Energy Crisis Gives Coal Stay of Execution

Valuations rise on expectations of short-term increases in demand, amid policy concerns over energy security.

Public-sector support and private-sector investment are lengthening the life of coal assets, including coal-fired power generation facilities, against a backdrop of rising uncertainty over energy supplies this winter.

Despite commitments from governments and financial institutions around the world to phase out financing of coal-based power generation, the energy crisis has stayed the hand of governments, with ministers and officials seeking to keep the lights, the heating on and workplaces in business. In response, valuations of some coal assets are rising.

In the UK, the government has been renegotiating deals with several power utilities to keep coal-fired facilities open, including one sited in Nottinghamshire operated by Germany’s Uniper. However, it is China, which is much more heavily reliant on coal for power generation, where the transition from the world’s dirtiest fuel is stumbling most.

Despite a commitment to “strictly control” coal-fired power generation in China’s current five-year plan, this year has seen approvals from Beijing both for new coal mining capacity and for coal-fired power plans.

Coal’s apparent new lease of life has prompted investors in the Chinese stock market to put money in the industry, with the country’s coal index rising 10% in August, while other stocks plummeted. On August 31, Reuters in Shanghai reported: “Investors are snapping up China’s coal stocks, betting the country’s urgency to revive economic growth will override concerns about pollution to drive demand for fossil fuels and reliable energy.”

Investors have cited the need to stimulate economic growth after the pandemic, as a reason for returning to coal, alongside concerns about renewables’ short-term reliability after hydroelectric sources were suspended due to drought conditions, as well as the impact on global energy prices of Russia’s invasion of Ukraine.

Extended life of coal plants

Official support for coal appears to have plateaued, but recent analyses suggest the industry will continue to thrive and offer returns.

On August 29, the International Energy Agency (IEA) and the 38-member Organisation for Economic Co-operation and Development (OECD), the club for developed countries, jointly reported that state support for fossil fuels almost doubled in 2021 as many countries sought to balance their commitments on cleaner energy with the need to shield households from rising fuel bills.

The report said: “Government support for fossil fuels in 51 countries worldwide almost doubled to US$697.2 billion in 2021, from US$362.4 billion in 2020, as energy prices rose with the rebound of the global economy.

“In addition, consumption subsidies are anticipated to rise even further in 2022 due to higher fuel prices and energy use.”

Although coal subsidies have remained constant – at approximately US$20 billion – a separate IEA report predicted that coal would enjoy a bumper year in 2023, following a buoyant 2022.

It said: “Based on current economic and market trends, global coal consumption is forecast to rise by 0.7% in 2022 to 8 billion tonnes.” That takes it back to the level seen in the record year 2013.

What is more: “Coal demand is likely to increase further next year to a new all-time high.”

The IEA coal report noted strong demand in China and India, which is perhaps to be expected as coal remains an important energy source in those countries. But: “Coal consumption in the European Union is expected to rise by 7% in 2022 on top of last year’s 14% jump. This is being driven by demand from the electricity sector where coal is increasingly being used to replace gas, which is in short supply and has experienced huge price spikes following Russia’s invasion of Ukraine.”

And it is the war in Ukraine, with its associated disruption of supplies and fears of a complete Russian switch-off in supplies to EU countries in retaliation, that has triggered the energy crisis that has prompted a certain official flexibility over the fate of coal.

As the IEA noted: “Several EU countries are extending the life of coal plants scheduled for closure, reopening closed plants or raising caps on their operating hours to reduce gas consumption.”

Making mining green

Many investors cast doubt over the longevity of coal’s revival given commitments made by governments at COP26 and the withdrawal of many financial institutions from financing the sector in recent years.

Maria Lozovik, Portfolio Manager at Marsham Investment Management, said the Ukraine war may see a temporary increase in coal production for electricity generation, but insisted that the downward trend is in place. In the longer term, she said, the real challenge was not to dig more coal, but to address the paradox that the transition to clean energy will involve mining materials for those energy sources, including lithium, nickel, copper, manganese, silver and zinc.

In terms of production, such mining is intrinsically no cleaner than coal mining. “The solution is for companies to find cleaner ways to extract metals. Emissions can be reduced, perhaps by 50%,” added Lozovik.

“Uncomfortable reality”

Tom Nelson, Head of Thematic Equity at global investment manager Ninety One, said that the energy system can be characterised as a shifting balance among three factors: security of supply, economics of supply and that supply’s environmental impact, this balance being known as the energy trilemma. He added: “The Ukraine crisis has changed the game with regards to the first two factors. The pre-eminent supply of natural gas into Europe is no longer secure, and fossil fuels have become much more expensive.

“In thinking about the implications of this for the energy transition, time horizon matters. In the short term, the uncomfortable reality (from an emissions perspective) is that demand for thermal coal for power generation will likely increase in both Europe and Asia.”

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