Coal holds on while pieces of green puzzle come together

The fact that this year’s UN climate talks were held in Warsaw, the coal capital of Europe, reinforced a sense of deep divisions, paucity of ambition – and perhaps a degree of fatigue – among national governments about reducing emissions of greenhouse gases from the consumption of fossil fuels.

Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment, said the progress made in Poland was “simply inadequate”.

Meanwhile, things seem good for “Old King Coal” – the amount of high-carbon coal being used to produce electricity in Europe has increased, despite the continent’s ambitions to be a leader in the fight against climate change. Partly, this is because US coal has been displaced by cheap shale gas so US producers are selling cheap coal to Europe.

Coal-fired power in Germany, for example, makes a profit of €9.16/MWh while generating electricity using gas will lose €19.31/MWh, according to Bloomberg.

Low carbon prices in Europe are another contributory factor, according to the US Energy Information Agency. “We do not see significant downside risks to coal demand,” said Catherine Raw, portfolio manager for Blackrock’s World Mining Trust. “The demand for baseload power will remain and coal is the best option for that. The only other real option is nuclear and given the costs and the political risk, I don’t really see it happening.”

World coal consumption is currently rising at an average rate of 1.3 per cent per year, points out Raphael Juston, head of product management at SuperDerivatives. “This growth is primarily driven by demand from China, India, and other non-OECD countries, and research suggests that coal could potentially challenge oil as the world’s top energy source by the end of the decade,” he adds.

“Twenty five years ago, coal accounted for 25 per cent of primary energy production and, in 25 years time, the International Energy Agency reckons it will still account for 25-30 per cent of the energy mix, even with all the climate change measures,” says Milton Catelin, chief executive of the World Coal Association.

Yet a growing number of analysts are questioning the wisdom of investing in the commodity. “Earning a return on incremental investment in thermal coal mining and infrastructure capacity is becoming increasingly difficult,” says a report* published by Goldman Sachs this year.

“Mines are long-lived assets with a long payback period, and investment decisions today are sensitive not just to prices and margins today, but also to projections going well into the next decade,” it adds. Goldman says that coal as a fuel for generating power will see its dominant position eroded by “environmental regulations that discourage coal-fired generation, strong competition from gas and renewable energy and improvements in energy efficiency”.

Meanwhile, multilateral lenders such as the World Bank and the European Investment Bank, along with the governments of the US and – most recently – the UK have announced that they will stop funding coal plants overseas, “except in rare circumstances in which the poorest countries have no feasible alternative”.

“It is completely illogical for countries like the UK and the US to be decarbonising our own energy sectors while paying for coal-fired power plants to be built in other countries,” argues Ed Davey, UK energy and climate change secretary. “It undermines global efforts to prevent dangerous climate change and stores up a future financial time bomb for those countries who would have to undo their reliance on coal-fired generation in the decades ahead, as we are having to do today.”

Mr Catelin describes the World Bank’s move as “symbolic”, saying that it was never a large funder of coal projects anyway. However, Ben Caldecott, head of government advisory at Bloomberg New Energy Finance, points out that over the past five years, “the World Bank had provided more than $6bn for coal projects, and many private lenders will not support projects without the involvement of the concessionary finance providers”.

Mr Caldecott adds concerns over air pollution and water supplies as further reasons to move away from coal. He highlights a “fast dwindling enthusiasm for coal from institutional investors”, which was illustrated in July when Storebrand – a Norwegian and Swedish pension fund with $74bn of assets – decided to divest from all its coal investments, the first major investor to do so but almost certainly not the last.

“If global ambitions to limit global warming to less than 2C become a reality, many fossil fuel resources will become unburnable and their financial value will be dramatically reduced,” the company said.

Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change, told a coal industry conference in Warsaw that the industry faced “a business continuation risk that you can no longer afford to ignore”. She says that climate targets mean that “further capital expenditures on coal can go ahead only if they are compatible with the 2C”. This means, she explains, that most existing coal reserves should be left underground, that all new plants should be fitted with carbon capture and storage and that all existing noncritical plants should be shut.

As the cost of renewable energy falls, and rapid progress is made in power storage – which would enable intermittent renewables to replace the baseload power that is the bedrock of coal demand – it seems reasonable to assume that, within the next 30-40 years, which is the average lifespan of a coal-fired power plant, energy storage technology will have reached a cost and level of reliability that enables it to compete with coal. China’s pilot carbon trading projects, meanwhile, will bring the proportion of global power generation that is subject to an emissions trading scheme to almost 50 per cent.

It is no wonder that the Smith School of Enterprise and Environment at Oxford university is warning of the dangers that coal facilities could become “stranded assets”.

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* The window for thermal coal investment is closing, Goldman Sachs