Coal and the energy transition

It is important that we follow developments that show the transition to a sustainable energy future. James Wilson writes a good article in the Financial Times about the latest developments in the coal industry.

 

Coal left unloved as natural gas and fossil-free drives bite

The bad news for the coal industry has seemed relentless throughout 2015.

While campaigners against fossil fuels have kept up a steady drumbeat of calls to disinvest from companies producing coal, prices and share values of producers have continued to head south. The year may end with more moves against coal and other fossil fuels at global climate change talks next month in Paris.

Thermal coal prices from Australia, a widely used global benchmark, are down about 60 per cent from 2011. In the US, some well-known coal miners including Walter Energy and Alpha Natural Resources have entered bankruptcy, unable to cope with the price drop.

Not all miners of this abundant but increasingly unloved fuel are ready to throw in the towel. But all are having to adapt to wrenching change in the shape and importance of a global industry as some key markets enter what seems inexorable decline.

Consider the US, where the latest figures from the Energy Information Administration show coal production at the lowest level since at least 2009: output in the three months to the end of June was 14 per cent lower than in the same period last year.

Consumption is declining as the power sector turns to cheap natural gas, while more coal-fired power plants are expected to close in response to tougher emissions rules.

In April, the US generated more of its electricity from gas than from coal for the first time.

By 2019, US coal demand will be back to levels last seen in the early 1980s, according to the International Energy Agency. US coal exports are also at their lowest level in five years, while the average export price is down from $150 per ton in 2011 to $80.

Given such forecasts, it is easy to understand the gloom over US miners. Shares in Peabody Energy, the largest US coal miner, are down 97 per cent over the past five years.

In China, which the Paris-based International Energy Agency calls “the centre of the coal world”, coal use is also changing fast. The country accounted for more than half of global coal demand in 2013. But China’s demand is slowing as the economy cools and switches to less energy intensive forms of growth.

China is also waking up to environmental concerns over air pollution. China’s use of coal was “essentially flat in 2014”, according to the US EIA. Its data suggest imports are down 30 per cent so far in 2015 compared with last year.

Yet there are other areas of the world where coal use is expected to grow quickly. Focusing last month on Southeast Asia, the IEA said coal demand would expand at the fastest rate among all energy sources over the next 25 years, overtaking oil in the region’s energy mix. Contrary to the trend in other parts of the world, coal’s share in power generation in the fast-growing region is expected to increase — from less than one-third today to about 50 per cent over the next quarter century.

India, the world’s second-largest coal importer, is expected to see further strong growth in coal demand and an overall shift in coal use from the Atlantic to the Pacific basin is well entrenched.

“For many countries the energy choice for years to come will be coal,” says Benjamin Sporton, chief executive of the World Coal Association.

For supporters of coal, this implies a greater need for technology that enables the fuel to be used with less environmental cost — from more efficient power stations to carbon capture and storage techniques.

Yet other voices would rather put more pressure on the coal industry at a time of financial distress to curb output.

Divestment campaigners claim success in prompting a host of investment funds to agree to reduce or end investments in fossil fuels, although many of the commitments made will only affect “pure play” coal miners and not the larger diversified miners, where a smaller percentage of profits stems from coal.

The plunge in coal miners’ valuations so far has more to do with oversupply and lacklustre demand than with the success claimed by the pro-divestment effort.

Yet the campaign is set to put further enduring pressure on some miners and is another complicating factor as they try to shore up coal’s role in the global energy mix.

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