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Coal key to German power sector

World Coal,

In its global energy report, Bank of America Merrill Lynch has said coal will prove a vital part of Germany’s energy mix as the country’s power sector looks to rebuild from a firm downward trend.

German power prices have been on a firm downtrend for the past 2 – 3 years, driven by falling coal prices and the fast proliferation of renewable capacity. According to the Merrill Lynch report, 2014 will likely see these weak prices continue in the German market, given declining electricity demand, a negative outlook for coal prices and an expansion in renewable capacity.

However, the report did see a ray of light for German power prices. As the current market structure is “unsustainable, according to the report, yet reform of the oversupplied European carbon markets, endorsing backloading of 900 million EUAs, could bring medium-term recovery to the sector.

The supply overhang will likely be gradually reduced. The combination of slowly rising CO2 prices, combined with a tighter coal-gas spread could put upside pressure on long-dated German power prices in 2016, according to the report.

The report remained cautious on thermal coal prices in 2014, but saw a risk of short-term price spikes on supply disruptions in Colombia. The solution to the oversupplied market is to inflict further pain on producers via lower prices, according to the report, which would force them to curtail output. Newcastle thermal coal prices will likely average US$ 82/t in 2014, the report said.

Coal is backbone of German power

Coal is the most important driver of power prices in Germany, the report said. This is because it is the marginal, or price-setting, source of generation. Well-supplied coal and oversupplied carbon markets continue to favour coal-fired generation instead of gas generation. The margin to generate power in 2014, or clean dark spread (CDS), currently sits at €10.40/MWh, close to the highest point in eight months, as year-ahead coal prices fell by 18% this year and carbon prices plunged. Lignite, which benefits most from low carbon prices as it is the dirtiest source, is effectively running as baseload electricity, similar to nuclear.

Coal is somewhat unlikely uncontested winner of the build-out in renewables, according to the report. Despite solar and wind generation breaking records this year, the share of coal and lignite is set to make up over 45% of total generation . YTD September, the output of coal plants increased by 5% YoY to 252 TWh (annualised), while that of gas plants fell by 18% to just 39 TWh, less than generation from wind turbines and slightly more than that of solar. To fuel the demand for coal, imports have shot up to a record 51 million t, up 6.5% from last year. Coal did not just eat into the market share of gas inside Germany, but also outside as the country boosted exports of coal-generated electricity to neighboring countries that tend to rely more on gas, such as the Netherlands.

An estimated 2.7 and 1.5 GW of coal capacity is scheduled to come online in 2014 and 2015, respectively, some of which was delayed from 2013. For instance, the 1.5 GW coal-fired plant in Hamm as well as the 0.8 GW Vattenfall Moorburg plant in Hamburg are now expected in 2014. These coal plants will replace older less efficient plants, which is negative for power prices, and put gas-fired plants under further margin pressure. Beyond 2015, new coal capacity will not likely be forthcoming. However, given political challenges, the report suggested that Germany may then even lose coal generation capacity as older plants retire.

Edited by Sam Dodson

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