# European gas price surge prompts switch to coal
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-10-12
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Europe's Rising Gas Prices Fuel Switch to Coal: Impact
Meta Description: As European gas prices rise, utilities turn to coal for electricity generation. Carbon prices spike but coal remains cost-effective option.
URL: https://financedigest.com/european-gas-price-surge-prompts-switch-to-coalhtml

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By Forrest Crellin

PARIS (Reuters) – Soaring European wholesale gas prices are encouraging more utilities to switch to carbon-heavy coal to generate electricity just as the region tries to wean nations off the polluting fuel.

Although European coal and carbon prices have also jumped in recent months, they have lagged the spike in gas prices, causing short-term marginal costs to shift in favour of using coal to generate electricity.

Benchmark carbon permit prices under the [European Union’s](https://www.financedigest.com/explainer-why-malaysia-is-considering-a-ban-on-palm-oil-exports-to-the-european-union.html "Explainer-Why Malaysia is considering a ban on palm oil exports to the European Union") Emissions Trading System (ETS) have almost doubled since the start of the year while European coal futures are more than twice as high. Wholesale [Dutch gas](https://www.financedigest.com/shocked-by-gas-bills-thrifty-dutch-stockpile-coal-wood-for-winter.html "Shocked by gas bills, thrifty Dutch stockpile coal, wood for winter") prices, however, are almost four times higher than at the start of 2021.

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/gas-co2-and-coal-rebased-to-the-start-of-the-year-1736837584740-compressed.jpg)

Graphic: Gas, CO2 and Coal rebased to the start of the year, showing percentage gains: https://fingfx.thomsonreuters.com/gfx/mkt/egpbkmyoovq/Gas%20CO2%20and%20coal%20rebased%20to%20the%20start%20of%20the%20year.jpeg

Ahead of the next round of United Nations climate talks in Scotland in November, the EU has been encouraging other [big polluters to commit to more ambitious climate](https://www.financedigest.com/eu-to-urge-big-polluters-to-toughen-climate-pledges-by-cop27-summit-draft.html "EU to urge big polluters to toughen climate pledges by COP27 summit – draft") targets and move away from coal-fired power.

The EU’s ETS, the main tool for curbing greenhouse gas emissions, charges [power plants](https://www.financedigest.com/edpr-brings-iberias-first-wind-solar-power-plant-on-stream.html "EDPR brings Iberia’s first wind-solar power plant on-stream") and factories for each tonne of carbon dioxide they emit.

Gas-fired [power plants](https://www.financedigest.com/germanys-uniper-to-restart-coal-fired-power-plant-as-gazprom-halts-supply-to-europe.html "Germany’s Uniper to restart coal-fired power plant as Gazprom halts supply to Europe") had been cheaper to operate than their coal-burning equivalents for more than two years due to the added cost of carbon emissions, but that changed in around July this year.

While European coal generation was handcuffed by record carbon prices in the early parts of the summer, soaring TTF (Dutch gas) prices have now unlocked the gas-to-coal [switching lever,” said analysts at Bank](https://www.financedigest.com/new-legislation-makes-switching-bank-accounts-simples.html "New legislation makes switching bank accounts “simples”") of America.

High gas prices have also prompted a switch to oil in Britain, where coal accounts for just 2% of the power mix, with the country facing [tight electricity supplies this winter](https://www.financedigest.com/ceraweek-europe-gas-supplies-to-stay-tight-2-more-winters-equinor-ceo-says.html "CERAWEEK-Europe gas supplies to stay tight 2 more winters, Equinor CEO says").

In Germany, July’s reversal in the difference between the “clean dark” and “clean spark” year-ahead spreads – which measure the value of operating coal-fired and gas-fired plants after accounting for carbon [emissions – prompted greater use of brown coal](https://www.financedigest.com/citi-pledges-to-cut-emissions-for-more-sectors-including-coal.html "Citi pledges to cut emissions for more sectors including coal"), or lignite, a traditionally cheaper fuel source which was being driven out of the market by rising carbon permit prices.

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/clean-dark-spark-spread-with-gas-1736837584734-compressed.jpg)

Graphic: Clean-dark and clean-spark [spreads diverge as gas rises:](https://www.financedigest.com/interest-in-spread-betting-on-the-rise.html "Interest in spread betting on the rise") https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkekblpx/Clean%20dark-spark%20spread%20with%20gas.jpeg

The electricity transition is happening but not with the urgency required: emissions are going in the wrong direction,” said climate thinktank Ember’s [global lead](https://www.financedigest.com/generic-oncology-drugs-market-2021-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Generic Oncology Drugs Market 2021 Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027") Dave Jones.

In the [third quarter](https://www.financedigest.com/greek-residential-property-price-recovery-picks-up-in-third-quarter.html "Greek residential property price recovery picks up in third quarter"), lignite and hard coal in Germany accounted for 35.1 terawatt hours (TWh) of electricity generation combined, compared to 28 TWh in the second quarter and 29.3 TWh in the third quarter of 2020, data from Germany’s ISE Fraunhofer Institute showed.

Looking at the next couple of quarters, coal and lignite are expected to remain more convenient in the fuel mix than gas, said Silvia Messa, analyst at energy consultancy Volue.

Forward electricity [prices in Germany and France have more than doubled since January](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC"), rising with fuel and carbon prices, and prompting talks of intervention in the market to stabilise prices for consumers.

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/defrco2-1736837584700-compressed.jpg)

Graphic: French and [German year-ahead prices](https://www.financedigest.com/german-gas-commission-agrees-proposals-to-ease-impact-of-soaring-prices.html "German gas commission agrees proposals to ease impact of soaring prices") in 2021: https://fingfx.thomsonreuters.com/gfx/mkt/mopanjnggva/DEFRCO2.jpeg

Some critics blame the EU ETS for the spike in fuel prices, and are [calling for regulations](https://www.financedigest.com/german-regulator-calls-on-allianz-to-improve-controls-source.html "German regulator calls on Allianz to improve controls – source") to curb the effect of the emissions scheme on the energy market.

However, the current fuel-switch environment should be seen as a short-term flexibility problem and should not be blamed on the scheme, THEMA analyst Marcus Ferdinand said.

(Reporting by Forrest Crellin; editing by Nina Chestney and Kirsten Donovan)


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