Green Day 44: Increased coal-fired power generation in Europe

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The authors are analysts from NH Investment & Securities. They can be contacted at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. — Ed.

In Europe, coal-fired power generation was up 21% year-on-year due to both soaring natural gas prices (following Russia’s invasion of Ukraine) and lower wind power generation.

Coal consumption in Europe is increasing

Between the outbreak of the Russian-Ukrainian war on February 24 and today (May 17), EU member countries have generated around 99.6 TWh (+21% year-on-year) of energy from coal-fired power plants. Gas-fired generation contracted by 5% over one year to 97.3 TWh. Nuclear and wind energy production decreased to 135 TWh (-20% YoY) and 88.5 TWh (-1% YoY), respectively, because: 1) the utilization rate of French nuclear power plants has remained weak since December 2021; and 2) wind conditions in Europe were unfavorable to wind farms in May. We note that the operations of some French nuclear power plants have remained suspended since December 2021 after installation faults were identified.

Although aiming to achieve carbon neutrality, EU member states have increased their coal-fired electricity generation, responding to both rising natural gas prices and maintenance work at nuclear power plants. It is disappointing that economic factors take precedence over the EU principle of reducing dependence on coal-fired electricity. But coal-fired power generation in Europe is likely to remain high for now if: 1) natural gas prices remain high in the region, affected both by Russia’s insistence on paying for gas in rubles and by the imbalance between supply and demand on the LNG market; and 2) normal operations do not resume at nuclear power plants. Meanwhile, Europe’s coal supply setbacks are likely to worsen if the EU bans coal imports from Russia, starting in August.

Wind conditions are a crucial factor in Europe

From May 1 to 17, wind power generation in EU member states fell 28% year-on-year to 12.6 TWh. In response, they increased their gas and coal production by 9% and 27%, respectively. According to Ørsted, when wind power generation utilization rates were low in 2H21 due to weak wind conditions in Europe, natural gas prices jumped in line with the increase in natural gas demand. If this pattern repeats in 2H22, the upward trends in natural gas demand and prices will likely accelerate.

Wholesale electricity prices have stabilized in Europe; it remains to be seen how they will unfold at 2H22

So far in May, Germany’s wholesale power is trading at an average of over US$200/MWh on the European Energy Exchange (EEX). After rising to US$530/MWh following Russia’s invasion of Ukraine, the price has since stabilized. But, as natural gas prices, the main driver of wholesale power prices, are expected to remain elevated in 2H22, a price rebound seems highly likely.


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