Is gas-fired power back in the money?

• Ultra-expensive gas rendered gas-fired power unprofitable for much of 2022

• Recent falls in wholesale gas prices briefly reversed that situation

• Gas plant profitability could easily flip negative again, temporarily benefitting coal

• Economics still favour switching from coal to wind or solar PV plus battery storage

• Marginalising gas in Europe would alleviate pressure on Asian economies and reduce coal burn

Europe’s fleet of gas-fired power generators were among the big losers from volatile wartime gas prices in 2022. Soaring fuel costs pushed gas power plants into the red. To avoid incurring losses, EU gas power plants pared back production by 16 TWh (2%) in 2022 compared to the three-year average. Coal picked up the slack, with gas-to-coal fuel switching making the headlines in several western European power markets.

After a wild ride, last year ended with a major correction that brought the EU benchmark gas price back below the level it was trading at prior to Russia’s invasion of Ukraine. This improved the economics of gas-fired power, but not enough to prompt widespread fuel switching from coal back to gas.

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The European Union’s policy to refill gas stocks to 80% before this winter proved to be highly successful. A combination of brimming EU gas stocks, a flood of liquefied natural gas (LNG) imports and the onset of abnormally warm winter weather triggered a precipitous decline in the price of gas trading on the Title Transfer Facility (TTF), the Dutch gas trading hub.

Europe’s sudden switch from gas undersupply to gas glut drove wild price swings on TTF. The front-month contract cratered from its mid-summer peak of almost €250 per MWh in August to less than €60/MWh in the first weeks of 2023. Since gas is the price-setter for power generation across much of Europe, power prices declined sharply in some key EU markets, recasting the economics of coal- and gas-fired power.

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