Gas switching supports European coal in July

Coal burn in western Europe almost doubled on the year last month despite weaker overall generation from fossil fuels, as surging gas prices lifted some coal plants higher in the German merit order.

Aggregate coal-fired generation in Germany, Spain, the UK and France increased by around 1.9TWh on the year to 4TWh in July, which is equivalent to an additional 650,000t of NAR 6,000 kcal/kg-equivalent coal consumption at 42pc efficient coal plants.

This was the eighth consecutive year-on-year increase in monthly coal burn, bringing the January-July total to 30.2TWh from 23.2TWh a year earlier. This is equivalent to around 2.4mn t of additional coal burn from January-July 2020.

Total generation from fossil fuels fell on the year despite recovering overall power demand and weaker wind generation, as nuclear output rose sharply on greater capacity availability in France and Germany. But all of the decline in fossil fuel use was focused on gas, as surging prices cut into the fuel's competitiveness in the power sector.

A sharp increase in German coal burn led the increase in western Europe as rising gas prices pushed 42pc efficient coal units ahead of 55pc gas plants in the country's merit order during most days. Theoretical coal margins for day-ahead and month-ahead delivery were, on average, at €2.79/MWh and €3.88/MWh premiums against the equivalent margins for gas plants, respectively. In July last year by contrast, the equivalent 55pc gas margins were nearly €18/MWh higher than 42pc coal spreads.

German coal burn doubled on the year to 3.1TWh, while gas-fired generation fell by half to 3.2TWh as a result. Across the four western European markets as a whole, gas-fired generation fell by 6.2TWh to 17.3TWh, driven by drops in Germany, Spain and France, while coal burn rose by 1.9TWh to 4TWh, driven largely by Germany and, to a lesser extent, the UK. Gas-fired generation accounted for 81pc of total coal and gas burn in the four markets, down from a record-high 92pc in July 2020.

Weaker wind generation and rising power demand offset some of the impact of recovering nuclear availability on overall fossil fuel consumption, lending some additional support to coal demand.

Combined wind output in the four countries fell by 20pc on the year to a three-year July low of 13.3TWh, with the UK leading the decline. Average wind load factors were 1-4 percentage points below seasonal averages in the UK, Germany and Spain, after an unusually strong month for wind in July last year.

Overall power demand partially recovered from last year's pandemic-driven lows on fewer economic restrictions and warmer weather, although demand was still short of the 2016-19 seasonal average. The maximum daily temperatures in Berlin averaged 25.4°C last month against a 24.8°C historic average, due to 15 days with a maximum temperature of over 25°C, according to Speedwell weather data.

Coal burn outlook remains firm through 2021

Recovering power demand in Europe and continuing strong gas prices amid a large summer storage deficit and tight pipeline gas and LNG supply is supporting margins for coal-fired generation for the remainder of summer and the winter ahead.

German 42pc clean dark spreads (CDS) for the final quarter of 2021 and the first quarter of 2022 held average premiums to the equivalent 55pc clean sparks spreads of around €8.46/MWh in July.

In addition to stronger competition with gas, an expected recovery in EU economic growth should continue to support power demand and therefore coal burn in the near term. The European Commission expects EU economic growth of 4.8pc in 2021, following a 6pc contraction in 2020.

But recovering nuclear availability continues to limit the extent to which coal-fired generation can grow this year. French state-controlled utility EdF last month raised its 2021 nuclear output target by 5-15TWh, as a result of stronger demand in the first half of this year. EdF is now targeting 345-365TWh of nuclear generation for 2021, up from an earlier estimate of 330-360TWh, and the recent trend suggests the utility is currently on course to reach the upper end of this guidance.

By Evelyn Lee

De, Es, Fr, UK power generation GW

German month-ahead clean spark/dark €/MWh