By Forrest Crellin
Surging European wholesale gas prices are encouraging more utilities to switch to carbon-heavy coal to generate electricity - just as the continent tries to wean nations off the polluting fuel.
Although
European coal and carbon prices have also jumped in recent months, they have
lagged the spike in gas prices, causing short-term marginal costs to shift in
favour of using coal.
Benchmark
carbon permit prices under the European Union's Emissions Trading System (ETS)
have almost doubled since the start of the year while European coal futures are
more than twice as high.
Wholesale
Dutch gas prices, however, are almost four times higher than at the start of
2021.
Ahead
of the next round of United Nations climate
talks in Scotland in November, the EU has been encouraging other big
polluters to commit to more ambitious climate targets and move away from coal-fired
power.
The
EU's ETS, the main tool for curbing greenhouse gas emissions, charges power
plants and factories for each tonne of carbon dioxide they emit.
Gas-fired
power plants had been cheaper to operate than their coal-burning equivalents
for more than two years due to the added cost of carbon emissions, but that
changed in around July this year.
"While
European coal generation was handcuffed by record carbon prices in the early
parts of the summer, soaring TTF (Dutch gas) prices have now unlocked the
gas-to-coal switching lever," say analysts at Bank of America.
High
gas prices have also prompted a switch to oil in Britain, where coal accounts
for just 2 per cent of the power mix, with the country facing tight electricity
supplies this winter.
In Germany, July's reversal in the difference between the "clean dark" and "clean spark" year-ahead spreads - which measure the value of operating coal-fired and gas-fired plants after accounting for carbon emissions - prompted greater use of brown coal, or lignite. Lignite is a traditionally cheaper fuel source which was being driven out of the market by rising carbon permit prices.
"The
electricity transition is happening but not with the urgency required:
emissions are going in the wrong direction," said climate think-tank Ember's global lead Dave Jones.
In
the third quarter, lignite and hard coal in Germany accounted for 35.1 terawatt
hours (TWh) of electricity generation combined, compared to 28 TWh in the
second quarter and 29.3 TWh in the third quarter of 2020, data from Germany's
ISE Fraunhofer Institute showed.
Looking
at the next couple of quarters, coal and lignite are expected to remain more
convenient in the fuel mix than gas, said Silvia Messa, analyst at energy
consultancy Volue.
Forward
electricity prices in Germany and France have more than doubled since January,
rising with fuel and carbon prices, and prompting talks of intervention in the
market to stabilise prices for consumers.
Some
critics blame the EU ETS for the spike in fuel prices, and are calling for
regulations to curb the effect of the emissions scheme on the energy market.
However,
the current fuel-switch environment should be seen as a short-term flexibility
problem and should not be blamed on the scheme, THEMA analyst Marcus Ferdinand
said. - Euronews
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