Lower European wholesale natural gas prices due to swelling inventories and weak industrial demand have encouraged utilities to switch to gas from coal to generate electricity in a reversal of behaviour last year.

A surge in European gas prices to record highs caused by reduced Russia supplies after Moscow invaded Ukraine in February last year led utilities to switch to carbon-heavy coal even as the European Union (EU) seeks to meet climate targets that depend on increased use of lower carbon fuel.

Gas prices have since fallen after a milder-than-average winter and ample supply allowed more gas to be injected into storage sites.

European gas storage levels are around 70% full, compared to just under 50% full a year ago. The EU has a target to fill storage to at least 90% by Nov. 1. Analysts at Goldman Sachs said inventories could reach 100% full as early as August.

The Dutch front-month gas contract TRNLTTFMc1, the European benchmark, has dropped by around 65% since the start of this year.

While physical front-month European coal prices GCLARAPDSMc2 have also fallen, they have lagged the drop in gas prices, causing the short-term marginal costs to shift in favour of using gas to generate electricity.

EU coal-fired power generation has fallen around 45% so far this year to 19.8 terawatt hours (TWh) in May, data thinktank Ember said.

“We see a lot more coal-to-gas and lignite-to-gas switching happening since around mid-May, especially in Germany,” said Gabriele Martinelli, manager of European power research at Refinitiv.

Efficient gas plants replaced some lignite-fired coal plants in the merit order, leaving lignite-fired generation running below 40% of its available capacity in Germany on some days.

“Low gas prices are also making gas-fired plants in neighbouring countries more competitive, leading to record high net power imports to Germany over the past few weeks,” she added.

Demand for gas from industrials has fallen this year and the lack of spot Asian demand for liquefied natural gas (LNG), which could pull spare cargoes away from Europe, has largely failed to materialise, also adding weakness to global gas and LNG prices, Tom Marzec-Manser, head of gas analytics at ICIS, said.

The German economy, Europe’s largest, was in recession early this year after household spending fell under pressure from high inflation.

Energy market shifts are often temporary and more coal to gas switching could lift demand and raise prices.

With the EU carbon price incorporated, a level of 30 euros ($32) per megawatt hour (MWh) encourages switching to gas, according to analysts at Energy Aspects.

“We estimate that a 5 euro/MWh drop in (Dutch gas) prices relative to this level will result in a swing from lignite to gas of around the equivalent of 32 million cubic metres (mcm) a day,” they said.

“This has boosted our power sector gas demand numbers for western Europe by 4.9 billion cubic metres over June–October,” they added.

The front-month Dutch gas price TRNLTTFMc1 was trading at around 28.60 euros/MWh on Thursday.

However, for more coal to leave the power mix this year, gas prices will need to fall further, said Ingvild Sørhus, manager of EU carbon analysis at consultancy Veyt.

“We probably need to get closer to winter, with ample gas supply, in order for the winter risk premium to soften before seeing favourable fuel switching conditions then,” she added.
Source: Reuters (Reporting by Nina Chestney and Forrest Crellin; editing by Barbara Lewis)