FEATURE: German coal margins turn lucrative as outlook for thermal generation improves

German margins for coal-fired power generation became profitable in the last quarter of 2024 in a rare move as expensive gas spurred fuel switching.

The trend for lower gas for power is likely to persist in 2025 with Germany and Italy expecting demand to average 4.4 GW and 9.3 GW, according to the latest forecast from S&P Global Commodity Insights.

German's coal burn during the first half of 2025 is forecast to be about a fifth higher year on year, according to analyst estimates.

"We expect coal output to marginally increase (in H1 2025), weighted to the Netherlands where its higher efficiency fleet is expected to benefit from a more competitive position in the European thermal stack," said Daniel Muir, senior power and renewables analyst at Commodity Insights.

"As we move through to Q2 25, however, we again start to see the pace of solar capacity buildout come into force, pressuring gas output in particular, where production will be further squeezed to the peak morning and evening hours," Muir added.

Clean dark spreads rise

Platts, part of Commodity Insights, assessed German front-month clean dark spreads for 45%-efficient plants at Eur13.83/MWh average in October-December, compared with a 2024 average of minus Eur10.76/MWh.

Equivalent gas contract in the 'THE' market averaged close to Eur44/MWh over the same period, more than a quarter higher than the yearly average, offering support to the power curve.

Month-ahead coal margins exceeded Eur25/MWh during the Christmas period in late December. Margins for gas, despite remaining negative during that period at minus 2.36/MWh, were at the highest in the entire fourth quarter.

German THE gas prices climbed shortly after, surpassing Eur50/MWh at the start of the year, as the Russia-Ukraine long-term gas transit deal finally expired.

Muir said wind displaced temperatures as the fundamental driver for gas dispatch at the start of this winter.

"Downward deviations versus year earlier levels, particularly in November which across NWE saw y-o-y output fall 10 GW, presented space for additional gas run that could not be filled by more competitive sources, including coal which has seen capacity across Europe slashed in the past year, particularly following 7.5 GW of market exits in Germany," Muir said.

Boost for carbon

European traders are expecting a further rise in gas-to-coal gas switching boosting thermal power generation, spurred by the halting of Russian gas transiting through Ukraine.

This is expected to lift demand for European carbon prices with EU Allowances trading well above Eur75/mtCO2e by the first half of January.

Platts, part of S&P Global Commodity Insights, assessed EU Allowance contracts for December delivery at Eur76.87/mtCO2e on Jan. 14, the highest in just over a year.

Commodity Insights analysts expect prices to average Eur77.5/mtCO2e in the first quarter of 2025 driven by seasonal demand and potential shifts in energy dynamics.

"EUAs need to rise substantially to push it out the stack," a UK-based trader said.

Russia's halting gas transit via Ukraine starting Jan. 1 will "lead to a switch from gas to coal in Germany and Italy, thereby increasing the demand for EUAs as coal-fired power generation becomes more prevalent," Commodity Insights analysts said in a recent note.