Coal to Remain King For At Least 5 Years

China’s capital famously has some of the worst air quality on the planet. Earlier this year, NASA reported that the air quality index at the US Embassy in Beijing had hit 886 micrograms per cubic meter of air for particles of 2.5 microns or less in size. The World Health Organization considers particles of 2.5micrograms to be safe under 25 per cubic meter. An AQI above 300 is considered hazardous to all humans, not just those with heart or lung ailments. Nor is that level unusual. It has gone over 900 micrograms per cubic meter.

Most of that pollution is derived from burning fossil fuels, most of it coal. And, stung by some of the worst air pollution on the planet in the capital and other major cities, China has embarked on a dramatic attempt to diversify away from coal, signing a historic agreement with the United States during the APEC Leaders’ Conference in November to seek to cut greenhouse gases. Under the terms of that agreement, China has agreed to cap its output of greenhouse gases by 2030 and the US pledged to cut its emissions by 26-28 percent below its 2005 levels by 2025.

China’s substitution away from coal is coming despite the fact that the country is home to thousands of elderly, polluting fossil fuel plants, many of them operated behind the scenes by party apparatchiks who have tied their fortunes to them and to the mining of coal. China still led the world in renewable energy production in 2013, with total capacity of 378 gigawatts, mainly produced by hydroelectric and wind power, although its hydroelectric aims have alarmed environmentalists. However, this year, it became the leader in solar photovoltaic power and smart grid construction as well. It has increased production of solar cells by 100 times since 2005.

But despite China’s newfound determination to moderate its coal consumption, it will still swallow up 75 percent of coal demand over the period in the IEA’s annual Medium Term Coal Report, released on Dec. 16, which covers the next five years. China’s annual peak coal use is still far in the future and beyond the five-year purview of the report.

Globally, demand for coal, the burning of which is the biggest contributor to greenhouse gases in the atmosphere, is going to continue to increase, hitting 9 billion tonnes by 2013, according to the International Energy Agency.

Industrializing India, whose capital, New Delhi, is said to have worse pollution problems than Beijing, and the 10 Asean countries and other Asian countries will join China as the main consumers of coal during the period, offsetting declines in coal use on the part of the United States and the European Union, according to the IEA.

There are signs that other countries are starting to wake up to the problems, first outlined by climate scientists in the 1960s. The Philippines, during the UN Climate Change Summit last week, said it would lead developing nations in pushing for a new international pact requiring all nations, including developing ones, to cut their use of fossil fuels. The United States Congress, now controlled by anti-climate change Republicans, refuses to believe man-made emissions are the cause of the growing problem.

By contrast, the IEA, which represents 29 member net oil importing countries, has become one of the world’s most important bodies pushing for arresting climate change before it does irreparable harm to the planet.

“We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” IEA Executive Director Maria van der Hoeven said at the launch mid-term outlook. “Although the contribution that coal makes to energy security and access to energy is undeniable, I must emphasize once again that coal use in its current form is simply unsustainable. For this to change, we need to radically accelerate deployment of carbon capture and sequestration.”

Van der Hoven also called for more investment in high-efficiency coal-fired power plants, especially in emerging economies. “New plants are being built, in an arc running from South Africa to Southeast Asia, but too many of these are based on decades-old technology,” she said. “Regrettably, they will be burning coal inefficiently for many years to come.”

Global coal demand growth has been slowing in recent years, and the report sees that trend continuing. Coal demand will grow at an average rate of 2.1 percent per year through 2019, the report said. This compares to the 2013 report’s forecast of 2.3 percent for the five years through 2018 and an actual growth rate of 3.3 percent per year between 2010 and 2013.

As has been the case for more than a decade, the fate of the global coal market will be determined by China despite its campaign to both diversify its energy supply and reduce its energy intensity, and the resulting increase in gas, nuclear and renewables will be staggering. However, the IEA report says, “despite these efforts, and under normal macroeconomic circumstances, Chinese coal consumption will not peak during the five-year outlook period.”

The report’s forecasts come with considerable uncertainties, especially regarding the prospect of new policies affecting coal. Authorities in China as well as in key markets like Indonesia, Korea, Germany and India, have announced policy changes that could sharply affect coal market fundamentals. The possibility of these policy changes becoming reality is compounding uncertainty resulting from the current economic climate.

The issue of low prices remains a hot topic among coal market participants. Last year’s report emphasized that many coal producers were running at losses, largely driven by take-or-pay infrastructure contracts or financial liabilities. Coal prices have declined even more since last year, but several factors have helped producers withstand further economic pain.

“Our analysis shows that the price floor provided by production costs has decreased significantly, not only because producers reduced costs by gaining economies of scale, better management and budget discipline, but also due to external factors,” the report quoted Keisuke Sadamori, Director of Energy Markets and Security, as saying. “Depreciation of local currencies in the main exporting countries has been significant and low oil prices also help, as oil represents a significant share of coal costs, especially in open-pit operations.”

Coal use in OECD member countries is projected to decline in the outlook period, as growth in Turkey, Korea and Japan fails to offset declines in Europe and America. In the United States, retirement of coal capacity and competition from shale gas will lead to a 1.7% decline per year on average during the forecast period.

Australia, with theAbbott government having publicly forsworn all environmental protection limits, is set to account for the largest growth in exports as Indonesia next door, driven by a growing current account deficit, looks for additional markets.