Europe's power plants burn less gas as solar, hydro squeeze summer demand

European gas-fired power plants are to burn over a quarter less gas this summer as solar capacity gains and replenished hydro stocks squeeze demand, while overall power demand is still very slow to recover.

Analysts at S&P Global Commodity Insights forecast a 25% drop in gas-fired power generation in the third quarter for the five biggest markets after a 31% decline in Q2 with gas-for-power demand for both quarters likely the lowest on record stretching back to 2001.

"We expect CCGT to remain relatively muted on higher renewable production, while the weakening support in gas prices entering Q3 can bring it lower in the coal switching channel," said Daniel Prichard, a gas analyst at Commodity Insights.

A UK-based gas trader pointed to an increase in "renewables and French [nuclear] production, plus very good hydro output."

Overall, the year-on-year decline in gas-fired power generation across 10 European markets closely tracked by Commodity Insights between April and September (Summer 2024) is equivalent to some 9.5 Bcm less gas burned this summer.

The International Energy Agency estimates a 13 Bcm year-on-year decline for European gas-for-power demand in the first half of 2024.

Overall, lower gas burn outweighs gas demand gains elsewhere, helping reduce Europe's demand for LNG.

Platts, part of Commodity Insights, last assessed the benchmark TTF front-month contract at Eur32.58 /MWh on July 18.

Atlantic LNG NWE DES for September was assessed at a Eur0.47/MWh discount to TTF September July 18, Commodity Insight data show.

Germany bucks trend

German gas plants bucked the Europe-wide decline in H1 2024 with output up 10% year on year.

The country commissioned new gas-fired power plants and finally closed coal and lignite plants that were kept online or returned from reserves during the 2022 gas supply crisis.

In total, some 10 GW of German coal capacity is to shut in 2024, while almost 2 GW of new gas-fired capacity, initially planned to start 2022, is now operating.

Germany has Europe's biggest remaining coal-to-gas-switching potential, although hard coal now only plays a minor role, while lignite is more difficult to replace amid a dip in EU carbon allowance prices.

Commodity Insights analysts forecast German Q3 gas-fired output to rise 26% year on year to a 5 GW average, skewed towards September.

Generation economics are also set to improve for German gas with the clean spark spread closing in on zero for September, rising to Eur16/MWh for winter, Commodity Insights data show.

Summer spreads are much less supportive especially during solar peaks, deflating hourly prices amid a sharp increase in negative hourly prices.

"Plants are requiring a higher price to run given the very few profitable hours available," said Daniel Muir, power analyst at Commodity Insights.

German gas plant output is on track for the best year since 2020 driven by combined heat and power plants and the industrial sector rather than CCGTs as in Italy or Great Britain, still Europe's biggest markets for gas-fired generation.

Italy still in front

Italian gas for power demand fell 25% in the second quarter and is forecast to drop 16% year on year in Q3, but at a 10.2 GW average remains by far Europe's biggest market for gas-fired power generation.

Italy's premium power prices keep gas-fired generation margins profitable across July, while August clean spark spreads for 50%-efficient plants went back above Eur9/MWh in recent sessions.

Backed by capacity auctions, three new 800-MW CCGTs are set to come online. Tavazzano has already started operations, while Ostiglia and Fusina start dates were pushed back to 2025.

Moreover, the coal-to-gas conversion of the 1.7-GW coal-fired Brindisi plant failed the environmental assessment.

Capacity auction payouts ranged from Eur45,000/MW for 2025 to Eur48,000/MW for 2028.

Elsewhere, capacity markets also incentivize new gas units in Great Britain, where the last coal plant will shut in September, Belgium and Poland. Greece also saw a mini dash for gas with some new CCGTs (see table).

Europe's booming solar capacity additions, improved hydro levels in Iberia, the Alps and Italy, and the sluggish demand recovery are key reasons for reduced gas burn this summer.

Europe's new gas-fired power plants

Source: Compiled by S&P Global Commodity Insights

Heat wave risk for CCGTs

There is a risk that the ongoing heat wave across much of southeastern Europe may extend into August, boosting demand for gas-fired power generation and potentially delaying gas storage injections.

On the other hand, there is also a risk of gas storages filling up quicker than expected with Commodity Insights analysts currently forecasting late October across Europe.

"The whole tipping point will be tank top... or not," a Germany-based trader said. "It seems we'll reach it but we don't have a huge margin so the slightest hiccup can derail that," the trader said.

Any gas price weakness after that point could boost gas burn depending on temperatures and wind supply, with market participants seeing the timing of Europe reaching full storage as a key driver during the autumn.

"[Full storage by] late September would be too early for me," a trader said.