2021 BC (beyond coal)
Over the past few months it’s become apparent that an increasing number of people believe that the first part of the EU ETS’ work – kicking coal out of the electricity merit order – has been done, and that we should all now be looking ahead to the first tranche of industrial abatement,
I don’t suppose anyone will break out the champagne and party hats until the last European coal plant has shut down for good, and that’s a good few years away. Nonetheless, there’s growing evidence that we are if not at the beginning of the end, then certainly on the downward slope.
Europe Beyond Coal reported last week that over half of Europe’s coal capacity has either closed, or has set a closure date before 2030. 70% of the remaining 162 plants in Europe are mostly located in just three countries – Germany (which has a 2038 deadline), Poland and Turkey, Of the rest, 20% are in the Czech Republic, Bulgaria, and Romania, and the last 10% in the western Balkans.
Yes, that's thanks to politics, but we can throw a little data at this as well: clean dark spread data shows that coal-fired power is loss-making along pretty much the entire forward curve, from next month all the way through to calendar 2025.
And the losses are not just a euro or two, either. April and Q2 German coal-fired baseload power are both losing around €10/MWh, while calendar 2022 loses around €5/MWh based on Friday’s prices. Extend the curve to calendar 2025 generation and the losses are still between €5-8/MWh.
To be sure, there was a brief moment around the turn of the year when front-month coal-fired generation gave positive returns, but that was due mainly to a spike in natural gas prices. Normality has since been restored, as the charts above show.
All in all, year-ahead coal has been out-competed by gas, even if it hasn't always made a loss, for almost two years. Front-month and front-quarter coal has had a couple of moments in the sun, but has also generally lost out.
EUA have risen well beyond marginal fuel switching levels, so this is not a market in which coal can compete effectively for anything more than a brief moment when power gas and carbon prices fall out of line, as they did at the start of the year.
Put another way, it would take a drop in EUA prices to between €25-29 to bring even the most efficient coal plant within sniffing distance of rising above gas in the merit order, on either a month ahead or year-ahead basis. Most sober observers would says that’s a very, very remote possibility.
So. While we cannot say yet that coal is “done”, at least we can show that the numbers are bad enough for a revival to be highly unlikely.
Which is why a lot of people are now looking very closely at industry.
Of course, we still need to get rid of natural gas-fired power too. Some companies are looking that far ahead; Drax recently cancelled plans to build Europe’s largest gas plant and has sold off all its gas-fired generation.
Carbon Tracker has already suggested that clean-energy generation is more competitive than even gas-fired power now in both Italy and the UK. Doubtless more countries will find the same.
But still, others in Europe see a future for gas, particularly those countries that are still heavily reliant on coal. And the European Union’s sustainable finance taxonomy may help them acquire the finance to build those plants.
Whatever happens then, EUA prices are going to need to be higher if they are to eat into gas’ share of generation, as well as beginning to force significant amounts of industrial abatement.
There are already a number of “green” steel projects getting underway in Sweden, Italy, Norway and Germany and others are following. Whether other sectors will follow as quickly depends largely on whether technology can be rolled out at speed. The cement sector talks of “low” rather than “zero” carbon cement: the UK’s Hanson plc is looking at CCS to get its emissions down.
If the above really is true, then it’s no surprise that EUAs aren’t being pulled up or down by the relative profitability of gas or coal. We could say the market is floating until it finds a new level, one which begins to formulate a “green steel spread” and even a “green power spread”.