Coal use set to drop in Europe's power mix as weather moderates

9th June 2023 By: Bloomberg

Europe is on track for limited power demand in June on the back of favorable weather trends, reducing the need for the region to burn coal in generation.

Mediterranean countries are expected to see cooler weather than usual, possibly reducing air-conditioning needs and making it an “easy June” for the market, BloombergNEF analyst Andreas Gandolfo wrote in a note on Monday. Regions that are set for higher temperatures, like Germany, don’t typically see electricity demand respond as much to heat as in the Mediterranean.

Lower demand across the region could boost the role of renewables in meeting power needs, and reduce reliance on more expensive fuels like coal. Germany is already burning the dirty fuel at about half the seasonal average level for this time of year. In May, solar panels produced more power than coal in Europe for the first month ever.

A drop in demand along with higher generation low-carbon sources in some areas is helping to “narrow the space for fossil fuel generation” in Europe’s power markets, said Sabrina Kernbichler, an analyst at S&P Global Commodity Insights. The trend will initially help to reduce power prices in June, she said.

The power market is already heavily responsive to weather, and is expected to become even more so as the share of intermittent generation from renewables rises and more contracts are traded in short-term periods.

Sunny and windy weather could also further reduce gas demand in Europe, where its price is already lingering just above €20 per megawatt-hour. Based on spot prices, it’s unprofitable to produce power with gas or coal right now in Germany, Europe’s largest power market.

More broadly, European power prices rose on Monday, driven by a jump in gas prices triggered by Saudi Arabia’s pledge of additional crude-output cuts. German power for next month rose 9% to €81.80 by 12:38 a.m. in Frankfurt, still below half its level this time last year.