European gas- and coal-fired power generation margins have come under strong pressure as outright power prices trail behind a rising fuel complex and rallying EUA carbon allowances.
In Germany, the front-year clean dark spread (CDS) for a modern coal plant (45% efficiency) has fallen below Eur3/MWh, the lowest on record, with the CDS for the oldest coal units (35% efficiency) deeply negative at minus Eur4/MWh, S&P Global Platts data shows.
German gas plant margins have been hit even harder, with the clean spark spread (CSS) for the year-ahead for a modern gas plant (50% efficiency) at minus Eur5/MWh, the lowest level since May last year.
Outright German power prices have rallied in May with the year-ahead baseload contract trading above Eur40/MWh for the first time in five years, but coal, gas and EUA carbon allowances prices have all risen more steeply over recent weeks.
According to a trader, producers are selling at the attractive level with the delay for the new 1 GW Datteln-4 coal plant to 2020 announced Tuesday adding a premium to Cal-19.
"There are [however] fewer clients who buy the back [of the curve]. Currently we see more buying activity in the front contracts," the trader said, adding that "coal is not all the time price-setting anymore, we have seen it in April, May that the [power] prices are pressured quite a lot by renewables."
Q3 upside for Spain, Italy
In Spain, the front-quarter CSS for modern gas units has dropped to Eur9/MWh, 30% below average levels for the same Q3 spread a year ago, despite outright Spanish Q3 power prices rising above Eur60/MWh, their highest in almost 10 years, Platts data shows.
"More coal and gas generation will enter than now, but the current prices aren't real... the spark for Q3 I see it too high, Q4 is low," a Spanish trader said.
Year-to-date, coal and gas generation is down 26% and 4.5%, respectively, TSO data showed with gas slightly ahead of coal so far this month.
In Italy, gas-fired generation margins have been more resilient despite bullish gains for PSV gas price with the Q3 CSS still above Eur11/MWh, trailing last year's Q3 CSS average by just 3%, the data shows.
"Surely I think we are far from the real values of these products for Q3," an Italian trader said. "The only result is that power will come up."
Italy has the highest proportion of gas in its power mix amid major Continental power markets with gas-fired plants providing over 40% of Italy's power in 2017 compared to just a quarter in Spain and just 13% in Germany.
Coal-fired generation margins remain above gas-fired spreads across all major Continental markets, in contrast to the UK where the additional carbon floor price keeps gas plants ahead with the Q3 CSS around Eur6/MWh for the UK.
In the Dutch power market, where gas and coal account for more than 80% of the mix, the so-called "coal-switching price" was pegged at Eur16.34/MWh at close Thursday compared to an actual TTF gas prices for delivery in 2019 at Eur19.90/MWh, the highest front-year gas price since summer 2015, Platts data shows, with prospects of further coal-to-gas switching diminished for the moment.
This is despite EUA carbon allowance prices doubling since the start of the year, generally favouring less carbon-intensive gas over coal, but with the cold winter depleting European gas storage and geopolitical tensions now lifting oil and gas prices with coal also driven higher by continued strong demand in the Asian market.
Weakness in the euro against the dollar with the single currency falling from $1.25 in early April below $1.20 this week has also added pressure on largely dollar-denominated global commodities like coal and oil.
Overall, the falling generation margins for coal and gas plant operators are also against a background of ever-rising renewables generation, a rebound for European hydro levels and improved nuclear availability especially in France. Strong hydro levels are expected to stretch until at least June, but from Q3 onwards the rising fuel and carbon costs are set to filter through to higher spot power prices.
So far this year, output from gas-fired power plants across Germany, France, Spain and Italy has been down 5 GW, with coal plant running down on average 3 GW, TSO data aggregated by S&P Global Platts Analytics show.