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Solid demand outlook boosts coal industry confidence

The global coal sector is in a state of flux, as it realigns to handle shifting regional demand and adapts to a still-fragile economic recovery, the impact of natural disasters and the potential consequences of often-unclear national environmental policies.

But coal industry leaders meeting at the Coaltrans World Coal Conference 2011 remained confident that coal would maintain its leading role in global energy provision over coming years.

After a decade in which global coal consumption has grown by almost 50%, the industry now faces the task of ensuring that the sector builds on that platform. But stiff competition from gas and subsidised renewable energy, as countries seek to meet carbon emissions reductions targets, make that far from straightforward.  

“The industry has been attractive and profitable for investors – these have been the best of times. We must take care to avoid the worst of times,” Hartmuth Zeiss, president of the European Association for Coal and Lignite (Euracoal), told delegates at the Coaltrans conference, held in Madrid on October 17-18.

However, he said that if coal could continue to provide security of supply, reliability and flexibility, it would be well positioned to provide a counterweight in the energy mix to wind, solar and other renewables, whose intermittency makes them unsuitable for baseload power provision in most circumstances. 

That view was echoed by the International Energy Agency (IEA), which is making prospects for the coal industry a central theme of its 2011 World Energy Outlook (WEO), to be published on November 9.

Pawel Olejarnik, a senior energy analyst at the IEA, told the Coaltrans conference that coal demand would be driven by non-OECD countries, whose expanding economies will continue to suck in more energy imports.

“If you look at historical trends, coal has fared better than most people expected, considering climate change issues,” he told the Coaltrans conference. “Coal today is the backbone of electricity generation and, in our forecasts, it remains the backbone of electricity generation.”

The IEA has yet to release data from the 2011 publication, but Olejarnik said that projections in the report would show that coal’s position is set to stay “very solid”.  The agency has been reassessing its outlook for energy demand in the context of events such as this year’s Middle East unrest, the Fukushima nuclear accident in Japan and the development of shale gas reserves.

In 2010, the IEA forecast that, even if countries adopted all the environmental policies that they have so far pledged to implement (its “new policies” scenario), coal would still account for some 36% of electricity generation by 2035, which is more than any other fuel. Coal would also meet 23% of all energy demand, second only to oil in that respect. In 2008, coal accounted for 47% of global electricity generation and 27% of total energy demand.

China leads the way

While demand from OECD countries is likely to decline gradually over coming decades, as coal is displaced by renewables, gas and possibly nuclear power, this will be more than offset by strong demand from Asia. Much of that will come from China, which, the IEA has forecast, could add some 600 GW of new coal-fired power capacity over the next 25 years – more than the current capacity of the US, EU and Japan combined. India and Indonesia are also projected to contribute significantly to Asian demand.

However, Olejarnik cautioned that coal demand remained highly sensitive to changing environmental policy. A dash for gas – which produces less carbon emissions than conventional coal plants – could yet see coal’s market share diminish more rapidly over coming decades, he said. And in the longer term, the greater adoption of power sources with lower carbon emissions in Asia is likely to result in a flattening out in demand for coal in Asia in two or three decades time. 

The extent to which coal will be displaced by renewables or nuclear power in the shorter term is difficult to predict given the uncertain economic outlook. Euracoal’s Zeiss believes that while renewables still garner financial incentives from the European Union to make them more competitive with coal, a question mark remains over whether those incentives are sustainable.

“Heavily subsidised renewables are given privileged treatment in the EU, but can the EU afford them?” he asked at the Coaltrans conference. Most coal mining in the EU is efficiently mined at competitive prices, and what subsidies there are in parts of the bloc are being phased out over the next few years, he added.

Zeiss also highlighted the issues surrounding other competing fuel sources. The aftermath of the Fukushima nuclear disaster is set to raise coal demand, as Germany seeks alternative fuel sources, following the decision of the German government to abandon its nuclear power programme by 2022, and as other countries now weigh up their nuclear power policies.

Industry analysts say that Germany’s volte face on nuclear energy and the resulting increase in demand for coal-fired generation there reflect coal’s key advantages as a fuel – that it is a cheap, tried-and-tested feedstock that is easy to obtain when it is needed.

“It is ironic that coal, which as recently as six months ago was in the process of being jettisoned as dead weight, is now a lifeboat for the [German] power sector,” Steve Doyle of energy research firm Doyle Trading Consultants said at Coaltrans.

Controversy also continues to surround another competitor, shale gas, with moratoriums in place on its exploitation in France, South Africa and New York state in the US, among other places, while safety studies are carried out. If the results turn public opinion away from shale gas development, then coal will be well placed to fill the gap, Zeiss noted. The US shale gas boom has already led to coal being displaced by cheap gas in the power sector there, but that is providing opportunities for coal buyers elsewhere in the world, as US coal firms seek to boost exports.

Urgent need for CCS

However, few at the top of the coal industry believe that the sector can expect to maximise its potential, especially in the tough regulatory environment of Europe, without widespread adoption of clean coal technology – and, in particular the implementation of carbon capture and storage (CCS) on a large scale at power stations and in industrial processes, such as steel manufacturing.   

That has proved tricky thus far, as developers have struggled to raise finance to move the technology beyond the demonstration scale. However, Zeiss said the EU was unlikely to be able to meet its tough emissions reductions targets without attaching CCS technology to coal-fired power plants. “It seems that CCS needs to be deployed rather more urgently than previously thought for both coal and gas,” he said.

Given the need to implement CCS globally – especially in large emitters, such as China and the US – to make a significant impact on carbon emissions, the coal industry is closely watching progress at the international level. More clues may be forthcoming from the next round of global climate change talks, which start in November in Durban, South Africa.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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