The role of coal in power prices: legacy fuel or last resort?

Coal’s historic role in setting power prices

Throughout most of the 20th century and into the early 2000s, coal was the cornerstone of power generation economics. Its plentiful supply, ease of storage, and low cost secured its dominant role in energy mixes across Europe, the US, and Asia. Before the 2010s, numerous power systems operated as coal-centred markets where marginal prices were tied to the clean dark spread; the profit margin for coal-fired plants after subtracting fuel and carbon expenses.

Three main components shape coal’s marginal cost:

• Fuel: the procurement cost of coal, which differs by region and quality.

• Carbon: the price of emissions allowances, which increased after the EU Emissions Trading System (EU ETS) came into force.

• Logistics: which includes transport, port fees, and handling, is a material cost factor for landlocked plants.

As renewable and gas capacities grew, coal’s market share started to decline. By the mid-2010s, coal mainly influenced prices during peak demand, low renewable generation, or limited gas supply. Still, in systems where coal plants are on the margin, they continue to influence the highest wholesale prices.

How carbon and gas markets have reshaped coal economics

The economics of coal generation have been reshaped by two significant market forces: increasing carbon prices and fluctuating gas costs. The clean dark spread (CDS), which indicates the theoretical profit margin for coal generation after deducting fuel and carbon costs, has shrunk considerably over the past decade.

• Impact of high EUA prices: Since 2018, European carbon prices under the EU ETS have increased from below €10 to as high as €100 per tonne of CO₂. This has reduced the competitiveness of coal generation, with clean dark spreads often turning negative during periods of moderate gas prices.

• Breakeven versus gas: The position of coal compared to gas plants hinges on the clean dark spread versus the clean spark spread (CSS) for gas. When gas prices are low, gas plants typically outperform coal in terms of cost and emissions. However, during periods of gas price spikes, like those in 2021–22, coal temporarily regained influence over pricing, demonstrating how marginal fuel economics can fluctuate with global market shocks.

• Regional differences: Coal remains a key component in certain markets. In Poland, it still provides around two-thirds of electricity; in Germany, lignite plays a stabilising role during winter peaks; in the US, inexpensive domestic supply has delayed retirements despite the growth of renewables.

These dynamics emphasise that coal’s impact on power prices continues not because it is economically better, but because it acts as a backup in stressed systems.

When coal still sets the price - and why

Even as generation fleets decarbonise, there remain certain conditions under which coal plants influence wholesale electricity prices.

Coal typically sets the marginal price:

• During periods of scarcity or low renewable output, when wind and solar generation fall short of demand.

• In cold snaps or heatwaves, when peak demand increases sharply and all available capacity is utilised.

• Following gas outages or import constraints, coal units are often among the few flexible sources available.

Dispatch priority rules and reserve requirements also influence the system. System operators often keep a small number of coal plants in strategic reserve or as backup capacity to ensure security of supply. Transmission bottlenecks can worsen this. For example, if renewable-rich regions cannot export power efficiently, local coal generation may still determine the nodal price.

In short, although coal is no longer the norm, it still acts as the last-resort price setter when systems tighten.

The impact of phase-out policies on price volatility

As coal phase-out policies accelerate across Europe, the capacity landscape becomes more constrained. Retirements eliminate dispatchable assets from the system, which can lead to increased price volatility and decreased flexibility during peak demand.

• Capacity margins: The closure of coal units often brings markets closer to their reliability thresholds. This can increase scarcity pricing, especially during winter peaks or periods of low renewable generation.

• Market design responses: Policymakers are implementing capacity mechanisms and strategic reserves to compensate for lost baseload capacity. These measures pay generators for their availability, ensuring adequate backup as fossil capacity decreases.

• Short-term effects: During the transition, fewer coal plants lead to more pronounced price fluctuations in response to sudden demand spikes or renewable energy shortages. Instances of temporary coal reactivation - like during the 2022 energy crisis - highlight how delicate the balance remains until full replacement capacity is achieved.

Phase-out policies are vital for achieving emissions targets, but they also reveal the reliance on legacy assets for stability in fragile systems.

What happens when coal finally exits

When coal is entirely phased out, the market’s marginal pricing dynamics will shift once more. The final balancing role will probably be taken over by gas, flexible storage, and demand-side response.

• Residual balancing sources: Open-cycle gas turbines (OCGTs) are likely to become the new marginal units, supported by short-term battery storage and industrial demand flexibility.

• Emissions and cost implications: Removing coal will significantly reduce system emissions intensity, but price volatility may continue if gas remains the marginal fuel. This highlights the need to speed up storage expansion and grid interconnection.

• Last-mile decarbonisation: This involves completely phasing out coal, which removes a significant source of carbon emissions. However, this highlights the need for zero-carbon flexibility solutions, such as green hydrogen and long-duration storage, to prevent gas from becoming the new residual price-setter, thereby inheriting coal's role.

The post-coal landscape will not instantly bring about perfect price stability, but it will represent a significant move towards decarbonised market fundamentals.

Conclusion

Coal’s market influence is waning rapidly. Yet, despite years of decline, it still impacts marginal pricing and system reliability, especially when renewable output is low or gas markets tighten. As phase-out policies persist and new capacity mechanisms develop, coal will withdraw further - but its shadow will remain until zero-carbon alternatives can fully replace its stabilising role.

Understanding coal’s residual influence on power prices remains crucial for energy analysts, policymakers, and market participants navigating the final stages of the energy transition. In an increasingly decarbonised system, coal may be a legacy fuel, but in moments of scarcity, it remains the last resort that still impacts the price of power.