Gas prices at the German THE trading hub have fallen low enough to price out lignite in the German power generation mix.
Brisk LNG sendout, above-average stocks at European gas storage facilities and weak demand have steadily weighed on gas prices from the front of the curve in recent months. And consumption has fallen further in recent weeks as heating demand has faded because of warmer weather, in line with the typical seasonal progression.
As gas prices have fallen, gas has moved far ahead of coal in the merit order for power generation. The THE day-ahead price closed, on average, €11.93/MWh below the point at which a 55pc-efficient gas-fired unit would be more profitable to run than a 40pc-efficient coal-fired unit in May, and €15.08/MWh below this level on 1-6 June.
And gas prices have since dropped enough to price out lignite-fired generation, according to Argus' calculations.
The THE day-ahead price closed below the point at which a 55pc-efficient gas-fired unit would be more profitable to run than a 36pc-efficient lignite-fired unit on 27 April-6 June, and sporadically before this (see graph).
And the THE front-month market closed below this point every day on 5 April-6 June. It has extended its discount to lignite-to-gas switching levels in recent weeks, suggesting an incentive for firms to prioritise gas-fired generation over lignite (see graph).
This assumes a lignite price of €3/MWh, as cited by German regulator Bnetza in its latest grid reserve monitoring report.
A key factor in this price dynamic is elevated European emissions prices. The lignite price is less relevant than emissions prices to lignite-fired generation, Germany utility Trianel told Argus.
Lignite-fired output already fell to 7.1GW in May, the lowest for any month in exactly three years. In addition to low market prices, the high feed-in of renewables and planned maintenance weighed on lignite-fired generation, according to German utility Leag. Gas-fired generation was also weak at 4.71GW in May, down from 5.47GW a year earlier.
Strong renewable generation has weighed on overall thermal output in recent weeks, pushing down spark spreads and dark spreads alike. Renewables' share of the German electricity mix was at a record monthly high in May, at 69pc of total net public electricity generation, according to data from Fraunhofer ISE. And renewable output made up an even greater 73pc proportion of generation on 1-7 June.
Clean day-ahead spark spreads for 55pc-efficient gas fired units often held in negative territory in May. And equivalent dark spreads for 40pc-efficient coal-fired units and 36pc-efficient lignite-fired units were each in negative territory every day. These spark spreads were positive on 1-6 June, while dark spreads remained negative.
But given the prevailing price dynamics, gas-fired generation may step up ahead of coal and lignite if renewables drop off.
There is potential for gas prices to fall further this summer, especially if the European stockbuild picks up and sites fill before the heating season begins.
