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London — German coal-fired power generation margins recovered from record lows this spring and reached their highest since December as the rally in European carbon allowance prices comes to a halt for the moment.

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S&P Global Platts data showed the German year-ahead clean dark spread (CDS) for a 45% efficient old coal plant at Eur6.44/MWh by close Tuesday, with the CDS (35% efficiency) for the oldest coal plants now some Eur2 above modern gas plants.

Coal plant margins hit all-time lows in June, with generators squeezed by carbon and coal prices rising faster than gas and power.

However, coal margins have rebounded some Eur4/MWh since then, widening the gap to modern gas plants, especially since August, the data showed.

Clean spark spreads (CSS 50% efficiency) for modern gas units, which have rebounded strongly over recent years, remain below summer levels as especially gas prices have shown surprising bullishness for the winter season filtering into the Calendar 2019 contract.

For the quarter-ahead, the gap between modern coal and modern gas units is currently even, pegged at Eur15/MWh, reducing expectations for gas-for-power demand this winter, with even old coal units over Eur7/MWh ahead of modern gas unit margins.

CARBON RALLY SWINGS FUELS

A key factor in the swing is the unprecedented rally in EUA carbon allowances, with the December 2018 contract hitting a 10-year high above Eur25/mt on Monday, more than tripling so far this year.

EUA prices were back at Eur23/mt Wednesday, down for a second session and adding pressure on gas, which since August has shown a stronger correlation with EUA carbon than coal in an increasingly interlinked global energy market, with both coal and gas prices also influenced by trends in Asia.

The Dutch TTF year-ahead gas contract jumped 26% from the start of August to close Monday above Eur26/MWh for the first time sine 2013, Platts data showed, with year-ahead coal into Europe (ARA) up only 12% over the same period, but also at its highest since 2013.

In the gas market, fears of a cold winter in combination with low storage levels and a perception of high carbon prices driving gas demand from the power sector have linked gas prices closer to EUA carbon, which jumped 40% since August 1 alone.

Given the volatility in the markets, it is more difficult to asses the exact impact on power for the coming winter, but purely based on current generation margins, gas-fired power output is unlikely to extend its rebound in Germany this winter, allowing even old coal plants to run.

This is in contrast to expected closures due to economic reasons, with Germany debating how to best phase out coal over coming decades.

Actual power and gas fundamentals for the winter will largely depend on temperatures as well as some uncertainty around French and Belgian nuclear availability.

In terms of plant closures in Germany, over 2 GW of nuclear and lignite capacity will no longer be available this winter, but that comes against the background of continued wind capacity gains and improved French nuclear and hydro availability.

--Andreas Franke, andreas.franke@spglobal.com

--Edited by Annie Siebert, annie.siebert@spglobal.com