King Coal ‘Golden Age’ Over: Report
In a little-noticed report put out at the end of last month, the International Energy Agency reported that for the first time in almost two decades, global coal demand growth came to a stop in 2014, mostly because of slowing economic growth in China and across the OECD.
Coal is considered the biggest driver of greenhouse gases and climate change in the world. When 2015 figures are totaled the trend appears likely to continue, with climate policy having emerged as a major driver for the future of coal in large parts of the world, according to the report, the Medium-Term Coal Report 2015.
Beyond that, however, China’s power sector has been diversifying dramatically away from coal. More than 55 gigawatts of capacity in hydroelectric power, wind, solar and nuclear power were added in 2014. The country has become by far the largest producer of solar panels, driving the global price down dramatically. No place on the planet has been hit as hard from air pollution from coal smoke as the region around Beijing
“The golden age of coal in China seems to be over,” the report notes. Since the end of 2013, China’s energy production rise has almost entirely from renewables. “For the first time since the Medium-Term Coal Market Report was first produced in 2011, a ‘peak coal scenario’ in China is probable.”
The drivers of this peak would be an even stronger rebalancing of the economy, with stagnating housing and infrastructure construction and lower-than-expected power demand, mainly from declining electricity use in heavy industry. A further acceleration of renewable investment is possible, but the key uncertainty is the macroeconomic structure. Whether consumed directly or through electricity, around one-third of the coal used in China is related to infrastructure and real estate.
This is not just true of China, however. “Preliminary data in the first 10 months (of 2015) suggest the acceleration of these trends,” according to the report. “Due to the combination of aging coal capacity, weak power demand and strong renewable and climate policies, OECD coal demand had a relentless decline of 47 million tonnes in 2014.”
Given the economic rebalancing in China and ongoing structural decline in OECD countries, even as growth in coal consumption continues to grow in India and ASEAN countries, the downward trend appears irreversible.
The report was being written as the United Nations-sponsored Conference of Parties on climate change was taking place in Paris. The conference mandated a target rise in global temperatures of no more than 1.5C, putting more stress on coal producers.
“Environmental pressure is mounting,” the report says. “Carbon dioxide (CO2) reduction is imperative…Climate policy is more influential in longer-term coal demand than in the five-year outlook of this report. Coal is the most carbon-intensive fuel, and coal burning is the largest contributor to CO2 emissions: current unabated burning is incompatible with climate stabilization.”
Smog and acid rain have therefore emerged as key policy concerns shaping regulatory decisions, especially but not only in China. US Environmental Protection Agency rules in the United States and the Large Combustion Plant Directive in Europe have led to a wave of decommissioning coal plants, some of which would have continued to operate with existing climate policies.
Local communities have also begun to resist coal plant investments, which led to project cancellations in several countries. Such restrictive policies are increasingly adopted worldwide. Renewable feed-in-tariffs, CO2 pricing, coal taxes and other measures to reduce emissions together with the increasing competitiveness of renewables are causing coal to struggle to maintain its place in the power mix.
Banks and other financial institutions including multilateral development banks, export credit agencies in some countries are increasingly leery of financing coal plants overseas, the report notes. Other institutions are discussing the possibility of imposing similar policies. Pension funds and others are also divesting from coal or from fossil fuels more broadly. Nevertheless, lack of access to financing has not yet emerged as a major constraint for coal investments.
The IEA is revising its global demand forecast down by more than 500 million tonnes of coal equivalent. While demand will grow to 5.8 million tonnes through 2020, which is 0.8 percent per year, half the growth will occur in India with the ASEAN region representing another quarter, with lower growth in other regions such as Other Asia.
Demand is expected to decline by 75 million tonnes in the United States and 22 million tonnes in OECD Europe. The share of coal in power generation will fall from the current 41 percent to 37 percent
Projections of energy-intensive industries reliant on coal, like steel and cement, have been revised downward and, in some cases, to a decline. Given that gas and oil power generation is very limited in China, coal competes with low variable-cost nuclear and renewables; consequently, lower electricity demand projections primarily affect coal demand.
In addition, lower expected production of steel and cement is reflected in industrial coal use. Low oil and gas prices add to the well-known issues related to water and CO2 emissions, making coal conversion, especially coal-to-gas, lose momentum in China.
These three factors, together with China’s ongoing efforts to diversify away from coal to achieve a more energy-efficient economy and to address local pollution, lead to a levelling out of coal use.
Although China is the largest renewable investor in the world economy, without structural change to cut the energy intensity of GDP growth, even large-scale renewable investments would succeed only in slowing coal use.
“Accelerated structural reform and clean energy policies could lead to a downward trend in Chinese coal demand,” the report continues. “A stronger rebalancing, coupled with ongoing renewable and energy efficiency investments, can conceivably cut Chinese coal demand – a drop of 200 million tonnes below 2013 levels.
The decline in US coal demand is inevitable. Despite rejection of the mercury regulations by the US Supreme Court, we do not see upside risks in our demand forecast for the United States since existing coal capacity will be retired and no new coal plants are expected other than those few under construction. The share of coal in power generation will dip below 35 percent by 2020, the lowest share since the International Energy Agency (IEA) was created over 40 years ago.
India is the joker in the deck, the only major economy with strong coal growth, driven by ambitious government plans to provide full electricity access to the 240 million people still without it and to expand the manufacturing sector, where coal is the lowest-cost base load option.
“While India has an ambitious and accelerating renewable investment program, the scale of the electricity need is such that new coal investments and further growth in coal consumption are inevitable. Energy access and poverty reduction ambitions drive coal investments in Indonesia, Viet Nam and the Philippines.
“But India is not the new China. As forecast in former editions of this report, India will become the second-largest coal consumer in the world, bypassing the United States, and the largest importer of thermal coal. However, India and China have different governance and growth models, with energy-intensive heavy industry playing a considerably smaller role in India. Indonesia and Viet Nam, while expected to significantly increase their coal power generation, are on a different scale than India.