Gas-Fired Power Exceeds Coal in U.K. for First Time in a Year

Jun 09, 2014 9:08 am ET

June 9 (Bloomberg) -- Natural gas displaced coal in U.K. power generation for the first time in a year as the pace of the fuel’s price decline makes it more profitable to burn.

Gas-fired power plants generated as much as 10.7 gigawatts at the end of June 7, the most since March 29, 2013, and almost four times the amount from coal-fed stations on the same day, according to National Grid Plc. Front-month gas has dropped 43 percent this year to 38.55 pence ($0.66) a therm, the lowest since August 2010, broker data on Bloomberg show.

The switch to gas comes three years after utilities began shutting or selling the plants as cheaper coal and carbon emission permits made that fuel more profitable to burn. European Union policy makers started the bloc’s emissions- trading system in 2005 to encourage generators to use less coal, which produces twice as much carbon dioxide as gas.

“Gas has continued to fall and that, all of a sudden, means gas is much more competitive and you are now actually operating these plants much more,” Trevor Sikorski, an analyst at Energy Aspects Ltd. in London, said by phone today. “As gas falls, it drags down power prices and those coal spreads start getting squeezed.”

The front-year coal contract for Rotterdam dropped 8.6 percent this year to $79.20 a metric ton, the lowest since September 2009, according to broker data on Bloomberg. U.K. month-ahead power has slumped 21 percent since Dec. 31, cutting the profit for coal-fired plants by 80 percent to 5.66 pounds a megawatt-hour.

Spark Spread

The spark spread, a measure of gas-fed power plant profitability, for next month rose for a second day, climbing 8.5 percent to 3.07 pounds a megawatt-hour, broker data show.

Natural gas slumped after a mild winter left U.K. storage levels at their highest for the time of year since at least 2009. The country’s storage sites were 75 percent full as of yesterday, according to data from Gas Infrastructure Europe, a Brussels-based lobby group.

“There appears to be no floor for gas prices given ample supplies combined with tepid demand due to historically high storage levels,” Nick Campbell, an analyst at consultant Inspired Energy Plc in Kirkham, England, said by e-mail today. “Without any geopolitical shocks or unexpected outages this is likely to continue.”