A rally in recent weeks has pushed gas prices up to a range at which even older coal-fired power stations would be more profitable to run than some of the most efficient gas-fired power stations.
European gas benchmark price the Dutch TTF front-month has risen strongly over the past two weeks, having closed at €40.57/MWh on 7 October, up from a recent low of €32.80/MWh on 19 September. The higher gas prices have outstripped similar price increases of other energy-related commodities such as coal, with the TTF front-month contract approaching the top of the gas-to-coal fuel-switching range (see TTF front-month graph). In assessments on 3 and 4 October, even older coal-fired power stations with an efficiency of 42pc would would be more profitable to run than the newest gas-fired turbines with an efficiency of 60pc, for the first time since early December last year.
Geopolitical tensions in the Middle East have contributed to gas' price increase. But with muted LNG deliveries to the continent so far this shoulder season and colder weather than last year, European gas storage sites are less full than they were a year earlier. European stocks were filled to about 94.5pc of capacity on the morning of 7 October, according to GIE transparency platform data, down from 96.7pc a year earlier. Demand has already stepped up strongly in some countries, pushing the continent to some days of net withdrawals from storage earlier in the autumn than in most recent years.
While coal prices have also stepped up slightly in turn, partly in reaction to the expectations of higher coal burn, their slower upwards momentum has brought coal largely ahead of gas in the merit order. Many coal trading firms have banked on a strong coal burn this winter, with low trading activity in the shoulder season so far, which incentivises trading companies to keep coal prices close to the fuel-switching level, market participants have told Argus. And prompt prices for European CO2 emissions allowances in September and October so far have been about 20pc lower on the year, closing at an average of €64.24/t, compared with €81.60/t over the same period in 2023. Lower emissions prices benefit higher coal burn as coal is more CO2-intensive than gas, requiring operators to purchase and surrender more CO2 emissions certificates.
A similar price movement happened last autumn, when a rally in early October pushed the TTF front-month price to the top of the fuel-switching range. But from early December, when a mild winter reduced the remaining risks for gas security of supply, prices fell through the fuel-switching ranges sharply, to the bottom of the range.
Impact probably highest in Germany
Germany is one of the last remaining markets with large numbers of both coal- and gas-fired power stations in Europe, leaving the market able to react to price movements in either market more flexibly.
The power sector can still provide considerable demand-side flexibility in the German gas market, while coal phase-out plans in the rest of Europe mean the scope for alternating between the thermal generation fuels has narrowed. Gas prices can provide the signal that the market has spare gas for the power sector to burn by falling into coal-to-gas switching territory, while gas prices climb above the fuel-switching range to discourage gas-fired generation when the gas market is tighter.
Last winter, gas prices at the very bottom of the fuel-switching range encouraged the highest gas-fired generation in Germany in at least a decade, according to data from European system operators' association Entso-E. While many German coal and gas-fired plants are combined-heat-and-power plants, which do not respond to price incentives as flexibly as pure power plants, the impact of the fuel switch on gas' share in the thermal generation mix was still visible last winter in Germany. In October and November, with prices at the top of the range, gas-fired generation at 6GW met 55pc of the combined call on coal and gas. But when prices dropped through the switching range, gas' share increased to 63pc in December-March, with about 7.3GW of gas-fired generation (see generation percentage graph).
In addition, the German storage levy of €2.50/MWh, which power producers must pay, pushes gas prices up further in the fuel-switching range. The levy, which is likely to rise further from next year, thus further decreases gas' profitability compared with coal, which could be detrimental for Germany's own coal phase-out plans.
