Reuters' data shows that European coal prices would have to rise by USD 50 a tonne or more than 50% to make gas fired power plants as profitable as coal power generation. The current price for European coal futures delivered in 2013 is at USD 95.50 a tonne, down by 30% during the past year.
Reuters' data shows that this price would have to skyrocket to around USD 145 to reduce coal's power generation revenue margins to levels that match the margins on natural gas at current prices for the benchmark German power market.
Britain's National Grid said that "For gas to become the preferred source of fuel for power generation next winter, the gas price needs to fall by about 20 pence a therm or there needs to be a further increase in the coal price of about USD 50 per tonne."
Such an increase would put coal prices back to record levels seen before the outbreak of the financial crisis in 2008.
One energy trader in London said that "Barring some massive unforeseen event that knocks out a huge chunk of production from a major coal exporter, this isn't going to happen without a parallel rise in gas prices. The balance of near term risks to the industrial commodity complex is to the downside."
Analysts said that only a vast increase in gas flows or a sharp price reduction in gas supply contract prices from major gas producers would be able to make gas competitive against coal fired power generation again.
Societe Generale said in a research note that "Only the major gas producers have the ability to offer competitive pricing to stop the vampirization of gas by coal. So far, they are not willing."
Russian gas export monopoly Gazprom gave in to customer pressure earlier this month and reduced the price in its long term, oil indexed gas supply contract to top German utility E.ON, but SocGen said the concession would not be enough to make gas competitive against coal. It added that "The recent deal between Gazprom and E.ON doesn't address the uncompetitiveness of gas for power generation and leaves gas as a fuel of no choice for Europe."
Because gas is less dirty than coal power production, governments in Europe are keen to increase their gas-fired power generation share of fossil power plants in order to achieve their emissions reduction targets.
European gas prices have remained firmer than coal prices during the financial and subsequent economic crisis, because they are closely linked to the oil market, which has been relatively strong due to demand in emerging markets and fears of a conflict between Iran and the West.
Coal prices, by contrast, have dropped sharply during the past year, while exports from major producing countries have been healthy and the United States, where a shale gas boom has made gas generation attractive, has begun to ship coal to Europe.
At current market prices for power, gas, coal, emissions allowances and foreign exchange rates, German electricity for delivery in 2013 and generated from coal is almost EUR 16 per megawatt hour more profitable than gas generated power.
Another way to make gas more attractive for power generation than coal would be a sharp increase in emissions allowances in Europe's carbon trading scheme, which requires utilities, industrials and airlines to buy allowances for each tonne of carbon they emit.
But Reuters' data shows that the price for a tonne of CO2 would have to rise to almost EUR 40, up from under EUR 8 tonne currently to make gas generation cost competitive.
Source - Reuters
(www.coalguru.com)
