Lignite displaces gas in German power mix

Market: Electricity, Emissions, Natural gas
15/10/24

Rallying German gas prices have pushed a significant amount of gas-fired generation out of the country's power mix this month, opening space for lignite.

Average daily gas-fired generation in Germany has slipped to 3.8GW so far this month from 4.2GW in September and August and 4.1GW in July. During that time, lignite-fired generation climbed to 9GW from 7.2GW in September and August and 7.4GW in July.

Coal-fired generation has also edged down to 2.9GW so far this month from just over 3GW in September, but higher than the averages of 2.3GW in August and 1.4GW in July.

Meanwhile, supporting demand for thermal-fired generation, German renewables output has fallen to 30.3GW so far in October from just under 32GW in September when wind generation stepped up, but slightly above the 29.5GW in August when wind output was lower.

Remaining German power demand in recent weeks has been covered by imports, which have risen to a net 3.8GW so far this month from 3.4GW in September, but remained well below the 6.2GW in August. Electricity imports from neighbouring countries such as France are occasionally cheaper than domestic generation and can help fill in gaps between German power demand and supply.

A combination of changing renewable output, higher gas prices, stable lignite prices and lower emissions prices have spurred changes in the German power mix. The German THE day-ahead has risen strongly since late July and prices have rallied in recent weeks against a backdrop of rising geopolitical tensions in the Middle East. Meanwhile, German lignite-fired plants typically source fuel from nearby mines, substantially insulating domestic lignite prices from external market forces. German regulator Bnetza assumed earlier this year that domestic lignite would cost about €3/MWh in 2024-25.

At the same time, near-term prices in the EU emissions trading system (ETS) — a key driver of competitiveness for German lignite-fired generation — have fallen. Prompt ETS allowances closed at €65.36/t of CO2 equivalent (CO2e) on Monday, down from €72.14/t CO2e on 19 August, boosting the profitability of lignite-fired plants, which are the more CO2 intensive than coal and gas.

Those recent price shifts have made output from lignite-fired plants with a typical efficiency of 36pc more profitable than normal 55pc-efficient gas-fired plants as well as coal-fired stations operating at 40pc efficiency, which have also become more profitable. By contrast, in the first eight months of this year, 36pc-efficient lignite-fired plants had competed tightly with 55pc-efficient gas-fired plants even as gas prices fell to the bottom of the coal-to-gas fuel-switching range (see fuel-switching graph).

Buffer zone

More competitive lignite-fired generation has also started acting as the domestic buffer to cover gaps between supply and demand left by renewable generation (see power generation graph).

After Germany renewable generation dropped to 26.8GW on 2-9 October from a strong 45.5GW on 26-28 September, lignite-fired generation jumped to 10.1GW from 6.4GW — a 57pc gain — while gas-fired output only rose to 3.5GW from roughly 3GW and coal-fired generation increased to 2.9GW from 2.3GW. In December-July, when the gas and lignite fuel-switching range was tight, generation from both fuels reacted similarly to fluctuations in renewable output and both plant types buffered their generation based on demand (see power generation graph).

And forward prices assessed by Argus suggest that lignite-fired generation could remain competitive against gas and coal-fired output in the German power mix next month. As of market close on Monday, November-dated fuel and emissions prices would place the operating costs of a 36pc-efficient lignite-fired plant during that time below those of a 55pc-efficient gas-fired plant and a 40pc-efficient coal-fired plant.

That said, Germany's decreasing lignite and coal-fired generation capacity limits how much of the national power mix those plant types can provide. As of April, Germany had 82.4GW of gas-fired capacity, but just 15.1GW of lignite-fired capacity and 11.5GW of coal-fired plants, according to Bnetza.

By Lucas Waelbroeck Boix

Fuel switching range €/MWh

Power generation by fuel, 7 day average GW

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