As European gas prices have continued their surge throughout the past couple of weeks, the role and importance of coal has sparked a new wave of discussion across the continent.
The ideological split will drive a wedge between the European Union, a long-time champion of a coal phaseout, and corporate interests as market conditions favour gas-to-coal switching. The switching ratio has slid in coal’s favour in the last weeks of June 2021 and judging by the current futures structure, it will stay in place until at least Q2-2022. Thus, this winter might be coal’s last entry into limelight, presumably the last spark in the most polluting fossil fuel’s more than 200-year long history in Europe.
Europe’s coal exports have been hovering around the 12 million tons per month mark for three months already, moving back to levels last seen in Q4 2019. With coal demand increasing across the planet, the supply tightness has seen European coal prices follow the global appreciation trend – as of end-September, API2 Rotterdam coal futures have already breached the $230 per metric tonne threshold, up $80 per metric tonne in September alone. Rotterdam API2 coal prices for Calendar year 2022 have been trading around $170 per metric ton, more than triple of last year’s annual average, implying that the tapering off might be a lot more gradual than expected. On the other hand, TTF gas futures will slide back much quicker than coal over the second half of 2022, however that is a different story already.
The recent allure of coal also showcases the deficiencies of the carbon pricing mechanism. Whilst the EUA ETS December 2021 carbon futures moved above €60 per metric tonne in early September and have hovered around €62 per mt since, the rise in coal generation in key European powerhouses such as Germany have overall failed to trigger a carbon price increase that would be substantial enough to disincentivize coal utilization.
Instead, stagnant carbon prices have rendered coal increasingly profitable amidst runaway gas prices – by now, for every megawatt-hour of energy that a standard German plant operator would produce, the difference between coal and gas as energy source is already around €40 per MWh. Moreover, up until early September electricity prices in most Northwest European countries have been slightly above coal generation costs, since then, however, coal is by far the most profitable fossil fuel to use.
There are, however, limitations to gas-to-coal switching as countries like Germany could attest – in those places that coal is a suitable replacement for natural gas, the switch has most likely already happened, yet utility companies would run into trouble by trying to ramp up coal utilization even above that.
In Germany, the usual suspect when following coal-to-gas switching trends, coal is expected to gain some 10 GW of market share in the upcoming months, however, it cannot move higher because of overall installed capacity and because the country cannot just stop running on natural gas. For instance, Europe’s ammonia-producing plants (and more widely its fertilizer industry) needs natural gas and because of its overall dearth over the past couple of weeks, it was forced to curb production.
There are, of course, several factors, that might drag down the current coal hype. First and foremost, an impeding import boom to India and sustained buying from China will maintain enough upward pressure on coal prices for them to move even higher than they are currently. Second, unusually strong rainfall and COVID limitations have limited Indonesia’s production, meaning that the Asian global pull would get even stronger on the back of supply shortages. Third, carbon prices have so far not reacted as strongly as they could, but any drastic hike would impact coal much more than it would natural gas. Fourth, gas prices might finally decline amidst some sort of EU-Russia deal on increased pipeline supplies. All this might be a tangible factor for the future of coal in future, however as of today they are not despite coal having the lowest calorific value amongst fossil fuels and having an efficiency rate when burned that is some 10-15 p.p. lower than that of natural gas (with coal usually assumed to be around 35%).
Given the natural limitations to further coal utilization, in Germany the main interaction in the upcoming weeks will be between coal and wind. Coal-fired electricity generation rose to multi-year highs in the first weeks of September when every single day saw wind generation only a fraction of its usual strength and speed. Now, the situation has changed somewhat as wind started blowing again, dropping hard coal generation to an average generation rate of 7.5-8 GWh, still some 30-35% higher than at this time of the year in 2020. Yet still, Germany’s travails are far from over, especially with December looming large on the horizon. According to preliminary plans, that month alone three nuclear plants will stop operating in Germany – Brokdorf, Grohnde and Gundremmingen – with a combined (non-intermittent) capacity of 4 GW, representing the penultimate wave of nuclear phase-out closures before 2022 sees the last 3 reactors decommissioned. Such substantial capacity would need to be replaced with either coal or gas, with profitability skewed overwhelmingly towards the former.
Judging by the public utterances of Frans Timmermans, European Commissioner for Climate Action, Brussels sees no future in coal and is hoping for a gradual disappearance of it, stating there will not be any significant mining industry in Europe beyond 2040. The current coal demand surge should force the European Union to reconsider its position on coal – as polluting as it might be, it could still help alleviate energy crunches across Europe when the situation demands it. As things stand today, the upcoming four years would see at least seven countries phasing out coal: Portugal (2021), France (2022), UK (2024), Hungary, Italy, Ireland and Greece (all 2025). As Europe has seen nine consecutive year-on-year increases in aggregate coal burns, perhaps more switching flexibility and less bans could still be the way forward.
By Gerald Jansen for Oilprice.com
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Source : https://markets.businessinsider.com/news/stocks/coal-makes-comeback-in-europe-as-gas-prices-explode-10308449751178