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Argus Media: Fuel-switching and COVID crush European 2020 coal burn

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World Coal,

Weak overall power demand, strong competition from natural gas and rising renewable generation weighed heavily on European coal-fired generation in 2020, reports Argus Media. The long-term decline in coal use may slow or pause in 2021 as economies recover from COVID-19, although demand remains highly contingent on the rate of power demand and renewables growth, the extent of any recovery in nuclear generation and coal-gas fuel switching economics.

Annual coal-fired power generation in Germany, Poland, Spain, France and the UK was on course to fall by a quarter on the year to around 117.5 TWh – an average of 13.4 GW – in 2020, grid operator data shows.

Coal burn in the Netherlands looks set to have fallen by at least another 7 TWh in 2020, Argus estimates show, although the latest data only covers January-September. This would bring the combined y/y drop in coal burn across the six European countries to 34.8 TWh or 33% in 2020, to less than 130 TWh in total. This is the equivalent of 11.9 million t less NAR 6000 kcal/kg coal burnt in 42%-efficient plants.

Germany, Poland, Spain, France, the Netherlands and the UK together imported 64.1 million t of thermal coal in 2019, which was 72.8% of the EU-27 and UK total. The same six countries imported 30.1 million t in January-October 2020, which was 23.8 million t or 44% lower on the year and accounted for 72.3% of the European total.

The relatively steep decline in imports to Europe this year vs coal-fired generation implies a large stock draw across the continent, creating some supply tightness ahead of the winter and contributing to the recent rally in prices. Port stocks in the Amsterdam-Rotterdam-Antwerp region hit a 32-month low week beginning 21 December 2020 and were down by more than 2 million t since the start of the year.

Combined power generation across the six countries fell by 6% on the year in 2020, driven largely by the impact of COVID-19 on electricity demand. Fossil fuels – as the source of flexible, marginal generation – bore the brunt of the decline, although weaker nuclear generation amid pandemic-related disruption to the French fleet also absorbed a significant proportion of the lost demand.

In the fossil fuel mix, coal was hit particularly hard as plunging gas prices pushed the solid fuel back in the merit order. Argus estimates that 46%-efficient German coal-fired plants were competitive against only 9% of the country's gas-fired fleet in 2020, based on average spot coal, gas, power and carbon prices, down from 17% in 2019. Day-ahead clean dark spreads for 46%-efficient plants fell by 63% on the year to an average of €2.33/MWh in 2020, while clean spark spreads for 55%-efficient gas-fired units rose by 16% to €8.19/MWh.

Coal's share of total generation from fossil fuels in the six countries analysed fell by three percentage points to 22% in 2020, while gas' share rose by four points to 56% and the share of other fuels – mostly lignite – fell by one point to 22%.

Argus estimates that coal's displacement by gas in 2020 accounted for 19.5 TWh of the 34.8 TWh drop in coal burn, while the combined effect of weaker power demand, partly offset by lower nuclear generation, accounted for a further 8.2 TWh of the decline.

Wind and solar generation across the six countries rose by a combined 29.5 TWh in 2020 and accounted for around 6.6 TWh of the drop in coal-fired generation, Argus analysis shows. The remaining 4.7 TWh drop in coal burn was driven by stronger hydro generation and greater output from other renewable and non-nuclear, non-fossil fuel sources.

Limited potential for 2021 coal recovery

European coal burn will remain at the mercy of the same drivers next year, with any hopes of a recovery likely to depend on growth trends in power demand and nuclear generation.

The IEA said in a report in December that European electricity demand is expected to recover by 2.3% in 2021, but will still be down by 2% compared with 2019 levels.

An increase of 2.3%/y in total generation in Germany, Poland, Spain, France, the Netherlands and the UK would have only a modest impact on coal burn, Argus analysis shows, given the likely continued growth in renewable generation and recovery in nuclear output.

Aggregate coal-fired generation would climb by around 0.9% in 2021, based on a scenario in which overall power generation rises by 2.3%, nuclear output climbs by 1.6%, generation from renewables and other sources grows at a 4% rate, and coal's share of the fossil fuel mix remains unchanged at 22%.

This outlook assumes that French nuclear generation recovers to 330 TWh in 2021 – the lower end of operator EdF's 330-360 TWh guidance issued in July 2020 – from around 322 TWh in 2020, and that nuclear output remains flat on the year in other markets.

The outlook for French nuclear generation remains uncertain, as EdF suggested in July that it may have to lower its 2021 guidance because of uncertainties about maintenance and COVID-19. A downward revision would create some upside potential for coal burn in 2021, but EdF has not yet updated its outlook.

A weaker price incentive to run natural gas ahead of coal for power could also offer some support to coal demand at times in 2021. Argus estimates that annual NAR 6000 kcal/kg-equivalent coal burn would, in the scenario described above, rise by an additional 2 million t for every percentage point increase in share of the 2021 fossil fuel mix it records.

Throughout 2020, physical spot coal prices were on average €2.70/MWh – $23/t – higher than the ceiling price beyond which 46%-efficient coal-fired plants become uncompetitive with 55%-efficient gas-fired plants. The API 2 year-ahead has been at parity, on average, with the equivalent fuel-switch during 4Q20.

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