Coal Makes a Comeback Despite Net Zero Pledges as Energy Woes Continue
- November 7, 2022
- Posted by: Quatro Strategies
- Category: Energy
The world leaders had been debating at last year’s COP26 UN Climate Summit whether to include a pledge to “phase out” or “phase down” of coal to the final draft of summit’s agreement. Despite those discussion last year, this year coal makes a comeback to the power grid as Russia’s invasion of Ukraine has sent the world to an energy crisis. Global coal power generation could set a record for a second-straight year and remains the world’s biggest source of electricity. Consumption has surged in Europe to replace shortfalls in hydro, nuclear and Russian gas, while top producer China is extracting record volumes from mines to insulate itself from volatile global energy markets.
Prices of exported coal have skyrocketed to records and futures contracts show that they will likely remain at historic highs for years to come. Spending on new coal mines and power plants remain lower than what they were a few years ago, but the fact that there is still investment in the fuel alarms climate scientists, who say coal must be phased out by 2040 to avoid the worst effects of climate change. This weekend, leaders will gather once more for UN Climate Summit in Egypt to consolidate the work of Glasgow, Paris and other past COP summits. But coal’s comeback shows the world still has a long way to go.
Climate scientists and analysts say the power sector is the most important one that the world needs to see emission reductions this decade, and governments have to get more serious. Coal producers on the other hand still think they are needed to provide cheap and reliable energy sources.
Coal is cheap to mine, transport and burn; but is also the biggest source of greenhouse gases as it emits more CO2 than oil or natural gas. The International Energy Agency says coal must be phased out in developed nations by 2030 and in the rest of the world by 2040 in order to reach net zero emissions by 2050. Still, hundreds of billions of dollars are forecast to be invested in new coal assets through the middle of the century, and key nations like China and India are forging ahead with plans to roll-out vast new power plant capacity. Last year was supposed to be the beginning of the end for coal, as consumption had declined in both 2019 and 2020.
Instead, a strong industrial rebound from the pandemic drove coal consumption to a record. Widespread power outages in the world’s top coal users China and India made leaders there double-down on ensuring supplies of the fuel to keep their economies going. At COP26 in Glasgow a pledge to “phase-out” coal was changed to “phase-down” at the last-minute, on the insistence of Beijing and New Delhi.
In 2022, coal power generation rose about 1% over the previous year through August. In Europe, it’s been needed to replace Russian gas to help overcome lower output from nuclear and hydropower. In China, a historic drought in July and August sapped reservoirs of its massive dams, requiring a surge in coal consumption to fill the void. In the U.S., coal power plant retirements are being delayed and production of the fuel will increase 3.5% this year as miners seek to meet surging demand from around the world and take advantage of record prices.
In China and India, which together account for 70% of the world’s coal consumption, work is underway on even more power plants that use the fuel.
As a result emissions from power sector is expected to break a new record this year, despite investments in wind and solar generation jump to records. UN climate scientists have warned that they have to be cut in half by 2030 to be on path to limit rising temperatures to about 1.5 Celsius above pre-industrial levels. Emissions from US power plants will increase 1.5% in 2022.
Surging demand has boosted prices for coal to record levels, with benchmark Newcastle coal futures trading around $360 a ton, about six times higher than they were two years ago. Forward contracts are currently trading at above $260 a ton through 2027. Not a single forward contract was above $75 just two years ago.
Although windfall profits for coal miners have surged, investments in coal have been plunging as shareholders and banks increasingly refuse to approve new spending on projects either on ethical grounds or because of concerns they’ll be forced to shut long before they can generate a profitable return.
About 473 gigawatts of new coal power plants are still in various stages of planning, compared to about 1,600 gigawatts in the pipeline as recently as 2017. Still, if all the operations planned are built that would increase the global fleet by nearly a quarter.
Outside of China and India, plans for new production capacity are limited. Along with expectations that gas will remain costly after Russia’s invasion of Ukraine, that should keep prices high as supply won’t be able to catch up with demand.
While China invests in new coal mines and power plants, it’s putting even more money into clean electricity and energy storage that could eventually crowd fossil fuels out of the grid. In the United States, the Inflation Reduction Act promises to speed investments in wind and solar in a market that’s been a laggard relative to its wealth and emissions profile. In Europe, looming energy crisis and surging fossil fuel prices have boosted demand for renewables, with imports of solar panels from China on the continent more than doubling over the first half of the year.
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