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Europe: Back to the dark ages

London, 12 April 2013

Coal’s golden renaissance ... While coal use in electricity generation has dwindled in the United States, it has been staging a quiet comeback in Europe. Coal-fired power generation is growing at an annual rate of 5% and 22% in Germany and Spain, while gas-fired generation is falling by 15% and 23% respectively.

In the UK, coal-fired plants accounted for 39% of electricity generation in 2012, a 32% increase on 2011, while gas use declined by the same amount. "As the dispatch of coal plants is more economic in Europe at current coal and CO2 emissions prices, gas lost 5 percentage points of market share in the power sector in 2012. Meanwhile, coal use for power generation is falling at a rate of 12% in the United States," according to the latest research from BofA Merrill Lynch Global Commodity Research.

Germany’s “dirty secret”

"On the surface, this seems completely at odds with publicly stated commitments to cut back greenhouse gas emissions and the boom in renewables like solar and wind," say BofA. In Germany, CO2 emissions in the power sector perversely rose by 0.5% last year because of strong growth in lignite and coal generation, despite a rise in renewables. "The 5 largest CO2 emitters in Germany all happen to be coal-fired power generators and they jointly emitted 13% more in 2012 than in 2011."

Coal is just too cheap to resist

"With European thermal coal and CO2 prices plummeting over the last few months and European natural gas prices holding up, generation spreads continue to incentivise utilities to burn coal, particularly as cheaper coal has been exported from North America due to the shale gas revolution," say BofA.

Year-ahead API2 coal prices just fell to a fresh low this year while EUA Dec 2013 carbon prices fell almost 50% in January and are now trading close to €5/t. Meanwhile natural gas prices have remained strong on cold winter weather, low inventories and a shortage of LNG. Fundamentals remain poor going forward, in their view.

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