European coal-to-gas fuel switching set to continue this yea The fall of European wholesale gas prices to levels from before the Ukraine war and greater use of renewable energy is encouraging more electricity utilities to ditch heavily polluting coal, further pushing coal out of the power mix.
European gas prices soared in 2022 and early 2023 in the wake of Russia's invasion of Ukraine, prompting many utilities to switch back to relatively cheaper coal, right when the region was trying to phase it out to meet climate targets.
Now the costs have shifted back in favour of using gas to generate electricity, allowing the trend to resume.
European gas prices have fallen by around 15% since the start of this year due to a mild winter and abundant supply, and are 90% lower than record highs seen in 2022. Less so international coal market prices, with prices for non-Russian hard coal rising in March after Russian exporter SUEK was put on a U.S. sanctions list.
While EU carbon permit prices have receded from record highs of over 100 euros in early 2023, they would need to fall further to 47 euros per metric ton or lower for even high-efficiency coal plants to be able to replace low-efficiency gas plants in the first quarter of 2024, which seems out of reach at the moment, Veyt analyst Marcus Ferdinand said.
Benchmark EU carbon prices currently trade at around 61 euros per ton.
"There has been quite a lot of coal-to-gas switching in recent months. We saw clear evidence of a large shift in coal-to-gas switching in 2023, which has continued into 2024," said Fabian Skarboe Roenningen, vice president of renewables and power at consultancy Rystad Energy.
Roenningen said he expected more coal-to-gas switching this year in countries that have both coal and gas capacity, such as Germany, Poland and the Netherlands, as well as nations with a lot of coal production, but also transmission capacity to import gas, such as the Czech Republic, Greece, Romania and Bulgaria.
COAL BURN
Many European countries have already either phased out coal completely or have limited scope for large-scale coal-to-gas switching, including France, Spain, Italy and Britain.
The two major coal-burning countries in the region - Germany and Poland - have seen declines in the share of coal in power generation over the past year, continuing a trend from 2021 that was disrupted in 2022.
While coal remains Poland's main fuel in power generation, January and February brought a strong shift in favour of gas and renewables, Polish and European power grid operator data showed.
Gas power generation in Poland was up 32% year-on-year in the first two months of 2024, while hard coal and lignite use fell 15% and 10% respectively over that period, according to estimates by Forum Energii.
In Germany, the operating margins of both coal- and gas-fired power plants are deeply negative, leaving them operating mostly in peak hours when prices are higher, ICIS analyst Stefan Konstantinov said.
A repeat of disruption to hydro and nuclear plants which Europe experienced in 2022 because of low river levels and outages at French nuclear plants could turn those margins positive, but it seems unlikely in the short-term, especially on the nuclear side, he added.
In 2023, brown coal's use in the German energy mix in 2023 fell 26.8 TWh to its lowest since 1963 at 81.2 terawatt-hours (TWh), while hard coal's power production fell 21.4 TWh to 36.8 TWh, its lowest since 1955, Fraunhofer Institute data showed.