of Russia’s invasion of Ukraine. Signs are mounting that they might not have much further to drop as the lower costs raise the fuel’s attractiveness.

Benchmark futures have been fluctuating near €50 over the last few days, heading for a third month of consecutive declines after a mild winter and ample supplies helped to ease Europe’s energy worries. Gas could be on track to become more profitable than coal in power use, as prices for carbon permits soar.

Source: Bloomberg News analysis of third-party data. A full methodology note is included at the bottom of the page.

The dirtier fuel made a comeback last year, contributing about 1.5 percentage points more to Europe’s power mix than in 2021, according to Eurasia Group. That’s mainly because it was cheaper and more available to use after Russia throttled gas flows to the continent.

Coal Power Generation Grew Last Year

Record high gas prices drove demand for cheaper alternatives

Source: Ember

To be sure, not all countries were able to switch to coal — many have little to no working infrastructure left to use it for power. But those that do, such as Germany and the Netherlands, took advantage of the option, and might now re-evaluate the cost trade-off.

“The situation we have seen over the last few weeks has been the closest competition between coal and gas in a very long time,” said Fabian Ronningen, a senior analyst for power and renewables research at Norwegian consultant Rystad Energy AS.

Gas supply prospects for Europe appear plentiful, with a key export facility in the US gearing up to resume liquefied natural gas shipments, and even some Russian pipeline deliveries picking up momentum.

But there are signs that gas demand could rise: A purchasing managers’ index for the eurozone showed that manufacturing output expanded for the first time since last May this month. New private-sector orders also rose for the first time in that period, signaling the region may be on course for economic rebound and higher power demand.

Euro-Area Factory Output Is Starting to Pick Up Again

PMI gauge signals first expansion since last May

Source: S&P Global

Even if companies and power producers demonstrate caution in their return to using gas, at the very least, further switching to coal is likely to be reined in as carbon permits become more expensive and gas prices remain lower than before, according to Henning Gloystein and Franck Gbaguidi from Eurasia Group.

“The gas-to-coal switching will unlikely extend much further,” they said in a note, as “the economics of this fuel switching are diminishing.”

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