King coal fights back: Why coal’s place as a dominant fuel source is unlikely to be relinquished

Despite suggestions in much of the West that coal is a relic of an older age, the rock of concentrated carbon is likely to continue to be burnt to generate electricity across many developing and emerging economies far into the 2020’s, if not well beyond.

The image below is from the front cover of a recent edition of The Economist magazine. In their leader they highlight how coal consumption has dropped sharply in Europe and America (down by one-third since 2009) and how the mood towards coal has shifted against the fossil fuel in China:

A growing middle class yearns for their governments to clean up Asia’s choking metropolises. And renewable energy offers a path to cheaper power, generated at home, as well as a source of industrial employment and innovation. Coal’s days are numbered. The sooner it is consigned to museums and history books, the better.

Yet despite the protestations of the regions leaders (and China specifically) coal has seen a resumption over the past year. Domestic coal prices in China have surged over the past year amid rising industrial demand for power, an unofficial ban on coal imports from Australia and freezing temperatures. According to the National Development and Reform Commission, China consumed 11% more electricity in December 2020 than year earlier levels, much of it generated by burning thermal coal.

Meanwhile, China (the worlds biggest coal miner and also its largest consumer) extracted over 3.8 billion tonnes of coal in 2020, the highest level since 2015. Earlier this month, authorities approved the go-ahead for six coal mining projects meant to reduce the country’s reliance on imports.

According to the IEA the future of coal will largely be decided in Asia. China accounts for 50% of global demand, India 15% while Japan, Korea, Taiwan and Southeast Asia add a further 10 percentage points. Global demand for coal peaked at 8 billion tonnes in 2013, and despite a dip in 2020 coal consumption is forecast to rebound in 2021 and then remain around 7.4 billion tonnes per year through to 2025.

Attention to curb coal consumption understandably focuses on Asia. However, the methods used in Europe and America are unlikely to work in much of Asia. Across much of the region, the incentives for governments to intervene are much smaller and come with costs that potentially threaten their control. Here’s how The Economist describes the issues:

If targets are to be credible, Asian countries must tackle deeper problems. The strategy that worked in Europe and America will get them only so far, because the mining firms, power stations, equipment-makers and the banks that finance them are often state-controlled. Market forces and carbon taxes, which use price signals to change incentives, are therefore less effective. And coal politics is treacherous. The coal economy forms a nexus of employment, debt, tax revenues and exports. China has used its Belt and Road Initiative to sell both mining machinery and power plants. Across the region, local governments depend on coal for revenues. Many will defend it ferociously.

Related article: Drowning in oil? In defence of The Economist’s oil price articles

In addition, don’t forget that the average age of coal plants in Asia is 12 years, compared to 43 years in developed economies. Given that the lifespan of a coal plant is about 50 years the cost to developing Asia of decommissioning its coal plants is huge.

And then there is Africa, where the number of people lacking access to electricity has risen during the COVID-19 pandemic, to almost 600 million. New research from Oxford University predicts that total electricity generation across the African continent will double by 2030, with fossil fuels continuing to dominate the energy mix. Although natural gas is likely to be the main driver behind the increase, thermal coal powered generation is forecast to remain stable in absolute terms. While hydroelectric power is projected to grow, the continent is already experiencing intermittent power supply due to drought.

This winter governments may begin to reconsider any move away from coal and towards natural gas. After being in a prolonged bear market, natural gas prices have surged 10-fold since July 2020 – due to the same factors supporting coal, including stronger industrial demand and cold temperatures. In addition, China’s move to transition 10 million households from coal to natural has heating over the past year has also stoked demand when there was little gas in storage.

Record high natural gas prices, the realisation that gas supply may not be reliable (as disparate countries compete for LNG), power cuts (from Mexico to Pakistan to China), and the likelihood that volatile prices are likely to be a feature going forward will have shattered the complacency that had permeated the market over the past year.

This may ultimately prove to governments in Asia and Africa that they should sit on their hands, and that they have already moved too far too soon from coal and towards natural gas. The bitter cold of winter 2020 one final factor among many indicating coal is likely to remain a dominant fuel source for many years to come.

Related article: Up in smoke: Why investors in oil companies may reap a climate rebellion dividend

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