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There are multiple economic forces that undermine the prevailing narrative that coal is on its way out.
Coal is in demand in commodity markets.
Photo by Wakil Kohsar.
The president of the United Nations' 26th Conference of the Parties (COP26) fought tears as he announced that only 197 countries had been able to agree to "phasing down" the use of coal.
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The minister apologized to the delegates at the end of the two-week summit.
China and India, two of the world's biggest coal consumers, refused to commit to quitting coal at the last minute. The failure to end coal's reign wouldn't have surprised anyone watching commodity markets. Multiple economic forces have arisen that undermine the prevailing narrative that the dirtiest fuel source is on its way out.
Is this the last market for coal? Andrew said in an interview that he probably wouldn't.
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Coal is in demand in commodity markets. In October, the price of coal for delivery in northwest Europe surged by more than 300 per cent to US$ 231, compared with prices that were hovering around US$50 before the epidemic. In February 2020, prices in southern China were about US$80.
Few saw the swing coming.
Is this the last market run for coal? I would not say that.
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Andrew is an analyst at Markit.
Thermal coal was one of the main sources of energy until about a decade ago. In 2010, it made up 45 per cent of the energy mix in the US, compared with 25 per cent for natural gas, 20 per cent for nuclear, eight per cent for hydro and three per cent for wind, according to the U.S. Energy Information Administration.
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Fossil fuels made up 80% of China's energy mix a decade ago, and most of that would have been coal, according to the EIA data.
As governments began taking climate change more seriously, and technological advances lowered the cost of cleaner energy sources, the narrative was that market forces were going to put coal out of business.
Ontario eliminated all coal-fired electricity in the year 2014, replacing the source of 25% of its power with hydro and nuclear. Nova Scotia, which relies on coal for more than 60 per cent of its electricity, is set to cut off coal by 2030.
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Natural gas became more economical than thermal coal in the U.S. around 2008. The costs associated with coal have increased due to stricter environmental regulations.
By 2020, natural gas will account for 40 per cent of total energy, compared with 20 per cent for coal. The energy mix was about three per cent solar and three per cent wind.
A woman burns coal for domestic use at Singrauli in India.
Money Sharma is the photographer
In China and India, where air quality has become a major health and political issue, authorities seem to want to end their dependence on coal.
Fossil fuels make up about 66 per cent of the energy mix. If it is slowly growing, renewables are growing. Four per cent of the supply in both countries is solar, while wind makes up six per cent in China and five per cent in India.
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The government rhetoric about a green transition hasn't translated into enough investment in renewable energy to make coal redundant.
Even in countries with solid green reputations, coal remains part of the mix because storage capacity technology hasn't advanced enough to make wind and solar a reliable energy source.
The winter of 2020 was especially cold in parts of the Northern Hemisphere, and the past couple of summers were hot, stoking demand for coal.
The global recovery from the COVID-19 crisis put more pressure on energy supplies. China is a big user of coal, so demand went beyond supply. All indications were that demand was fading so miners didn't invest in new production.
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China entered international markets due to supply constraints caused by extreme flooding and stricter rules governing mine safety. Indonesia, a big coal producer, had floods that forced mines to close.
The weather, dwindling investment and a surprisingly strong recovery created the perfect storm for prices and production to jump. The market surge has exposed a gap between coal and renewable energy that could make kicking coal difficult.
The last thing any country wants is to be short of electric power during the winter.
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The last thing any country wants is to be short of electric power.
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Andrew Blumenfeld is a person.
Many countries are returning to coal as a replacement for cleaner fuel due to a mismatch between demand and supply. The U.S. and Russia have indicated that they will increase supplies of natural gas. Coal prices in northwestern Europe have plummeted by 35 per cent from their October peak.
Coal prices are higher than last winter. China placed a cap on coal prices in order to encourage utility companies to keep electricity flowing during a power outage last month.
At the UN General Assembly in September, China promised to end financing of new coal power plants abroad, but it didn't make immediate commitments that would curb domestic usage. The Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies said that there are still domestic coal power plant projects in the works.
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A worker uses a torch to cut steel pipes near the coal-powered Datang International Zhangjiakou Power Station, which is one of the host cities for the Winter Olympics in China.
Photo by Greg Baker.
Climate watchers were disappointed that Chinese President Xi Jinping did not set a firm date for reducing carbon emissions. When the government releases its next Five Year Plan on the direction of the economy, China watchers can expect a date on peaking emissions in 2026.
The Chinese leadership seems to be very committed to decarbonization, but they are also committed to doing it on China's timelines.
There is no carbon emissions limit in the US. The federal agencies are trying to tackle the coal industry. The EPA gave generators a deadline to retrofit their facilities to clean their wastewater of toxic heavy metals by the year 2025. There is a provision that would allow power plants to remain online without retrofits, until they are forced to shut down in 2028 for non-compliance.
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Evidence of a quicker pulse in the coal industry might even reignite the interest of investors, which could result in increased production, at least on the margins. Tyler Mordy is the chief executive of Forstrong Global Asset Management Inc. He sees opportunity in fossil fuels, despite recognizing that coal is a left-for-dead asset class.
The Pandemic made Mordy's bet on coal profitable. Another unpredictable crisis, such as further waves of COVID-19 infections or more natural disasters, could force countries back into old, dirty habits.
If coal production remains a big component of power generation and the ability to find a dispatchable source of electricity, I think the possibility of this happening in the future remains.
Financial Post.
Email: bbbharti@postmedia.com
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