The toll on coal: Increasing regulation and China’s slowing economy are threatening the fuel’s dominance

September 30, 2013 7:17 pm

Energy: The toll on coal

By Pilita Clark, James Wilson and Lucy Hornby

Increasing regulation and China’s slowing economy are threatening the fuel’s dominance

For the world at large, Wyoming still means Buffalo Bill and cowboy boots. For global energy markets, the sparsely populated US state has a more modern relevance – as the source of some of the largest coal reserves in the world. The Powder River Basin that stretches across much of the state has made Wyoming the US’s biggest coal producer. But coal industry executives received a shock in August when it was time to see which companies had bid for the rights to a new tract, said to contain nearly 150m tons of mineable coal in the federally controlled basin.When the deadline fell, officials discovered that not one company had bid – not evenCloud Peak Energy, owner of the mine that had originally sought permission to operate in the tract seven years ago.

“We were unable to construct an economic bid for this tract at this time,” says Colin Marshall, Cloud Peak’s chief executive.

In another year this might have been brushed off as an anomaly. US coal prices, after all, have been in the doldrums as a shale revolution has pushed natural gas prices so low that the country’s electricity generators have been spurning coal. US coalminers have responded by increasing exports, leading to a boom in coal burning in the EU. In addition, more than 280GW of coal-burning power station capacity, requiring more than 825m tons of coal annually, is still being built around the world, most in India and China. “These are not being planned or talked about. These are coming on,” says John Eaves, chief executive of US producerArch Coal.

But this year has brought a fresh threat to coal: new action to restrict the growth of coal-fired power plants, a leading contributor to the carbon dioxide emissions that scientists say cause global warming. The action has come from the US – where the Environmental Protection Agency has announced rules to limit carbon emissions from new coal-fired plants – as well as from multinational banks and even China, where regional pilot carbon markets began this year and last month its own curbs on pollution were announced.

Some industry analysts are also starting to wonder whether coal demand from China, which has shaped the global market, may peak or even slow sooner than anticipated as the country’s energy needs increase more moderately and as alternative sources develop. The ruling Communist party also has to keep one eye on the political risk posed by growing anger about cities choked by coal pollution, particularly from prosperous urbanites who vent their dissent online.

A quarter of the world’s annual coal demand comes from Chinese power plants: any shift – whether from slowing economic growth or from China’s own efforts to curb coal use to improve environmental quality – would reverberate through the whole industry.

On top of this, a campaign modelled on the 1980s disinvestment movement that pressed South Africa to dismantle apartheid has begun to take off in the US. Its direct impact on large coal companies’ share prices is likely to be limited, according to Oxford university’s Smith School. But it is likely to spur a “process of stigmatisation” leading investors to shed coal stocks, researchers say, something Storebrand, a Scandinavian asset manager announced it was doing in July.

Taken together, regulatory action and a predicted slowdown in demand for coal exports has turned 2013 into “a watershed for the global coal market”, say analysts at Goldman Sachs.

For coal, this would be a sharp turnround from the surging consumption in recent years. Global demand grew from 3.2bn tonnes in 1990 to 4.9bn in 2010, according to the International Energy Agency and is expected to hit 5.6bn tonnes by 2015. It provides 40 per cent of the world’s electricity needs, according to the IEA, making it the largest source of power generation. The IEA has predicted coal will overtake oil as the world’s leading primary energy source before 2030.

Tougher regulation has been predicted for some time and the US coal lobby spent millions of dollars attacking what it called President Barack Obama’s “war on coal” before he won his second term. Uncertainty about the regulatory environment was one of the reasons that Cloud Peak cited for not bidding in Wyoming.

The trend is clear. If this winter or spring the air is worse [in Chinese cities], the pressure will only increase

– Xu Zhongbo of Beijing Metal Consulting

The rules announced by the EPA on September 20 will cap emissions at 1,100lb of carbon dioxide per megawatt hour for new coal-fired power plants, requiring them to be about 40 per cent cleaner than current plants. Gina McCarthy, its director, insisted the rules were not about “killing future coal” but about stimulating the use of as yet uneconomic carbon capture technology.

The coal industry is livid. Peabody Energy, the US’s largest coal producer, says the EPA plan is “outside the realm of the law, fails to protect the American consumer and will hurt electric reliability and America’s ability to compete”.

Mr Obama’s pressure on coal is not limited to the domestic market. This year, he said he wanted to end the public financing of coal plants abroad unless there was “no other viable way for the poorest countries to generate electricity” or unless plants were fitted with carbon capture technologies.

The World Bank, a leading source of such financing, turned the president’s words into action. It announced new lending policies in July that mean it will provide financial support for new coal power plants “only in rare circumstances”, such as in cases when countries had “no feasible alternatives to coal”.

A week later, the European Investment Bank said it would take similar action. Citing “significant climate challenges”, it will introduce a new “emissions performance standard” for fossil fuel generation projects. Initially, the performance standard will be set at 550g of carbon dioxide per kilowatt hour, which analysts say will rule out new lending to regular coal and lignite power plants. But some EIB directors favoured a tougher standard of 450g CO2/kWh and tighter rules are expected to be discussed later in coming months.

“The vote to introduce an EPS represents a step-change in the EU’s fight against climate change – and puts the bankers ahead of politicians in terms of tangible action,” says Ingrid Holmes of the E3G environmental consultancy. “With several directors pushing for 450g CO2/kWh at the meeting, I’d expect to see it tightened further over the next 12 months.”

As for China, its increasing coal appetite has been “one of the most unassailable assumptions in global energy demand” say analysts at Citi – but they now challenge that assumption, saying the country’s demand could even peak by 2020. “Put simply, if non-coal generation growth outstrips power demand growth, which is already slowing, coal use is set to plateau or decline,” they say.

The Air Pollution Action Plan released by the Chinese government last month has suggested that the country will further reduce its reliance on coal. It forecasts that coal will make up 65 per cent of the country’s primary fuel usage by 2017, down from 66.8 per cent last year. The plan calls for coal usage to be capped in wealthy coastal megacities, with particular limitations for polluted Beijing and the nearby provinces of Shandong and Hebei – the latter home to Tangshan city, which accounts for about a quarter of China’s steel output. Overall, the provinces around Beijing will reduce coal consumption by 73m tons, or about 10 per cent of 2012 levels.

Underscoring the message on the day of the announcement, state television devoted part of the noon newscast to polluting steel plants. “The trend is clear – the public pressure to improve will become bigger and bigger. If this winter or spring the air is worse, the pressure will only increase,” says Xu Zhongbo of Beijing Metal Consulting.

Pollution reduction targets in the Pearl river delta and the Yangtze river delta, home to China’s manufacturing base as well as its wealthiest cities, are also likely to be accompanied by commitments on coal caps and a switch to cleaner power sources, such as nuclear, natural gas and renewables, says Greenpeace climate and energy campaigner Li Yan.

But any reduction in coal in the east is most likely to be accompanied by increased use in the west, where a number of provinces have big plans to develop their coal reserves.

Highest on their priority list are projects to turn coal into gas and liquid fuels. Wood Mackenzie, a consultancy, estimates that proposed conversion projects account for about 800m tons a year in coal demand; those projects that are already approved make up about 180m tons a year. Ironically, a natural gas price rise this year, intended to spur more gas production and reduce losses by state-owned importers, has made gas consumers more interested in coal conversion investments.

. . .

Overall, China’s economy is still forecast to grow more than 7 per cent this year, which implies a rise in absolute tonnage of coal consumed for the foreseeable future.

Many analysts and coal suppliers reject the idea that “peak coal” is approaching China and say in any case other Asian economies, such as India, will increase their demand for many more years. “Growth will be lower but it is still going to grow and we just do not see peak coal. We have really aggressive capacity increases in gas and renewables and nuclear and [even so] we still see coal growing until 2030,” says Andy Roberts of Wood Mackenzie.

Godfrey Gomwe, chief executive of thermal coal at Anglo American, says: “Our view is that Chinese and Indian coal demand will grow at a compound annual growth rate of about 3.9 per cent up to 2020, and then a slightly lower rate up to 2030. It will still remain a good story. We see more upside than downside in China.”

A crucial variable, according to mining analysts at EY, is China’s capacity to develop its own large shale gas reserves. Mr Gomwe, however, believes shale gas in China will be less important than in the US. “They do not have the infrastructure and the gas is a long way from the market and very deep. A number of factors conspire against a shale gas boom in China,” he says.

Goldman Sachs forecasts that seaborne coal exports will grow only at 1 per cent until 2017, and could peak in 2020, compared with the 7 per cent growth enjoyed from 2007-12.

It points to a tighter battle for exports, especially as US producers increasingly focus on selling abroad to try to compensate for the depressed domestic market.

“There are several US coal basins that are looking to export markets as their saving grace,” says Wood Mackenzie’s Mr Roberts.

Mr Eaves of Arch Coal adds: “You are going to see the US participate in a much more strategic way.”

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Carbon capture hopes dashed by high costs

The environmental dilemma confronting the global coal industry could not have been more starkly evident than it was one day last month when two things happened at once on either side of the Atlantic, writes Pilita Clark.

On September 20, the US Environmental Protection Agency published rules to cut carbon dioxide emissions from new power stations that would effectively make it impossible to build more coal-fired plants unless they were fitted with carbon capturing technology.

In Norway, the government announced it was abandoning years of effort to build a commercially viable carbon capturing system at a power plant project in Mongstad that the country’s leaders once described as Norway’s “moon landing”.

The problem, said Ola Borten Moe, minister of petroleum and energy, was the “challenging” project’s high costs.

This was another setback in a global attempt to tackle climate change by capturing carbon emissions before they are released into the atmosphere, and storing them deep underground.

Carbon capture technology has long been proved to work technically. But finding a financially viable way of applying it to one of the coal-fired power plants responsible for a large share of carbon emissions has proved an enormous stumbling block.

Not only is the capturing and storing infrastructure expensive to build, it also needs some of the electricity a power station generates, making projects both more expensive and less efficient.

At the same time, carbon capture developers have faced resistance from critics who claim carbon storage facilities pose environmental risks.

According to the Bloomberg New Energy Finance research company, governments around the world have committed at least $25bn over the past five years to carbon capture systems, though $8bn has since been clawed back.

Yet there is little sign of a commercial scale coal-fired power plant using it anywhere. One of the first is expected to be a project in rural Mississippi, estimated to be costing $4.7bn. It is due to begin operating next year but, in what has become a familiar tale, it has had to overcome legal challenges and cost overruns heading towards $1bn.