German Coal-Plant Profit Jumps as Hot Weather Boosts Demand

(Bloomberg) -- German coal-plant profitability is staging a rare revival after slumping during the peak of the pandemic.

As carbon-emission permits prices climbed more than 8% in the past week, the cost of coal for delivery to northwest Europe next year rose 4%, boosting the attractiveness of burning the dirtiest fossil fuel.

The dark spread in the day-ahead market -- the price of electricity, minus the cost of coal and carbon permits with an adjustment for generator efficiency -- rose above zero this month after being negative for most of the year.

Prices for day-ahead German power are more than double the 10-year average for the time of year as unusually high temperatures boost electricity use for cooling. Utilities have responded, with generation from coal and lignite above the seasonal norm for the first time since at least 2015.

“Hot weather across Europe at the moment has all available gas and coal plants running at full capacity to meet the power demand from air conditioning,” analysts at Swedish utility Bixia AB wrote in a note.

Year-ahead coal prices have almost halved since 2018 when the fuel hit $100 a ton, and could plunge to $45 by next year, according to Capital Economics Ltd. Coal futures for 2021 were trading at $58.85 a ton on ICE Futures Europe Thursday.

Coal’s attractiveness may be short lived. A sustained carbon rally will increase the penalties for burning fossil fuels and temper gains from running coal plants.

“Clearly, coal generation was hardly profitable mid-year but rising prices are persuasive reasons for plant owners to resume operations -- for how long it’s hard to say,” said Bruno Burger at Fraunhofer ISA.

Carbon prices have jumped amid European Union proposals to accelerate the reduction in greenhouse gas emissions by 2030. The pollution certificates are on course to reach an all-time high of 31 euros ($37) per ton, analysts at Commerzbank AG said. Carbon traded at 29.26 euros on Thursday.

©2020 Bloomberg L.P.