Germany has already begun its coal-exit plans, which started by closing down 4.8 GWs of hard coal by 31.12.2020. The aim is to close all coal-fired units in Germany by 2038, helping to reduce CO2 emissions and fulfill wider EU decarbonisation targets.
Whilst fuel prices have increased strongly across the board since the start of Q2-21, the Short Run Marginal Costs (SRMC) for gas-fired plants have increased significantly more than for coal-fired plants.
As a result, coal-fired production has become significantly more profitable than gas-fired production during Q3-21. This situation is a stark contrast to last year, when gas-prices were very low and gas-fired plants were therefore more profitable than the coal-fired plants.
This blog will take a look at the situation from Sep-Oct this year compared to Sep-Oct 2020 as a short reminder of the strong and unexpected changes we have seen in the fossil fuel sector in Germany over the last year.
Key findings
The more profitable hard coal plants in Germany have for Sept-Oct increased production by about 43% (3.7 TWh) compared to the same period last year.
By comparison, Gas-fired production fell by about 29% in the same period (-2.8 TWh).
Coal production would have been another 36% higher (+additional 4.5 TWh) had the closures of 31.12.2020 not taken place. In real terms, this means accounts for emission savings of around 25% that would otherwise have been produced by hard coal plants.
Price curves for fuels, SRMC's and FWD month ahead since Sept-2020
In general, the SRMCs for hard coal and gas-fired plants were more or less equal from Q3-20 until start of Q3-21. During this period, the German Power Month Ahead was traded close to these equal SRMCs. Then, during Q3-21, the gas price soared across Europe due to low levels of supply, and the SRMCs for gas came out much stronger than SRMCs for hard coal. Due to limited hard coal capacity, both Forward Power and spot prices followed the gas SRMC, as shown in the chart below.
In the table below we show the average numbers for Sept-Oct 2021 vs Sep-Oct 2020.
This shows that the natural gas SRMC has increased by about 500%, whilst the Forward Power Month Ahead has increased around 400%.
This shift to more expensive coal fired production is obviously in the wrong CO2 emission target direction, but the 4.8 GW closures of hardcoal-capacity from 31.12.20 have to some extent contributed to reduced coal-fired production and reduced emissions.
Power balance and production Sep-Oct 2021 vs 2020
In the table below you find a comparison between the accumulated power balance for Sep-Oct 2021 vs the same period in 2020. Due to the fuel price development, we see increased levels of hard coal production for 2021 (replacing the contribution of natural gas) compared to 2020. For those two periods, we see nearly no changes in consumption, total production and net exchange via interconnectors.
Clearly, this reverse fuel switching situation has come about due to extreme gas prices. To further show the increase in coal usage, we have compared the REMIT availability and actual production numbers for these two periods:
The percentage change in utilization tells us that the relative use of the hard coal fleet has nearly doubled from 2020 to 2021 (42% vs 76%). If we assume that the availability of the 4800 MW closures from 31.12.20 would have been about 75% (careful estimate) then the average production would have been about 3400 MW/4.5 TWh higher. This estimation is a bit simplified, but indicates that the hard coal production during Sept-Oct 2021 would have been 4.5 TWh/12.2 TWh = 36% higher without the closures of 31.12.20.
Final Words
We have in this blog focused on the reverse fuel switching phenomenon caused by extreme gas prices since the start of Q3-21. By checking the numbers for fossil fuel production in this situation, we have also explained the strong impact of the coal closures. EQ will continue to follow the further steps of the coal phase-out by focusing on the German capacity balance for the situation after 31.12.2021, when the next coal-exit step will take place.
