Power and Natural Gas Roil Energy Shift: What to Know at E-World

(Bloomberg) -- Electricity and natural gas traders arrive in Essen, Germany, this week for the annual E-World conference, one of the industry’s biggest gatherings in Europe this year.

With power and natural gas prices tumbling, attention is focused on how quickly German Chancellor Angela Merkel will move to squeeze coal out of the energy market. Here’s a few themes traders will be discussing:

Power’s Rapid Decline

After last year’s warmer than usual winter, gas storage sites were brimming at the start of the heating season. And temperatures for the most part have remained above normal.

That has shaved down demand for gas at a time of abundant supplies both from pipeline and in cargoes of liquefied natural gas. The result: gas prices are tumbling and dragging power down across Europe.

“The driver for the low power prices at the moment is a unsustainably low gas price,” said Alexander Esser, a power markets analyst at Aurora Energy Research in Berlin. “That’s pushing more power supply to switch to gas from coal.”

Energy Transition

While cheaper power is a relief to consumers, it complicates the picture for utilities already struggling to cope with governments demanding they slash greenhouse gas pollution.

German Chancellor Angela Merkel is seeking to phase out nuclear as a power generation fuel by 2022 coal by 2038. European Union policy makers are working toward a goal of zeroing out fossil fuel emissions by 2050, and that suggests gas will need to come off the grid next.

Yet there’s a question where electricity will come from once coal disappears. In Germany, nuclear and coal provide more than a third of the grid’s needs. By 2022, about 23 gigawatts of coal and nuclear plants amounting to 11% supply come offline.

Gas has a strong champion in the government and Deputy Economy and Energy Minister Andreas Feicht. He may touch on its future role in opening comments to the conference.

Gas-fired generation rose by about 20% in Germany last year to contribute over 10% of its power needs. The nation also is building LNG import facilities and encouraging the Nord Stream 2 pipeline project, which will increase gas supplies from Russia.

“Germany is locking in gas commitments,” said Toby Couture, director at E3 Analytics, a renewable energy consultancy based in Berlin. “It’s going to make reaching it’s own climate targets much more challenging.”

Sparks and Darks

Shifting markets have tilted the economics of the power market away from coal and toward gas. Dark spreads representing the profit generators make by burning coal have plunged in Germany, while spark spreads for gas plants widened.

Utilities like Uniper SE and Vattenfall AB’s German unit are switching coal plants to gas to meet power demand. There are 10 new gas plants at various stages of completion in the country, according to the BDEW utilities lobby.

Even with fewer coal plants, Germany is unlikely to reach its target for 65% of power to come from clean energy by 2030, a government forecasting unit said this month.

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net, Jonathan Tirone

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