The UK front-season Clean Dark Spread (CDS) hit a 1.5-year high this week as power prices surged amid bullish oil and gas markets, making UK coal-fired generation increasingly attractive because coal gains have been much more moderate than gas when looking at the elevated energy complex, traders said.
Clean-dark spread for W18 highest in 1.5 years
All available coal plants likely to run: trader
Gas vs coal margins narrow but still favors gas
The CDS for a 35% efficient coal plant including emissions and carbon resembles a theoretical profit margin price and was last seen higher in September 2016, an analysis of S&P Global Platts data showed.
At Tuesday's close, it reached GBP3.47/MWh and has remained above GBP3/MWh since then. Last summer (April 2017-September 2017) the front-season CDS including the emissions and UK's CO2 tax averaged only GBP0.6/MWh.
"For the coming winter, everything [of coal-fired generation] that is still available will run", a trader said.
Coal-fired generation in the UK is just above 10 GW, and the trader pointed to the switching potential.
"I think gas and carbon will remain supported, but not so sure about coal at these levels," he said.
Bullish oil markets have lifted gas contracts sharply in recent weeks, with the UK NBP front-season gas contract jumping from 58.600 pence/therm at the start of May to 65.450 p/th on Wednesday.
The Clean Spark Spread (CSS) for 50% efficiency for the front season including carbon price support stood at GBP5.9/MWh on Wednesday, narrowing the spread to the equivalent CDS to about GBP2.50/MWh. While the CDS is still well below the CCS, the spread hasn't been closer since autumn 2016 than in Week 21.
The last time coal-fired generation in the UK was more profitable than gas-produced power was in autumn 2015, according to these theoretical margins.
Despite EU carbon allowances reaching a seven-year high above Eur16/mt in Week 21, carbon heavy coal-fired generation has a more positive economic outlook for the next winter.
The spreads referred to in this article include EU carbon allowances as well as the carbon floor price of currently at GBP18/mt.
The support mechanism, introduced in April 2013 to add weight to the EU Emissions Trading System, contributed to making coal plants more uneconomical to run over the years, with a fall in profit margins over the past five years.
