German coal supply restrictions support January prices

The German January power contract has stepped higher, with expectations for a strong call on older gas-fired power plants and high coal-fired output costs owing to restricted coal deliveries because of low river levels.

Clean dark and spark spreads for base-load delivery in January have risen in the second half of this month as a result of the risk that tight coal supply will persist in the coming weeks. The situation could curb coal-fired power generation over the winter, lifting gas-fired output at times when demand for German fossil-fuel generation is firm.

Persistently dry weather in Germany has restricted coal barge movements since late summer. The December contract has, in recent days, resisted upside pressure from tight fuel supply to a number of German coal-fired plants. This is because daily average wind power generation was forecast to be at firm levels of 14.5GW-23.6GW on 1-4 December. This would limit the call on gas-fired units and allow affected coal-fired plants to scale back production without affecting German wholesale power prices, as the need for fossil-fuel generation would fall on strong renewables output.

And industrial power demand in the last week of December is typically low because of the Christmas holiday season. The week 52 contract — the week covering the Christmas period — ended yesterday's session at €39.75/MWh, a level at which even modern 59pc-efficient gas-fired plants would not be able to recoup marginal costs, currently at €43.18/MWh, for base-load generation.

But the January contract has increased as the market expects coal and gas-fired generation demand to rise if wind power output is around average.

Low water levels on the Rhine river have increased coal barge rates from the Amsterdam-Rotterdam-Antwerp (ARA) trading hub to Mannheim in south Germany to around €40-41/t this week, and to up to €40/t since mid-October. This compares with a typical rate of €5-6/t. A barge rate of €40/t adds around €14/MWh to the cost of operating a 40pc-efficient coal-fired plant. Clean dark spreads for January base-load delivery ended yesterday's session at €20.13/MWh, suggesting that affected coal-fired units would continue to recoup positive generation margins at times when they can opt out of scaling back production to optimise their coal stocks. And clean spark spreads for older 49.13pc-efficient gas plants closed yesterday at €3.83/MWh. Working day-ahead clean spark spreads for such gas-fired plants were positive on 20 out of 40 days so far this winter, since 1 October, including on 11 days so far this month when coal supply to German plants deteriorated further and amid lower wind power generation on several days.

Coal supply squeeze

Rhine water levels at the Kaub measuring station — the narrowest point for coal barges travelling from ARA to south Germany — stood at 31cm at midday today and are forecast to be around 29cm-33cm on 29 November-1 December. At that level, less than 20pc of barges can pass Kaub.

German railway firm DB Cargo has received higher demand for coal deliveries by rail as a result of low Rhine levels, a spokesman said. DB Cargo will provide 10 additional trains a week to deliver coal from Dutch ports to power plants in Germany from December. On average, each train can carry around 2,700t of coal, DB Cargo said.

From next week, the 10 additional trains will increase deliveries by 27,000 t/week compared with the norm. But barges that can still pass Kaub can load significantly below maximum capacity. Smaller barges capable of loading 2,500t can now take around 10-20pc of capacity, which means that the barges load around 2,250-2,000t less per delivery compared with normal weather conditions and unrestricted shipping. So additional trains are unlikely to completely offset lower deliveries by barges should the situation persist.

German coal-fired power generator GKM, which operators units with a combined capacity of 2GW in Mannheim, cannot exclude a further drop in coal supply unless the situation improves significantly, despite optimising its coal supply options and fully exploiting all supply routes, the firm said. GKM has increased its coal receipts by railway since the summer.

Low Rhine levels also occurred at the end of 2016, the beginning of last year and in September-November 2015. But the difference this year is that rainfall levels have been well below average over a much longer period. Notable barging restrictions typically set in when Kaub water levels drop to around 90-100cm, compared with around 30cm now. Since January 2010, Kaub levels have risen by 60cm or more over a 30-day period in 23 out of 108 months, suggesting that this significant recovery is far from impossible but statistically less likely than a moderate increase. This has contributed to the strength of the German January base-load contract and underlying clean dark and spark spreads.

Optimisation measures

The situation has predominately affected coal-fired plants in south and in central west Germany (see table), with some plant operators announcing as early as late July and the beginning of August that low water levels were restricting supply to their units.

But Swedish state-owned utility Vattenfall late last week notified the market that output at three of its coal-fired combined heat and power (CHP) plants in Berlin, with a combined capacity of around 775MW, will be restricted beyond must-run capacity needed to meet district heating demand because of insufficient coal supply.

The firm's Remit notice had initially been in place until today. But Vattenfall yesterday extended the notification until 7 January amid expectations that the situation will not significantly improve over the next few weeks. The CHP units in Berlin are the first coal-fired plants in more northerly locations to be severely affected by the situation. They are connected to the 50Hertz grid.

In total, Remit notifications on restricted coal supply has been issued for coal-fired plants with a combined capacity of 7.7GW, of which 4.4GW alone are connected to the control area of south German transmission system operator (TSO) TransnetBW. Around 2.1GW are connected to the Amprion and 510MW to the Tennet grid. Total coal-fired power capacity operated in the German wholesale power market stands at around 21.4GW this winter compared with 22.7GW in the 2017-18 winter, as a number of units shut down or moved into the German grid reserve. This means that nearly 36pc of Germany's market-based coal-fired generation capacity is now significantly affected by coal supply limitations.

Coal-fired power generation has been trending lower in the TransnetBW grid month on month in the off-peak morning period — the first eight hours of the day — and the off-peak evening hours from hours 20-23, while generation during peak-hours has been largely steady on the month. In the Amprion grid, off-peak power sector coal burn on 1-27 November has also been lower compared with October, although peak-load generation at 4.1GW is well above the daily average of 3.7GW last month.

In the Tennet and 50Hertz grids, coal-fired power generation has been higher month on month throughout the day. Overall, daily average German coal-fired generation on 1-27 November reached the highest for off-peak hours — at 9.1GW in the morning and 10.6GW in the evening — for any month since February and the highest for peak-load output, at 12.8GW, so far this year. This highlights that coal plants in the Tennet and 50Hertz grids have more than offset lower off-peak generation from units in the TransnetBW and Amprion areas, where most of the plants hit by the coal barge restrictions are located.

But with tight coal supply now reaching more northerly locations such as Vattenfall's CHP plants in Berlin, plant optimisation measures might have to increase not only in south and central west Germany but across the country to manage coal stock levels through the winter should dry weather conditions persist. For CHP plants, the situation is exacerbated as they need to operate at must-run power capacity to meet district heating supply which means that they can manage their coal stocks only by limiting power generation beyond must run, as Vattenfall indicated it would do at its Berlin plant sites. From the 7.7GW of coal capacity now affected by tight coal supply, nearly 6.3GW are also CHP plants.

With little reprieve in sight in the near term for affected coal plant operators, optimisation measures could last into and even intensify in January should there not be significant rainfall, which would lift output beyond must-run from gas-fired CHP units and non-CHP gas units on days with lower wind power generation.

German power sector gas burn by control area MW

German coal-fired generation by control area MW

Rhine Kaub water levels cm

German January clean dark, spark spreads €/MWh