Europe Could Absorb 40 bcm More Gas Annually - at Right Price
Level represents spare gas plant demand in six countries; gas generation margins recovered only briefly this year. Coal margins higher, ruled by global trends, EU CO2 policy.
Europe's power industry could absorb around 40 billion cubic metres (bcm) of additional natural gas annually in coming years if gas prices fell against those of coal to lift generation margins, a study by German energy advisory Team Consult said.
"Our core question was what is the potential of coal-to-power generation that could be replaced with gas," said Jens Voeller, head of the gas business unit of the Berlin-based company.
"We are aware that 40 bcm is a maximum level," he added.
Northwest European gas traders are trying to gauge such potential in a region where underemployed liquefied natural gas (LNG) terminals expect to receive a wave of global supply, especially from the United States and Australia.
Team Consult looked at the utilisation and economics of gas-fired power plants in six European countries, namely Britain, Germany, Italy, the Netherlands, Belgium and Spain, over the past six to eight years.
Those countries imported 35 bcm of LNG in 2015, down from 60 bcm in 2010, in addition to receiving gas through pipelines from origins such as Russia and Norway.
Gas-to-power usage has been in decline, due to rivalry from cheap coal and subsidised renewables.
"A substantial fuel switch (now) would come only if the gas price's low of 2016 coincided with the highest coal price," Voeller said.
Gas generation briefly recovered its profitability in recent months.
This came as month-ahead gas on Germany's trading hub NetConnect hit record lows of 11-12 euros per megawatt-hour (MWh) while month-ahead coal delivery to Europe, expressed in the API2 index, hit two-year highs of $80-90 a tonne, Thomson Reuters data shows.
But January gas is now back at 17 euros as oil prices, to which they are linked, respond to producer plans to curb output.
Month-ahead coal has dropped back to $79, meanwhile, amid a dip in global demand.
German generators' forward margins show that burning coal in 2017 to derive electricity currently would earn them 5.6 euros/MWh while burning gas would produce a theoretical loss of 4 euros, keeping plants shut.
Europe's mandatory carbon trading scheme, designed to discourage coal burning, fails to generate punitive costs.
If coal and gas prices do not change in favour of gas, there will have to be regulatory intervention, such as a further tightening of carbon allowances, to drive up carbon prices, Voeller said.
Reporting by Vera Eckert
