Dutch TTF gas below coal-to-gas fuel-switching ranges

Europe's gas-fired power stations are more profitable than coal-fired units, writes Till Stehr

Ample gas stocks and a lower demand outlook have pushed European gas prices down to ranges at which gas-fired power stations are more profitable than coal-fired ones, for most efficiencies and most foward periods.

Prices at Europe's most traded gas hub, the Dutch TTF, have fallen to their lowest winter point in years. Argus last assessed the TTF front month lower in winter 2020-21. Mild winter weather across northwest Europe left storage sites far fuller than usual for the time of year, leaving plenty of scope with which to lift withdrwawals over any periods of strong gas demand. And forecasts suggest February will be mild in Germany and elsewhere, suggesting consumption will remain lower.

Gas prices have fallen further than other energy-related commodities in recent weeks, outstripping losses particularly in coal prices and approaching the bottom of the coal-to-gas fuel-switching range. Gas-fired power stations with an efficiency of above 53pc would financially outperform most coal-fired power stations with an efficiency of below 46pc for all periods between the front month and front summer inclusive at prevailing prices.

The power sector is a key source of demand-side flexibility in Europe's gas market, although the coal phase-out means scope for alternating between the fossil fuels is narrowing. Gas prices move deeper into coal-to-gas-switching territory when Europe has spare gas for the power sector to burn, while gas prices climb above the fuel-switching range to discourage gas-fired generation during periods of tightness in the gas market. Gas prices last rose above the coal-to-gas fuel-switching range over the latest price rally in October, when energy security concerns heightened following the discovery of a leak on the Balticconnector pipeline, the closure of Israel's Tamar field and workers' strikes at Australian LNG liquefaction plants. Prices have fallen through fuel-switching ranges after mild weather in October-November left the continent better stocked than usual for the time of winter.

And coal prices are unlikely to fall further to remain competitive with gas in electricity generation as increased production and logistics costs in recent years have dissuaded many Atlantic basin coal suppliers from lowering offers.

Lower power prices weigh on operating margins

Spot and forward electricity prices in Germany - which has the largest scope for coal-to-gas fuel switching in Europe - have fallen on a milder weather outlook in the coming weeks.

German power prices have fallen further than gas prices in recent days as high renewables output resulted in a lower call on thermal plants. At the same time, the lightest French nuclear maintenance schedule since January 2018 is likely to boost electricity imports from France, weighing on German thermal generation.

Forward operating margins for German power stations have turned negative for contracts this winter over the past two weeks. That said, the day-ahead clean spark spread for a 55pc-efficient gas turbine closed at €4.61/MWh on 29 January, as relatively low wind generation is raising the call on thermal generation. Wind generation was forecast at 21GW on 19 January, equating to a load factor of 32pc.

German front-month clean spark spreads for a 55pc-efficient gas unit turned negative on 12 January. And spark spreads for the same unit closed negative up to the start of winter 2024-25 on 19 January.

Slim or even negative operating margins may discourage firms from forward hedging their gas-fired power generation for this year. But gas ahead of coal in the merit order could still lift gas-fired generation over periods of low renewables output. Gas prices fell enough to encourage lignite-to-gas fuel-switching last summer, before emissions and power prices got caught up in their downward movement.

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