Dropping Prices of Natural Gas Cause European Countries to Switch Energy Sources

More than a year after Russia cut natural gas supplies to the rest of Europe and significantly exacerbated an ongoing energy crisis, it seems the region is seeing a drop in natural gas prices. A recent analysis by S&P Global Commodity Insights reveals that a drop in natural gas prices has contributed to fuel switching among major European economies. The analysis also stated there was little likelihood of coal-fired energy generation declining even further.

Natural gas prices have performed poorly in recent weeks, and this seems to have changed the dynamic of the market, specifically by pushing more energy producers to natural gas. A coal trader in Europe says that coal simply isn’t cost effective even though coal prices are currently at the lowest they’ve been in years and producers are switching to natural gas to keep their overheads as low as possible.

Like the United States, Canada and Australia, Europe has been keen on cutting its reliance on coal for energy generation amid global efforts to reduce carbon emissions and combat climate change. However, Russia’s invasion of Ukraine had significant geopolitical effects, with one of the chief ones being a cessation of natural gas supplies from Russia to Europe.

This forced countries that had previously turned their backs on coal, such as Germany, the United Kingdom and the Netherlands, to fire up their coal-power plants again, especially as winter was fast approaching. While environmentalists were not happy about the increase in coal use among several European countries, the move was seen as a necessary evil to shore up energy supplies in the short term and allow the countries to push through the winter.

Recent reductions in natural gas prices are now allowing such countries to switch back to natural gas. S&P Global lead power analyst Sabrina Kernbichler notes that Germany’s energy mix was significantly affected by the reduction in natural gas prices as the European Nation (EU) nation reduced coal-generated from 1.9 GW in May to 1.5GW in June. Demand for coal in the EU has dropped to such low levels that EU traders have shipped more than a million metric tons of unused coal from Europe to North Africa and India.

If there are no fundamental changes to the energy market in the near future, many stakeholders expect gas prices to reduce even further. According to a Northwest Europe-based gas trader, natural gas prices could go even lower if recession’s levels stay steady and demand from the Asian market does not increase from current levels.

Given the current environment, it may be safe to say that major coal extractors such as Peabody Energy Corporation (NYSE: BTU) are most likely experiencing a drop in their revenues given the decreasing prices and slowing demand after the frenzied market activity in the run up to winter.

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