Only a few days have passed since the most recent report of the Intergovernmental Panel on Climate Change(IPCC) warned of the devastating consequences of human-induced global warming. This stark warning from UN Secretary-General Antonio Guterres, and the scientists behind it, was centered on the urgent need to reduce coal use in the energy mix.
However, in the lead-up to publication, it was not covered by mainstream media headlines. The steady ascent of coal prices, which soared past US$100 (PS72) per metric ton in June, then to US$130 in mid-July to more than US$170 today. This is nearly four times the September price.
The rise in prices can be attributed to demand following the pandemic. This is especially true in emerging Asian markets like China, India, Japan, South Korea, and Europe. The electricity demand, which is still closely tied to coal, will increase by 5% in 2021 and another 4% in 2022.
There are also some issues on the supply side, such as China. In 2020, the global energy consumption was 556 exajoules, with oil, natural gas, and coal accounting for 31%-27%, 25%, and 25%, respectively. This is more than four-fifths.
There are two main uses for coal: electricity generation and steel production. Approximately two-thirds is consumed by the former. The greater the chance of reaching the Paris Agreement targets, the faster we can get rid of coal.
However, coal appears to be stubborn and resilient when it comes to its elimination. The percentage of natural gas in global electricity generation has remained the same at 23% since 2010, despite increasing world power consumption by around 25%. The actual generation of electricity in terawatt-hours (TWh) has quadrupled, and the percentage share of renewable has increased by three times, except for hydroelectricity. While coal is now at 35%, it has dropped to 40%. However, it still leads natural gas, which is its closest competitor. Also, the amount of coal we use for electricity has increased overall.
Coal is a good investment. The capacity of coal-fired power plants has been large enough to justify the cost of building them. It is fairly cheap, and all three largest consumers, China, India and the US have access to it politically.
Coal-fired power is predictable and steady, making it ideal for providing the minimum amount of electricity needed by a country. This is known as the caseload. The percentage of fuel converted to electricity, also known as capacity utilization, is usually higher than 70%. This is due to the constant drive to replace coal with renewable and natural gases. However, it was 53% in 2019. But, given current demand, it should be higher for 2021.
All of this translates into steady income from selling coal-fired power to many countries. This makes it attractive for investors. Coal can easily fulfill the three-pronged equation of sustainability, affordability, and supply security. However, it can also leave a dirty smudge on the last.
The largest users
Coal was a major factor in the phenomenal Chinese economic growth over the past 20 years and the significant expansion of Indian electrification. They have helped double the world’s coal-fired power since 2000, to more than 2,000GW.
China generated 63% and India 72% of the world’s electricity in 2020. China produced nearly half of the world’s coal in the same year. India was second at around 750 million tonnes. They accounted for nearly two-thirds of global consumption and were the largest importers. These figures are truly mind-blowing.
Coal is in decline elsewhere. The US is the second-largest electricity generator . Natural gas has replaced coal. It generated 20% of the US electricity in 2020, compared with 43% in 2010. Natural gas has increased from 24% to 40% over the same period.
The wind equals Germany’s coal generation. In the UK, however, coal is only used as a backup. Japan and South Korea are also expanding their natural gas and nuclear resources to reduce their carbon footprint. is also joining the effort by increasing its solar and wind power.
It is still difficult to eliminate coal from a business perspective. The west has effectively exported the problem to China, as so much of the heavy manufacturing in the world has been moved to China. Coal-fired power plants can be long-term investments. They are often 40-50 years old. Plants built-in 2000 are only halfway through their lives. Therefore, closing them down now would be a disaster for investors.
Unless coal prices are not kept at an unsustainable level (which is unlikely), or the cost to emit carbon dioxide is higher due to taxes and carbon trading schemes (possible but not everywhere), coal could surprise us all and continue to exist for longer periods than we think. Let us pray that it does not.