Is the coal-cheaper-than-gas paradigm coming to an end? Based on 2016 and 2017 Italian market results coal increasing prices came along with a substantial decrease of coal generation.
The burning of fossil fuels is deemed to be by scientific consensus as one of the human activities that plays a major role in global warming, which is projected to have harmful effects on the environment and humans during this century. Furthermore the burning of fossil fuels is one of the main causes of pollution, especially air pollution.
CO2 and Coal
Among fossil fuels coal is by far the highest emitter of carbon dioxide (CO2), which mostly comes from the natural carbon cycle, but human activities such as burning fossils fuels and deforestation add CO2 to the atmosphere altering the carbon cycle and impacting its role in determining the average atmosphere’s temperature.
In Italy coal is mostly used for electricity generation in thermal power plants (80.8% in 2015), with the remaining quota used in coke facilities for industrial processes (11.6%) and in some other industrial sites (7.7%).
Coal in the Italian electricity generation mix
Considering the Italian power sector, the data reported in Table 1 shows the 2015 underuse of natural gas power stations compared to coal power stations stemming from the average load factors. Most of Italian natural gas power plants are based on Combined Cycle Gas Turbine (CCGT) technology, which are built to have average load factors ranging from 70% to 80% that means around 6500 working hours per year. Considering that natural gas is the fossil fuel with the lowest CO2 emissions, a higher exploitation of CCGTs generation capacity at the expense of coal power plants generation would, ceteris paribus, reduce the CO2 emissions of the power sector.
This is not happening mainly because coal is cheaper than natural gas in terms of standard variable costs, since the traditional fuels cost structure is not reflective of the costs of the externalities created by their production and use, such as the CO2 emissions – with the EU Emissions Trading System being not yet able to provide a price signal to drive low carbon investments. Furthermore there still isn’t a strict enough regulation about the possible alternative fuel use in electricity generation.
Switching signals in Europe…
During 2016 and the first part of 2017 coal prices surged, starting to, a least partially, overcome the above mentioned regulatory and pricing shortcomings, and the possible displacement of coal plants by gas plants has become one of the most discussed and analysed trends in European energy markets.
In the UK the fuel price trends helped the national carbon price floor (CPF) to support and speed up coal plants phase out, and Friday 21 April 2017 was UK’s first ever working day without coal power since the Industrial Revolution. These results show that setting a CPF, especially in case of favourable fuels price trends, would play an active role in leading the way to the energy transition.
UK’s CPF currently stands at £18 per tonne of CO2 and is frozen at that level until 2020, and recent data shows that UK coal generation fell below wind output in 2016.
At European level in 2016 coal generation fell by 94 TWh and gas generation increased by 101 TWh, so that EU power sector emissions fell by 4.5% (48 Mt less CO2 emitted). UK alone made up the lion’s share of this huge coal generation reduction but also Italy, Netherlands, Germany and Greece saw some switching from coal to gas.
…What’s happening in Italy?
What stems from those coal price trends is that even in the absence of a proper carbon price floor, market drivers can results in a displacement of coal plant by gas plant. This is what seems to have actually happened in Italy, where the 2016 strong decrease of coal electricity generation compared to 2015 came along with a sharp increase of coal prices.
Based on market results the 2016 Italian coal generation was 7.7 TWh lower than 2015 (-18.8 %), notwithstanding a decrease of CO2 ETS prices from more than 7 €/tCO2 2015 average to roughly 5 €/tCO2 in 2016, while the average yearly reference coal price raised from 56.5 $/mt to 59.7 $/mt.
As shown in Figure 1, the major increases in coal prices happened during the second half of 2016, and they remained high for the first five months of 2017, similarly to the natural gas reference prices (PSV “Punto di Scambio Virtuale” – Virtual Trading Point), and in the same months Day Ahead Market prices (PUN “Prezzo Unico Nazionale” – National Single Price) increased too, driven by natural gas growing prices and by the France’s nuclear plants 2016/2017 winter outages.
Figure 2 shows a more interesting result of such price trends: natural gas variable power generation costs compared to coal power generation costs, based on the following assumptions:
- Only the raw material prices were considered (no further logistics to the power plant)
- CO2 ETS prices/cost are included
- Natural gas plant (CCGT) power generation efficiency equal to 55%
- Coal plant power generation efficiency equal to 35%
Starting from the end of 2015 the electricity generation cost gap between coal and natural gas substantially declined, thanks to increasing coal prices and decreasing natural gas prices (natural gas then rump up during winter season), and they remained very close during the first part of 2017.
If the coal-gas cost gap will remain very low (or negative!) for long we should expect to have further reductions of coal electricity generation all-around Europe. Despite the absence of proper and direct policy measures, the global fossil fuels market trends are challenging the paradigm of coal generation cheaper than gas generation, paving the way to a decline of coal generation.