Gas Looks Good Again to Utilities as EU Coal Phaseout Bites

Updated on
  • U.K. gas more profitable than coal for first time in 4 years
  • Cleaner fuel gaining converts in climate change fight

Lawmakers from Germany to the U.K. want to legislate coal out of existence. As profit margins slump, power producers too are giving the fuel the cold shoulder in favor of cleaner natural gas.

The switch to the less polluting fuel is so far most prominent in the U.K. market. After prices dropped 26 percent this year, gas was last month more profitable than coal in power generation for the first time since 2011, according to data compiled by Bloomberg. Gas has also started to displace older coal-fired plants in Germany at times of peak power demand, according to Pira Energy Group, a consultant to the industry.

As European nations phase out coal, which emits about twice the carbon dioxide of natural gas, utilities from Centrica Plc to SSE Plc in the U.K. are so bullish on the future of the cleaner fuel that they are bringing back mothballed stations. A revival in Germany, where gas has been out of the money since 2012, may also favor EON SE over RWE AG because 24 percent of its domestic plants are gas-fired, compared with 16 percent for its peer.

“This is a turning point in European power,” said Bruno Brunetti, a senior director of electricity at Pira in New York, who has tracked Europe’s energy markets for 20 years. “This is a structural recovery in gas-plant profitability, not just a random uptick.”

The tide against coal extends beyond power-plant economics. Norway’s $900 billion wealth fund and insurer Allianz SE this year joined investors snubbing the fuel. While it is currently used to generate 41 percent of the world’s electricity, almost twice that of gas, that share will drop to 30 percent by 2040, according to the International Energy Agency in Paris.

Coal Phaseout

Britain will phase out its dirtiest coal-fired power plants by 2025 and plans to spur new gas and nuclear stations as replacements. Generators have announced they intend to close about 5,000 megawatts of coal capacity by March 2016, or enough to supply electricity to 10 million European homes.

U.K. gas plants generated an average of 6,161 megawatts in November, the highest for the month since 2011 and outpacing the 5,680 megawatts produced by coal, according to grid data compiled by Bloomberg.

Clean spark spreads, a measure of plant profitability based on the prices of power, gas and emission permits, will almost triple to 7.96 pounds ($11.98) a megawatt-hour in the winter of 2019-20 from 2.87 pounds for January, according to data compiled by Bloomberg.

Spark Spread

Dutch lawmakers want their government to take action to shut all coal plants, while Germany will start closing lignite units next year, putting them on standby for an emergency reserve. German clean spark spreads are the highest for the time of year since 2011, though still in negative territory, Bloomberg data show.

“The clean-spark spread is getting ever better,” said Omar Ramdani, head of analysis at RheinEnergie Trading GmbH in Cologne. “We are seeing a little revival here with gas plants, which are just in the money, running some hours more per year.”

New gas plants will probably be built in Germany to help keep the grid stable as older capacity shuts, EnBW AG, the nation’s third-biggest utility, said by e-mail. Natural gas will be the preferred fuel as the role of coal diminishes amid environmental concerns, EnBW Chief Executive Officer Frank Mastiaux said on Nov. 13.

Gas Slump

Switching from coal will be helped by a further decline in gas prices. Europe will continue to be the dumping ground for excess liquefied natural gas coming from Asia, where demand has slumped, according to Thierry Bros, a European gas and LNG analyst at Societe Generale SA.

U.K. gas is forecast to fall 13 percent to 42 pence a therm ($6.32 a million British thermal units) in the three months to March from the same period in 2015, according to Societe Generale. The month-ahead contract traded at 36.9 pence a therm in London, compared with 35.22 pence for the equivalent Dutch contract, according to broker data compiled by Bloomberg. The price in the Netherlands will need to come down to 21 pence to be really competitive with coal, according to Bros.

“We are expecting more power station gas burn this winter than last,” Paul Monk, a partner at London-based Catalyst Commodities Ltd., said by e-mail. The fuel will continue to gain share of U.K. electricity generation next year when coal plant closures “really bite,” he said.