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煤炭

Analysis: Bullish UK NBP gas prices make coal-fired power more economical

煤炭

Platts Global Coal Alert

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天然气

GECF:天然气在减缓气候变化方面“不可或缺”

Analysis: Bullish UK NBP gas prices make coal-fired power more economical

London — Bullish NBP spot and winter contract gas prices have focused the power market's attention on the UK's coal-fired power plants, which have recently become more economical to run in the summer as well as in the winter.

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The gap between prompt NBP gas and the coal switching channel indicates that, if and when needed, thermal generation is going to be predominantly coal-fired this winter, with higher gas prices opening the way for increased coal-fired generation, despite a strong hike in carbon prices.

Data from S&P Global Platts show 35% efficient coal-fired plants are competing with 45% gas-fired plants. The UK month-ahead coal-switching price for 45% efficiency was 68.43 pence/therm on Monday, slightly lower than the NBP day-ahead contract assessment of 69.70 p/th. However, UK month-ahead CSP for 50% efficiency was 78.19 p/th. Platts CSPI is the theoretical threshold at which gas is more competitive than coal in power generation. When the gas price is higher than the CSPI, CCGTs are more expensive to run than coal-fired plants. "Despite the gains in carbon over recent months, coal generation has been supported this week by particular strength in the gas market," according to S&P Global Platts Analytics. "We forecast gas to lose ground this winter too, with the Q1-19 Clean Dark Spread above the Clean Spark Spread. As a result we expect coal generation to be stable year-on-year this winter, despite the closure of 2GW of capacity, while gas generation is forecast to fall more than 3 GW vs Winter-17."

According to Platts data, the profit margin for a 35% efficient coal-fired plant in Q1 2019 was GBP5.43/MWh on Monday, up from GBP4.63/MWh on Friday last week. The dark spread is the profitability of power produced at a 35% efficient coal-fired power plant, after taking into account the cost of coal and emissions.

The Q1 2019 spark spread -- the gross margin of power produced at a 50% efficient gas-fired power plant after accounting for the cost of gas, CPS, and emissions -- was nearly flat day-on-day at GBP5.71/MWh.

Data from collected from National Grid show that coal-fired power generation from September 1-4 has been around 67.91 GWh so far. This has been a sharp rise compared with August 1-4 coal-fired output of 12.54 GWh, with no coal production at all on August 1 and on August 4. Overall, August had almost six days without coal, whereas there is a much lower chance of zero daily coal output in September as the profit margins for month-ahead and season-ahead contracts continue to rise amid bullish gas prices.

According to the grid operator, coal-fired output picked up from around 1 GW during the early hours of Monday to above 2 GW by around 2 pm BST.

Between 1 pm and 1:30 pm BST Tuesday, coal-fired output stood at 2.4 GW, or 7.3% of the total generation mix, while gas-fired output remained the dominant fuel of the mix at 17.5 GW or 53.1% of total supply, data from the grid operator show. Bullish NBP gas squeezes spark spread

The bullish momentum shown by the NBP in recent weeks has been driven by a number of factors.

In terms of gas fundamentals, the expiry of long-term interconnector transportation contracts at the end of September, as well as declining domestic production and a bullish fuels complex, have pushed up the price of gas for this forthcoming winter, with both Q4 18 -- of which front-month October is a component -- and the Q1 19 contract climbing 44% and 37% since April, respectively.

The absence of long-term storage in the UK following the closure of Rough, coupled with the option for storing gas in continental Europe greatly diminished with higher transportation costs in both directions, has meant the UK's import dependency has suddenly come into focus.

In order to source gas for the winter, buyers have increasingly been looking to European hubs in order to hedge positions, and consequently are at the mercy of European prices. Transportation costs are also being passed on to buyers, for those buying in the UK from those supplying at the interconnector.

In the first instance, rising oil prices were behind the initial increases for NBP winter. In the most recent spree of buying since the beginning of August, prices have been much more sensitive to spot markets, both in the UK and Europe, and a combination of bullish coal and carbon, which have raised the floor for European prices and lifted the NBP with it.

This is somewhat paradoxical given that rises in coal and carbon have contributed to the NBP increasing above the price of coal switching, and many participants are content to point to lower liquidity and short covering in a seller's market as fundamental drivers of the NBP rather than the influence of continental hubs.

However, spot market ramifications cannot be understated. Going into Q3, the NBP was driven upwards by unexpectedly higher levels of CCGT demand during the prolonged heatwave in the UK. Amid comfortable system conditions, the market still appeared short as prices continued to rise due to buying activity. The spot market has also added value to the front winter as the fundamentals for power generation were reassessed by the market.

The coal switching price was surpassed during the so-called "Beast from the East" weather system in March, when the gas system came under considerable strain and pushed gas prices up to such an extent that coal was more profitable. With this threshold already having been reached in September, the outlook for coal looks favorable should the capacity and flexibility exist for this type of generation. --Shubhlakshmi Shukla, shubhlakshmi.shukla@spglobal.com

--Neil Hunter, neil.hunter@spglobal.com

--Edited by James Leech, james.leech@spglobal.com