A new series of reports from global investment bank Citigroup has highlighted the dramatic changes that are sweeping the world’s largest energy markets -- events which will have a significant impact on the future of the coal industry.
The trio of reports -- A New Balance of Power, A Short Gas Bridge to Renewables, and Global Thermal Coal: When Cyclical Supply Met Structural Demand -- come to several key conclusions.
The first is that emission standards and rising costs will force a mass closure of coal-fired generation (more than 60 gigawatts) in the next few years in the world’s biggest market, the United States. And contrary to most expectations, the reports say gas will play only a minor role in this “energy transformation,” because it will be overtaken due to the falling costs of renewables.
The second conclusion is that increasingly strict environmental measures are severely limiting the feasibility of opening new coal plants, not just in the U.S. and Europe, but also in China – which for the past few years has dominated the global coal market and has been the world’s biggest consumer and importer.
In short, Citigroup says, the evolution in electricity markets is being driven by a combination of regulatory and technology changes.
This, the reports say, has major implications for areas with large coal resources, which require huge investments in infrastructure (rail lines and ports), and may simply not make economic sense in the future. The reports note that financiers are already absorbing these lessons, and many projects have been delayed as a result.
The reports note the growing risk to fossil fuels, and the emergence of what Citigroup described in an earlier report as the impending “age of renewables.”
“[Coal] demand is in structural decline as environmental pressures rise and costs of alternative energy sources decline,” the Citi analysts state. “The shale gas revolution was the first blow, but rapidly declining wind and solar costs and the spread of unconventional gas production techniques are set to erode coal’s long-time cost advantage over alternative electricity sources.”
To illustrate the changing nature of the U.S. market, Citi published the graphs below. The graph on the left highlights the trends identified by Citi, including a short-term burst of gas-fired generation in coming years before all new capacity is taken up by wind or solar. Some reports suggest solar is already substituting for peaking gas plants. The graph on the right illustrates the scale of closures in the coal industry, with the biggest hits to come from regulatory moves in the next four years.
“Increasingly strict environmental measures are also severely limiting the feasibility of opening new coal power plants not only in Europe and North America, but in China as well,” the report notes. Meanwhile, global coal prices are sinking further, with Citi predicting a price of just $72 per ton this year -- well below the break-even estimates of most coal mines.
“Investors are increasingly considering whether some fossil-fuel-related assets might become “stranded,” with significant loss of value, if stronger carbon constraints are imposed to mitigate the risk of dangerous climate change, or if alternative energy solutions become technically and economically more attractive,” Citi notes.
As a result of this, financiers are taking a cautious view, which explains the delay in many coal projects in Australia, where there are more than $60 billion of projects either publicly announced or undergoing feasibility study, but where only one project -- the controversial Whitehaven development at Maules Creek -- is currently in development.
“Where once there was a long list of projects that should have been underway by now in Australia, projects have dramatically succumbed to the reality of lower prices and high capex/capex intensity,” Citigroup notes.
It says China is no longer paying lip service to environmental issues, and it represents the most significant shift in environmental policy related to coal. Demand will slow as the China economy transitions away from investment and manufacturing-led growth, as alternative power capacity is built out, and environmental measures are enacted to discourage coal usage. It may cease to become an importer.
“To reduce China’s dependence on coal, the government is pursuing an 'everything but' strategy,” Citi notes. “This includes rapid build-out of solar, wind, nuclear, and natural gas generating capacity.” Solar, it says, will provide the fastest growth, while the largest volume growth will come from hydro.
It also means a renewed focus on carbon markets. Citi includes this graph to highlight the recent growth in volumes on the country’s nascent carbon exchanges, which are coming into play just as Australia looks to end its carbon price.
In India, the other great hope for coal producers, Citi says imports are likely to be capped at lower-than-expected levels because coal consumption will be lower than forecast.
Here are a few other key takeaways from the reports.
“The transition period from now to 2020 could give utilities time to evolve until new technology and a new paradigm begin to play a much larger role in energy consumption and power generation. At first glance, more rooftop solar and distributed generation, along with slowdown in power sales, and lower peak power prices and heat rates, are headwinds to merchant power generators. But it still takes time for new sources to fully develop and integrate into the market.”
“The growth in gas demand for power generation could be less significant than is commonly believed. Gas is commonly thought of as the substitute fuel for coal in power generation once coal plants retire. But rising renewables generation should increasingly take over market shares of coal and gas-fired generation, particularly in an environment of slow electricity demand growth.”