German gas generation falls 35%, coal rebounds as margins diverge

German gas-fired power generation fell in July as record high European gas hub prices further eroded margins, while hard coal generation almost exceeded gas-fired generation and lignite topped the German power mix.

TSO data aggregated by Fraunhofer ISE shows that gas generation totaled 3.3 TWh in July, down 35% year on year as gas prices hit the highest levels on record.

July Generation

Source: Fraunhofer ISE

Storage concerns heading into the winter gas season and ongoing supply constraints continue to support prices in Europe, with Dutch TTF gas prices climbing above Eur40/MWh. Fundamentals in Europe are just part of the reason global gas prices have hit significant highs, with JKM and Henry Hub prices hitting significant levels of $15/MMBtu and $4/MMBtu, which saw European LNG imports in July fall to their lowest levels since January.

The quarter-ahead Dutch TTF gas contract climbed 15% in July, while EUAs went in the opposite direction. After hitting an all-time high of Eur57.87/MWh on July 5, the December 2021 EUAs contract shed 10% in the remainder of the month.

This saw coal- and gas-fired power margins diverge, with the German quarter-ahead clean spark spread for a 50%-efficient CCGT hitting a three-year low by the end of the month. Conversely, the equivalent dark spread for 45%-efficient plants recently hit its highest levels on record, according to S&P Global Platts data that dates back to 2017, despite an increase in coal prices.

According to Platts assessment data, the quarter-ahead CIF ARA coal contract hit its highest levels since September 2011.

Negative clean sparks

Challenging conditions for German gas plants are priced to extend into 2022, as Platts year-ahead clean spark spread with CSS (50% efficiency) assessment turned negative on Aug. 4 for the first time since April 2019 as the TTF 2022 gas contract rose above Eur28/MWh.

According to S&P Global Platts Analytics' latest five-year forecast published Aug. 4, German gas-fired output will rise above the 2020 high from next year on the back of nuclear, lignite and coal closures, averaging around 9 GW throughout the forecast period.

All six German reactors are set to shut by the end of 2022, while Germany has auctioned over 8 GW of coal closure compensation since December 2020, bringing 2022 capacity well below 15 GW.

RWE is also set to shut another 2.5 GW of lignite unit, mainly linked to the Hambach mine, by the end of 2022.

Germany's leading candidate to replace Chancellor Angela Merkel after the Sept. 26 election, Armin Laschet (CDU), has rejected calls by the Greens and its sister party CSU to re-negotiate coal exit dates.

Laschet added, however, that higher carbon prices could lead to quicker-than-anticipated coal closures achievable by 2030 in Western Germany.

Holding back

Short-term prospects for gas-fired generation, meanwhile, may have taken another hit in August delivery, as lower Russian gas flows through Yamal in Germany have given prices one less reason to fall, leaving Europe further exposed to global gas price strength.

After a consistent flow of 81 million cu m/d throughout summer, net imports at Yamal's Mallnow terminus have slipped to 49 million cu m/d. Both German and Polish transit networks have told Platts that this is due to market behavior, and no upstream issues have been reported on the Russian side.

While aggregate German storage is now over half full, this is still well below the 89% fill this time last year, Gas Infrastructure Europe data showed. Gazprom's Rehden storage facility in Germany is just 12% full, after beginning summer at 9.5%.

With little change in onward transport to Central and Southern Europe, German imports have been affected the most, at a time when as much gas as possible is needed for storage, and indeed for power generation.

Also supportive of prices is an evident lack of winter volumes on the market that would be delivered by Nord Stream 2 if it wasn't forbidden from operating. A similar situation was seen ahead of the signing of the Russia-Ukraine transport accord, which saw short-term volumes collapse after the agreement, and winter prices supported before it.

Nord Stream 2 has the potential to facilitate a major fuel switch towards gas in Germany, should its purpose not be to avoid costly transport through Poland and Ukraine, for which just a few years of operation would completely offset and provide a return on investment.

However, without a U-turn by German regulator BNetzA on exemption from production-transmission unbundling, and further assent from the European Commission that Nord Stream 2 does not contravene the principles of energy union, fuel switching and price compression potential seem unlikely for some time to come, especially if non-contract Russian volumes to Germany continue to be withheld until said derogation is granted.