Despite relatively flat gas and power prices, the near-term competitiveness of gas as fuel for power generation has been improved in recent weeks by increases in coal prices, an analysis by S&P Global Platts showed.
The 90-day CIF ARA thermal coal increased from $46.40/mt to $48.70/mt between May 6 and 13.
In the same time period, the NBP and UK power front-month contracts remained nearly flat, drifting from 29.30 pence/therm to 29.05 p/th and GBP32.20/MWh to GBP32.60/MWh, respectively.
Despite little change in flat prices, dearer coal has substantially improved gas’ competitiveness as a fuel for power generation.
One proxy for the competitiveness of gas against coal is the Coal Switching Price Indicator (CSPI), which approximates the threshold price for gas below which it is a cheaper input for power generation than coal.
By extension, if the gas price were higher than the CSPI, CCGT generation would be more expensive than coal-fired generation.
The month-ahead CSPI, assuming 45% efficiency, has been on an upward trajectory in May to-date, gaining from 33.84 p/th to 35.06 p/th between May 3 and May 13, clocking 34.61 p/th May 6.
The combination of bullish coal and relatively flat power prices has widened the differential between the NBP month-ahead contract and the CSPI, meaning gas has become better positioned as a fuel for power generation.
The month-ahead differential rose above its quarter-ahead equivalent in the beginning of May as June 16 became the front-month contract, the first time this year to date.
The month-ahead differential has climbed from 5.31 p/th May 6 to 6.01 p/th May 13, while the gain in the quarter-ahead differential has been more modest from 4.47 p/th to 4.92 p/th.
This suggests the improved competitiveness might prove short lived, although much depends on how coal prices develop.
While the CSPI gauges strictly the relationship between coal and gas, the clean spark spread indicates the differential between gas and power prices, an indicator that has also showed signs of strength, albeit not to the same extent as the CSPI.
The month-ahead clean spark spread assuming 45% efficiency has climbed from GBP0.90/MWh May 3 up to GBP1.67/MWh May 13.
UK GAS-FOR-POWER DEMAND UP 56% ON-YEAR
As a result of the increased competitiveness of gas against coal allied to coal-fired plant closures, gas-for-power demand in the UK has increased by more than 50% year on year so far in 2016.
A total of 7.644 Bcm (56 million cu m/d) has been used by UK gas-fired power stations to generate electricity during the January 1-April 16 period this year, 56% higher when compared to the same period in 2015.
Moreover, cumulative gas-for-power demand so far in 2016 stood only marginally below the 7.858 Bcm used during the January 1-April 16, 2011, period, the last time gas in the UK was the dominant fuel.