Coal crash coming?
The very conservative International Energy Agency has just released its closely watched annual World Energy Outlook (WEO), with forecasts for the structure of the energy market through to 2035. This year’s WEO was much anticipated, given the pace of developments in renewables and climate policy, and it didn’t disappoint. The report included the IEA’s interpretation of what major governments’ commitment to a 2°C temperature target would mean for the energy market. The contrast with what most market players assume, particularly coal companies, could hardly be more dramatic.
One global coal player, Peabody, recently told the World Coal Conference that it assumes demand for coal will increase by over 50 per cent by 2030. The IEA on the other hand tells us that if we are to have a reasonable chance of limiting warming to 2°C degrees, coal demand will have to peak by 2020, and by 2035 will have dropped to levels last seen in 2003. These are dramatically different views of the market and the implications for company valuations, and therefore for investors and corporate strategy, are considerable.
The same report compares coal and oil’s current 46 per cent share of global electricity generation to what it would be in 2030 under the 2°C degree scenario. The answer is just 22 per cent. The difference would be picked up by low CO2 energy, nuclear and renewables, which would see massive growth. They assume non-hydro renewables would go from 3 per cent to 20 per cent, all the more remarkable given the assumed 50 per cent increase in overall energy demand numbers. Interestingly, despite this demand growth, even the total amount of coal-generated electricity would fall in absolute terms.
The significant thing about these forecasts is that the IEA has generally been considered to be excessively conservative and largely aligned with the views that dominate the fossil fuel industry. Indeed, the Peabody forecasts referred to above reference an earlier IEA WEO report. So what’s going on when this industry friendly body chooses to prick the coal bubble? And what does it all mean for investors and resource companies?
What it means is the coal industry is headed for a crash. This is heresy in the industry and would be dismissed by some as starry-eyed naivety. But the numbers don’t lie and this issue has cold hard rational numbers all over it.
One of these numbers is 2°C. There are many uncertainties in the detail of climate science, but there is clear consensus on that number. It is the line in the sand scientists have drawn and said, if we go past it we face catastrophic system-wide risk. While some scientists argue that number is too high and too risky, none of any consequence argue it is too low. That’s why the governments of China, India, Europe and the USA have all agreed, along with many global corporates, that 2°C is the line we can’t cross.
Not crossing it requires the numbers in the IEA report to be achieved. This is hard science. If you put any more CO2 in the atmosphere than that, we will almost certainly be heading past 3-4°C. The economic consequences of that would make the collapse of the coal industry look like a picnic. The science also tells us, supported now by the IEA, that the decision will be made this decade, by action or lack of it.
Further complicating assumptions of growth is a very interesting analysis published today in Nature by two well regarded US energy experts, Richard Heinberg and David Fridley. Their article, “The End of Cheap Coal,” calls into question assumptions of endless supplies of cheap coal, using much of the same logic as earlier predictions around the end of cheap oil. It’s worth remembering that those who have been predicting the end of cheap oil since the late 90s, including Heinberg, were ridiculed for many years.
Now even the IEA supports that view with comments like “the era of cheap energy is over”. The new analysis in Nature suggests there may be a similar dynamic at play with coal, with reserves constantly being revised downwards as time passes. They also remind us that industry has a history of getting their forecasts wrong, noting that for oil, "the current price of more than $US80 per barrel is about three times higher than the upper range in official forecasts for 2010 that were being issued in the late 1990s.” Like oil, the issue is not that we are running out, but volatile and rising prices as the peak level of supply is reached.
But aren’t rising coal prices good for the coal industry? Isn’t this good news for them? The answer is surprising – and this is where the two issues combine. In the short term the answer is yes, but ultimately higher prices will trigger the death of coal. Everyone knows the only way coal can survive in the low-carbon world that science says we must now have, is if carbon capture (CCS) technology can make coal a zero CO2 energy source. The economic viability of CCS is already questionable and is rapidly losing support, but if it is ever to work it can only do so with cheap coal.
This is because the additional cost of CCS equipment and CO2 pipelines, along with the inherent loss of efficiency involved in its use, means that if coal prices rise, renewables will become cheaper than coal with CCS. So if Heinberg and Fridley are right, coal prices will increase, CCS will be uneconomic and renewables will take over. This, of course, will then see coal prices drop again. But it seems likely, by then, that the market will have shifted its focus to renewables, and perhaps nuclear, with coal unlikely to recover given renewables prices will keep falling.
So why do Peabody and so many others assume levels of growth that are in such contrast to this hard logic of both the market and climate science?
Firstly, of course, because they want it be so. They sell coal and the more they can convince the market of an endless coal boom, the higher their share price. This is particularly so for resource companies that are heavily or exclusively reliant on coal like Peabody. Self-interest is a powerful driver of denial. But it’s more complicated than that.
What these people and their investors are falling for, supported by many people in government, is what I call the “economic inertia trap”. This is the belief that something that is big and moving in a certain direction will continue to do so. They simply can’t imagine the level of change required to shift that inertia could possibly occur. Coal is cheap and plentiful, people need lots of energy, so coal will be burnt. This is delusion on a grand scale. Does anyone really believe society will calmly stand by as we head towards 3°C, then 4°C, staring economic and social collapse in the face while we focus on cheap energy as some kind of overriding objective?
Let there be no doubt, we will act on climate change – and when we do, the coal industry will face an almighty crash, as Phil Preston and I argued when we recently released our paper on the financial implications of all this. Probably not this year or next, but we think before the end of this decade.
But don’t expect Peabody or their friends to come on board early. Horse and cart companies didn’t become auto companies. Amazon reshaped the book retailing business before book retailers woke up. Kodak failed to be ready for digital photography, and so on. So we can safely expect the coal companies to stay in denial all the way to the finish line – or in their case, their finished line. That is their choice to make. It is also their investors’ choice on whether to go with them or when to jump. The clock is now ticking.
Comments on this article
Photovoltaic solar technology
Photovoltaic solar technology is developing so rapidly that it will be cheaper than coal within a decade, more likely within the next few years. From there, thermal coal has no future, and the IEAs predictions no longer relevant, as solar will completely displace coal and most of the 'contributors' to this comment section will be out of work.
Climate change won't exist until there is Scientific Consensus!
This artilcle has got ahead of itself on a number of counts. First, the science is not settled - it is divided. What is worse is the complete failure of the scientific community to debate out the evidence - until there is overwhelming consensus amongst scientists one way or the other. What we have now is 2 camps rubbishing eachother whilst failing to cover what scientists are supposed to be good at ... measuring and analyising the facts. The facts must be tested and agreed on. Then the Government needs to calmly, without hint of ideology, present that to the people.
The statements about technology and CCS is simply wrong. There is no mention of EOR UCG or GTL technologies that exist now and are both environmentally friendly and commercial. These technologies are described on the Linc Energy website and have been tested thoroughly. If this issue is as serious as argued, then the media and others, have got to stop using it as a political football.
Announcement of the death of the coal somewhat premature.
Many years ago I read an article by a resource economist who argued that we should not be using oil to power vehicles etc because there were other ways of powering vehicles and the most valuable use of the finite resource was in the manufacture of plastics. We still don't seem to have an alternative to plastics, and many argue that peak oil has already occured.
I have for many years believed that at some stage, as the price of oil increased, the production of plastic from coal would become viable. I have just googled "plastic from coal" and found an article on the production of polypropylene plastic from coal. Those predicting the imminent demise of the coal industry might like to check this link:
http://peakenergy.blogspot.com/2008/09/coal-to-plastic-in-china.html
Coal may not continue as the energy source of preference for more than 20-25 years ( the lifespan of the many coal fired power plants under construction or currently planned), but may well be the major source of some plastics before too many more years.
A market exercise
Oil producers pushed for price rises by saying oil would run out "soon." But it hasn't.
The IEA pronouncement of coal is a reversal of scarce commodity claims in order to do the same thing.
The global warming scare is prompted by oil and coal interests because it allows them to increase prices in order to reduce CO2 emmissions.
Henny Penny is alive and well and contributing to the coffers of the Greens.
2C max rise
There is a defect in all climate models.
All assume that increased CO2 will give increased temperature.
The fact that stratospheric temps have fallen as CO2 levels rise means that what little CO2 absorbs (it is a lousy greenhouse gas if you look at the absorption spectrum) is already being absorbed to extinction.
Increased CO2 simply reduces the extinction path length, and cannot increase total absorbed energy as it has already done that.
Unfortunately, the entire "CO2 is evil" bandwagon has now acquired a life of it's own and even the scientists seem to no longer question the fundamental assumptions.
In the past, we have more than the projected "disastrous" 2C rise with no harm. Why is it a disaster now?
The C word
I think some people in this forum clearly underestimate the power of international markets on our coal exports - those key markets (especially China) aren't going anywhere anytime soon. BHP have some bright people working for them (inspite of recent failures in the M&A sector) and I don't see them dropping any of their key coal assetts.....
@Bernard Walsh - thanks!
Thanks for the answer Bernard. Its an important question because even the green economy will depend on the usual array of industrial metals being available, plus plenty of newer metals.
nine-tenths of SFA
@michel, I haven't crunched any numbers, but off the top of my head I'd estimate the probability of a meteorite hit on a nuclear facility any time in the next millennium as having more zeroes than you've used question marks.
correction
When I reffered to asteroid hits below I meant meteorite hits (sorry I am so busy and juggling work between my daily dose of CS) - and I would love an answer of what CS and Mr Bennetts think???
I know we are talking about far out stuff here - but it is a valid point. If a larg meteorite hit a nuclear facility or storage site what would be the consequences???????? and what is the probabilitites of this??????? (there definately is a probability that needs to be weighed)
Mr Bennetts you seem like a
Mr Bennetts you seem like a good man with the ability to think. I have noticed you mention Nuclear on a number of occassions. Can you please give us your thoughts regarding the risk asteroid/space rock hits have to nuclear storage facilities or nuclear faciltities in general? And can you please tell us how many hits we have had to earths surface over the last 4 to 5 decades during your life time - taking into account the nuclear storage sites will be stationary targets for next 10,000 years or more????
Time to run down our coal consumption
@ Davidson:
Slowing domestic consumption will not make more coal available for export, because domestic coal frequently has higher ash and lower energy content than export coal. Think about it... local power stations are designed to pulverise high ash coal. There are more burners and these are selected specifically for the domestic (cheaper) coal. Overseas customers don't want to ship 30% ash coal around the world. They want 17% ash coal which is easier to handle. The domestic market often takes the lower grades which otherwise would have to be discarded in the overburden. Spontaneous combustion in overburden stockpiles is particularly difficult to stop. Besides which, if domestic coal was sent overseas any time soon, you and I could look forward to shivering in the dark during balckouts next winter. I'm in favour of renewables and hot rocks, etc, but we cannot have it both ways. They can only get us so far and no further.
Without substantial nuclear baseload, Australia cannot get by with just renewables. And please, don't give me BS from the ZCA2020 report - it is not at all credible.
Keep it real, folks
@David Arthur:
I don't know what miners are permitted to get away with in Qld, but in NSW there are hefty real dollars guarantees for site restoration held by the regulators and not released to the companies till the restoration to pre-mining productiveness has been achieved, audited and agreed.
Now, I am as unimpressed as anybody by the condition of old abandoned leases and I am not impressed by some of the landforms that miners are able to get away with, but it is fair to say that they leave their sites these days having restored them - at least to some sort of standard.
1. Carbon sequestation will
1. Carbon sequestation will not work - it goes against the laws of the carbon cycle!!!!
2. last time i mentioned the next point it was edited out - but when it comes to Nuclear I hear and see no-one talking about the long-term storage risk associated to the highly probable chance of asteroid and space rocks enetering our atmosphere and impacting Earth.
What do Muslims walk around when they go to MECCA????(I am not joking) They are walking around an asteroid rock that entered our atmoshphere early 1100's which was too large to burn up before it crashed into the ground. Yes amazing isnt it that in fact they are worshipping a space rock!!!!!
What will an asteroid hit do to a nuclear storage facility????
How many "shotting stars" = asteroids and space rocks impact Earth every decade???? it would be great if CSpectator could answer this
Mate - great article. You hit
Mate - great article. You hit some of the nails on the head.
New Coal Mines
Peabody is on the money. There was a time the Bowen Basin was the largest coal source in the world with 4 billion tonnes. Well the investment in new coal fields is rapidly changing that with one new african project at 12 billion tonnes!
Quick answer re coking coal
@Steve Phillips - I believe the Direct Reduced Iron process can be used instead of 'traditional' coke-fired blast furnaces. Needs hydrogen and carbon monoxide, which can be produced from atmospheric CO2 if required (don't know how the costs compare, although I understand CO2 can be reduced to CO in a solar thermal collector).
@David Arthur - yes, I fear there will be a lot of new coal mines opened, particularly up here in Queensland. There seem to be a lot of approvals coming out of the state gov't lately... at the same time they're selling off the coal ports & coal rail transport company to suckers - er, retail investors...
Coal crash coming
Bloody good artcle Paul. Add to this the imense pressure on Australia's government to reduce emissions even if only by efficiency measures and extrapolate that worldwide and it is obvious that cheap coal has a bleak and short-lived future. I disagree with the demand fall-off though simply because of the growth of developing nations running ahead of the growth in base-load capacity renewables. BUT the higher the coal price the more capital and funding will flow to the renewables sector as it reaches competitive pricing.
And, by the way, I still believe CCS is unattainable
Quick question...
I agree totally with the above, but how do we replace coking coal?
RIGHT TIME TO RUN DOWN OUR COAL CONSUMPTION
Al this suggests that the right time to run down our domestic coal consumption is now. Most of the coal going to domestic power could be diverted to exports (often at much higher prices). Even if cola mines tied to specific cola fired power stations had to be shut down, the demand for people with mining related skills and the mobile equipment in these mines is high.
There will be a lot more social and economic disruption if we are trying to wean ourselves off coal while the international demand for coal is declining.
Too late?
Before this peak occurs, there is still time for small coal projects to get started. Open cut coal can yet foul up a lot of beaut country (eg Mary Valley and Darling Downs in Qld, Liverpool Plains in NSW) before the market dries up.
We can, however, be fairly confident that proponents of these small coal projects will design their departures from their operations so as to leave the clean-up to the public purse. Remember to always privatise the profits, and socialise the costs!