September 17, 2012 / 12:11 PM / 5 years ago

Europe's coal power plants gain from rising euro

* Euro up 5 pct against dollar in past 10 days

* Stronger euro benefits coal-fired power generation

* API2 2013 coal futures drop below $100/mt

* Gas market remains tight

By Henning Gloystein

LONDON, Sept 17 (Reuters) - European utilities burning coal for power generation will gain profitibilty thanks to a euro gaining against the dollar since a court rule allowed the European Central Bank to buy up bonds of troubled euro zone members.

A higher euro increases the purchasing power of European utilities that buy coal in the dollar-traded coal market to produce electricity that is sold domestically in euros.

Europe’s common currency has risen almost 5 percent since the German supreme court allowed the government to ratify a policy that will allow the European Central Bank to buy up government bonds of troubled euro zone members.

“Coal has already been the fuel of choice for utilities that can switch between coal and gas, because there is a coal oversupply while gas is a bit tight,” one utility trader said. “The rising euro will only strengthen that trend.”

Power generation profits from coal-fired facilities that sell their electricity for baseload supply (24 hours) in 2013 are at 11.3 euros per megawatt-hour (MWh), while the equivalent gas margin is at minus 9.3 euros a MWh.

This means that that gas-fired power generation in Germany is only profitable at high-priced peak demand hours (0800 to 2000 local time), and that coal power plants are over 20 euros per MWh more profitable than German gas units.

The impact foreign exchange rates have on coal margins is big.

Taking current market prices for power, coal and carbon under Europe’s emmisiosn trading scheme, coal profit margins vary by 23 euros per megawatt-hour (MWh) between the euros’s historic high and low against the dollar.

At its historic high around $1.60 against the greenback, German power plants would sell electricity delivered in 2013 at a profit of 16.25 euros a MWh, while at its low of $0.83 they would make a loss of 6.97 euros per MWh.

This means that even at its historic low, German coal-fired electriciity generation would still be slightly more profitable than gas, albeit at loss making levels for both fuels.

In their latest poll, analysts polled by Reuters said that they saw the the euro average around $1.22 during the next 12 months, with an upside to $1.40 and a downside to $1.20, depending on developments.

OVERSUPPLIED COAL MARKET

The stronger euro comes at a time when profitability of coal-fired power plants in Europe is already higher than for gas facilities as coal prices have been weaker relative to the power and gas markets.

This poses problems to the European Union’s energy policy which wants to see a shift from coal-fired power generation towards gas, which sends fewer emissions into the atmosphere than electricity generated from coal.

Healthy export levels from traditional exporters such as Colombia or South Africa as well as rising supplies from the United States, where a shale gas exploration boom has pushed coal out of the domestic market and into Europe, have led to an oversupplied coal market and helped pull prices down.

API2 2013 coal futures contracts have been in a downward cycle since summer 2011 and have dropped more than a quarter since then to under $100 per tonne.

At the same time, European gas markets are tight as buyers have to compete with Asian utilities for imports of liquefied natural gas (LNG) and pipeline supplies from Russia and Norway are also tight. (Reporting by Henning Gloystein, editing by William Hardy)

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