Covid-19, gas-switching to push more coal out of EU mix

The collapse in power demand driven by Covid-19 lockdown measures weighed heavily on coal burn in western Europe again last month, with a further decline of around 3mn t still possible in June-September.

Aggregate power generation across Germany, Spain, the UK and France fell by 15pc on the year in May, following a 16pc year-on-year decline in April, as measures to slow the spread of the coronavirus continued to impact electricity demand.

Coal-fired generation across the four markets was hit particularly hard, as the fuel fell further behind gas in the merit order for thermal generation.

Coal burn fell by 57pc on the year to 2.4GW in May and accounted for only 9pc of total fossil fuel generation, compared with a 13pc share 12 months earlier. Gas burn fell by 31pc to an average of 17.7GW, stretching its share of total fossil fuel output to 67pc, from 59pc in May 2019.

Day-ahead spot gas prices in Europe remained under heavy pressure in May amid a sizeable summer storage overhang and a steady stream of LNG arrivals. This increased the economic incentive for coal-to-gas fuel switching in the generation stack, with coal bearing the brunt of the overall decline in demand for fossil-fuel based generation amid weaker power consumption.

Coal-to-gas fuel switching, rising renewable generation and weaker overall power demand cut aggregate coal burn in the four markets by around 4.7GW on the year in January-May, equivalent to around 6.2mn t of NAR 5,800 kcal/kg coal burn in 40pc-efficient plants.

Net imports to the same four countries were down by 8.5mn t on the year in the first quarter, customs data show.

Further demand reductions driven by the same factors are likely over the rest of the summer, although the pace of the decline may fall as a significant proportion of coal-fired generation was already displaced by gas in the third quarter of 2019.

Total fossil fuel-based generation in Germany, Spain, the UK and France would fall by 5.6-13.6GW on the year to 31.7-39.7GW in June-September, if overall power demand is 10-15pc lower than in 2019, according to Argus analysis. This outlook is based on scheduled nuclear availability in each country and French state-controlled utility EdF's recent indication that France's nuclear generation will total around 300TWh this year. The outlook also assumes that wind and solar load factors and hydroelectric output are all in line with the three-year average.

Coal accounted for 10-11pc of fossil fuel generation in June-September last year, and if the fuel achieves the same share of the mix this summer, coal-fired generation would be 0.6-1.5GW lower on the year, depending on the overall drop in power demand. This would be the equivalent of 0.95mn-2.3mn t less coal burn over the four-month period, after an estimated 7.6mn t was consumed in the same months last year.

But coal burn would fall even further if its share of the generation mix continues to recede. This is a distinct possibility, given that clean dark spreads for high-efficiency 46pc coal-fired plants are negative for June-August and far below the expected return available to gas-fired generators during the same period.

If coal were to capture only 9pc of the fossil fuel mix — the same as in April and May — generation from the fuel would face a 1.4-2.1GW decline, equivalent to 2.1mn-3.2mn t of coal burn in June-September, according to Argus analysis.

Coal margins are more favourable for fourth-quarter generation, but current forward prices still suggest that gas will outcompete coal in the fuel mix and limit any rise in seasonal coal burn during the transition to winter. Argus assessed the API 2 fourth-quarter swap at $48.95/t on 1 June, but the price would need to be around $12/t lower to push 46pc-efficient coal-fired plants ahead of 55pc-efficient gas-fired units in the merit order.

By Jake Horslen

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