<article><p class="lead">Weak overall power demand, strong competition from natural gas and rising renewable generation weighed heavily on European coal-fired generation in 2020. The long-term decline in coal use may slow or pause in 2021 as economies recover from Covid-19, although demand remains highly contingent on the rate of power demand and renewables growth, the extent of any recovery in nuclear generation and coal-gas fuel switching economics.</p><p>Annual coal-fired power generation in Germany, Poland, Spain, France and the UK was on course to fall by a quarter on the year to around 117.5TWh — an average of 13.4GW — in 2020, grid operator data show. </p><p>Coal burn in the Netherlands looks set to have fallen by at least another 7TWh in 2020, <i>Argus</i> estimates show, although the latest data only covers January-September. This would bring the combined year-on-year drop in coal burn across the six European countries to 34.8TWh or 33pc in 2020, to less than 130TWh in total. This is the equivalent of 11.9mn t less NAR 6,000 kcal/kg coal burnt in 42pc-efficient plants.</p><p>Germany, Poland, Spain, France, the Netherlands and the UK together imported 64.1mn t of thermal coal in 2019, which was 72.8pc of the EU-27 and UK total. The same six countries imported 30.1mn t in January-October 2020, which was 23.8mn t or 44pc lower on the year and accounted for 72.3pc of the European total.</p><p>The relatively steep decline in imports to Europe this year versus coal-fired generation implies a large stock draw across the continent, creating some supply tightness ahead of the winter and contributing to the recent rally in prices. Port stocks in the Amsterdam-Rotterdam-Antwerp region <a href="https://direct.argusmedia.com/newsandanalysis/article/2171348">hit a 32-month low last week</a> and were down by more than 2mn t since the start of the year.</p><p>Combined power generation across the six countries fell by 6pc on the year in 2020, driven largely by the impact of Covid-19 on electricity demand. Fossil fuels — as the source of flexible, marginal generation — bore the brunt of the decline, although weaker nuclear generation amid pandemic-related disruption to the French fleet also absorbed a significant proportion of the lost demand.</p><p>In the fossil fuel mix, coal was hit particularly hard as plunging gas prices pushed the solid fuel back in the merit order. <i>Argus</i> estimates that 46pc-efficient German coal-fired plants were competitive against only 9pc of the country's gas-fired fleet in 2020, based on average spot coal, gas, power and carbon prices, down from 17pc in 2019. Day-ahead clean dark spreads for 46pc-efficient plants fell by 63pc on the year to an average of €2.33/MWh in 2020, while clean spark spreads for 55pc-efficient gas-fired units rose by 16pc to €8.19/MWh.</p><p>Coal's share of total generation from fossil fuels in the six countries analysed fell by three percentage points to 22pc in 2020, while gas' share rose by four points to 56pc and the share of other fuels — mostly lignite — fell by one point to 22pc. </p><p><i>Argus </i>estimates that coal's displacement by gas in 2020 accounted for 19.5TWh of the 34.8TWh drop in coal burn, while the combined effect of weaker power demand, partly offset by lower nuclear generation, accounted for a further 8.2TWh of the decline.</p><p>Wind and solar generation across the six countries rose by a combined 29.5TWh in 2020 and accounted for around 6.6TWh of the drop in coal-fired generation, <i>Argus</i> analysis shows. The remaining 4.7TWh drop in coal burn was driven by stronger hydro generation and greater output from other renewable and non-nuclear, non-fossil fuel sources.</p><h2>Limited potential for 2021 coal recovery</h2><p class="lead">European coal burn will remain at the mercy of the same drivers next year, with any hopes of a recovery likely to depend on growth trends in power demand and nuclear generation.</p><p>The IEA said in a report this month that European electricity demand is expected to recover by 2.3pc in 2021, but will still be down by 2pc compared with 2019 levels. </p><p>A 2.3pc annual increase in total generation in Germany, Poland, Spain, France, the Netherlands and the UK would have only a modest impact on coal burn, <i>Argus </i>analysis shows, given the likely continued growth in renewable generation and recovery in nuclear output.</p><p>Aggregate coal-fired generation would climb by around 0.9pc in 2021, based on a scenario in which overall power generation rises by 2.3pc, nuclear output climbs by 1.6pc, generation from renewables and other sources grows at a 4pc rate, and coal's share of the fossil fuel mix remains unchanged at 22pc.</p><p>This outlook assumes that French nuclear generation recovers to 330TWh next year — the lower end of operator EdF's 330-360TWh guidance issued in July 2020 — from around 322TWh in 2020, and that nuclear output remains flat on the year in other markets. </p><p>The outlook for French nuclear generation remains uncertain, as EdF suggested in July that it may have to lower its 2021 guidance because of uncertainties about maintenance and Covid-19. A downward revision would create some upside potential for coal burn next year, but EdF has not yet updated its outlook.</p><p>A weaker price incentive to run natural gas ahead of coal for power could also offer some support to coal demand at times in 2021. <i>Argus</i> estimates that annual NAR 6,000 kcal/kg-equivalent coal burn would, in the scenario described above, rise by an additional 2mn t for every percentage point increase in share of the 2021 fossil fuel mix it records.</p><p>Throughout 2020, physical spot coal prices were on average €2.70/MWh — $23/t — higher than the ceiling price beyond which 46pc-efficient coal-fired plants become uncompetitive with 55pc-efficient gas-fired plants. The API 2 year-ahead has been at parity, on average, with the equivalent fuel-switch during the final quarter of the year.</p><p class="bylines"><i>By Jake Horslen</i></p><p><div class="picture"><div><span class="pic_title">Power generation: De, Pl, Es, Fr, Nl, UK</span> <span class="units">TWh</span></div><img src="https://argus-public-assets-us.s3.amazonaws.com/2020/12/23/europestack23122020044218.jpg"></div><p><div class="picture"><div><span class="pic_title">Coal-fired generation vs imports</span> <span class="units">TWh, mn t</span></div><img src="https://argus-public-assets-us.s3.amazonaws.com/2020/12/23/euro123122020044224.jpg"></div><p><div class="picture"><div><span class="pic_title">API 2 vs coal-gas fuel switch bands</span> <span class="units">€/MWh</span></div><img src="https://argus-public-assets-us.s3.amazonaws.com/2020/12/23/fs23122020044232.jpg"></div></article>
