German hard coal-fired generation might fall year on year this summer, if recent trends of weaker overall power demand, renewables build-outs and a coal-gas fuel switch incentive continue.
Hard coal-fired generation over 1 April–30 September could slip by 19pc on the year and 5pc below the 2018-22 average to 4.8GW, under a scenario where overall electricity generation is on average 4.1pc lower on the year in April-September, according to Argus calculations.
This is in line with the 4.1pc drop in German power demand over 2022-21, which was primarily the result of industrial and household demand erosion associated with high prices, policy and behavioural changes in energy consumption stemming from the fallout of the Russia-Ukraine conflict.
A 19pc drop in hard coal-fired generation would equate to 1.9mn t less NAR 5,800 kcal/kg coal burn across the six-month period.
This scenario assumes that wind and solar power generation grow by 7pc and 5pc respectively year on year, and that lignite generation declines by 5pc year on year, in line with the percentage drop in output over the first quarter. Germany is planning to phase out 1.9GW of lignite capacity by July, so there is further downside risk to the lignite outlook. Oil-fired generation, which plays a minimal role in the power mix, is assumed to be flat to last summer, while hydropower, biomass-fired power, imported power and other forms of generation are forecast in line with seasonal trends. Nuclear generation is assumed at 1.4GW in April and falling to zero from May onwards in line with the country's nuclear phaseout. Germany's last nuclear plants closed on 15 April.
Hard coal-fired generation is assumed to hold a 37pc share of the combined coal-gas mix in line with the February-March share. Coal held a 40pc share of the coal-gas generation mix of 14.8GW last summer, according to Fraunhofer Ise data. There is further downside risk to this outlook as the share of hard coal in the combined coal-gas mix in February was just 34pc.
Fuel-switch dynamics for this summer have tilted against coal in recent weeks, on softer gas prices and fundamentals, suggesting coal's share in the coal-gas mix should fall. Based on 14 April forward prices, 40pc-efficient coal will remain behind 55pc gas in the German merit order until the fourth quarter.
Upside risks
One upside risk to this demand outlook would be a further deterioration in the French nuclear situation. Current April-September availability based on operator schedules is expected to be 45pc, or 12.4GW higher year on year at 40.9GW. But given fresh faults have been found at utility EdF's plants and a wave of strike action is still happening across France, some sources are sceptical over whether EdF's outlook will be achieved.
A deterioration in Europe's gas supply outlook would be another upside risk for coal demand. But given underground gas storage sites in Germany, and Europe as a whole, have exited the winter at healthy levels, restocking requirements ahead of next winter currently look modest.
An alternative scenario is that a gas oversupply may develop in Europe later in the summer, whereby more gas needs to be burnt in the power sector to free up storage space. Or firmer supply could depress gas prices to a level that could further erode coal's share in the thermal mix and drive coal-fired generation below 4.8GW.
Another key upside variable would entail a less stark drop in overall power demand, be it through some mothballed industrial operations restarting amid lower energy prices or a reversion to more typical household energy usage patterns.
If overall power generation is flat to summer 2022, then hard coal-fired generation could average 5.6GW this summer, only 5.6pc lower on the year and 11pc above the 2018-22 April-September average.
Ample coal supply, generation capacity
Germany has sufficient coal supply and generation capacity if demand for coal-fired generation increases this summer, despite some recent plant outages.
Inventories at the Amsterdam-Rotterdam-Antwerp (ARA) coal hub are around 5.5mn t, which is 1.5mn t higher on the year. This is enough supply to meet 128 days of NAR 5,800 kcal/kg hard coal consumption at 40pc efficiency at a 4.8GW rate.
The return of several German coal units last year to full-time operations or the grid reserve has boosted Germany's available coal-fired capacity to a level that should mean there is no shortage of capacity to generate around 4.8GW over the summer. German available capacity is expected to fall from the current 13GW to around 8GW in mid-June, during the summer maintenance period , EEX data show.
Utilities should not have difficulties bringing supply to where it is needed, assuming a prolonged disruption to Rhine river level does not take place. Low water levels on the Rhine hampered barge movement in the third quarter last year, particularly impacting EnBW, GKM and Uniper coal plants in southern Germany. But power plants are currently better stocked than last summer given firm buying over recent quarters, so the risk to operations from Rhine disruption appears less than last summer and skewed to longer periods of low water.
The structure of the European power markets allows generators with marginal costs such as coal and gas to pass the increase in their fuel costs on to consumers. This enabled European buyers to out-compete buyers from other destinations in the spot market for high-calorific value (CV) coals, in response to a steep increase in power prices owing to gas supply concerns. Availability of high-CV coal in the spot market is unlikely to be an issue for European buyers in the near term, barring significant supply disruption in the US, Colombia or South Africa.
Import mix changes
The US, Colombia and South Africa have emerged as the main substitutes for sanctioned Russian imports over the past year and will again dominate the import mix this summer. Imports into the ARA hub and directly into Germany are likely to be below last summer's level, when participants rushed to bring in cargoes ahead of the EU's 10 August deadline for Russian imports.
Combined Belgian, Dutch and German thermal coal imports were 30.8mn t over April-September 2022,which was 45pc higher year on year, shipping data show — although this figure will be inflated by certain US and Australian shipments of coking coal that are not possible to differentiate from thermal coal in the data.
Imports fell for a third straight month in March to hit an 18-month low of 3.2mn t. Receipts are likely to remain muted throughout the second and third quarters while winter restocking requirements are evaluated.
The backwardated structure of the API 2 curve is also providing little incentive to store coal. "Why would you buy now and bear the stocking costs when you can instead buy in a couple of months' time if you don't expect there to be any shortage," a trader commented. But no-one would want to enter winter with low stocks, he added.
