European Gas Reaches Tipping Point to Price Out Coal in Power
Comment of the Day

February 22 2023

Commentary by Eoin Treacy

European Gas Reaches Tipping Point to Price Out Coal in Power

This article from Bloomberg may be of interest to subscribers. Here is a section: 

European gas prices rose amid expectations of higher demand from power producers, after a recent slump improved the profitability of the fuel compared to coal. Benchmark futures have been fluctuating near €50 over the last few days after plunging about 35% since the start of the year. Together with surging carbon prices, that could rein in an increased reliance on coal to produce electricity, but also prevent gas prices from falling further. 

Last year, coal-fired power generation in Europe increased by about 1.5 percentage points versus 2021, ending a steady decline in coal usage rates, according to Eurasia Group. That was mainly driven by a surge in gas prices after Russia cut supplies. 

Not all countries in Europe still use significant amounts of coal, but for those that do — such as Germany and the Netherlands — the switch to gas is becoming more likely, according to Fabian Ronningen, a senior analyst for power and renewables research at Norwegian consultant Rystad Energy AS. 

“The situation we have seen over the last few weeks has been the closest competition between coal and gas in a very long time,” he said. It remains to be seen whether increases in gas generation will outpace the rise in coal usage this month, he added, since infrastructure bottlenecks and fuel availability
can have an impact.

Eoin Treacy's view

Natural gas coming back to a competitive position relative to coal suggests prices have fallen enough to be appetising for consumers. Natural gas is a vital commodity for the global economy so when it falls to levels that are competitive with a heavily polluting alternative demand will certainly return.

The fact carbon credits surmounted €100 today will only further enhance that argument.
Dutch gas is steadying in the €55 area but has more work to do to break the downtrend.
The Freeport LNG terminal was cleared to restart production and exports yesterday so that offers an additional avenue for excess US supply to find a home internationally. Henry Hub gas bounced from the psychological $2 area today. Upside follow through tomorrow would confirm more than a very short-term low. 

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