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Market Forces and Coal


Posted on 19 August 2019 by Riduna

Following defeat of the Australian Labor Party in the Federal election a leading Member has suggested that the Party should not rely on the use of Market Forces as the basis for curbing emissions.  This would be a mistake since it is these forces, particularly those of supply and demand, which governments can not resist – no matter how ill-disposed to rapid reduction of greenhouse gas emissions they may be.

Supply and demand are influenced by price, reliability, cost to use, appearance and many other comparative factors.  Simply put, a manufacturer will not produce goods or services unless cost of production enables him to compete profitably with other producers. Consumers are unlikely to purchase a product unless it is deemed to have advantages over other products. 

Into this mix has been inserted new, highly disruptive, though still evolving technology in the form of renewable energy generation.  It is disruptive because it enables radical departure from existing, often long-standing technology to which we have all become accustomed.  It offers cheaper, more efficient production of goods and services which can be supplied to consumers at lower prices, though more profitably.  Nowhere is this more evident than in the generation, storage and use of electricity.

Coal

Demand for coal is primarily created by demand for electricity, steel, bitumen and other products.  The fact that the Adani coal mine will be built and will export coal to India is a natural response to this demand – and the demand for more jobs in Regional Queensland.  It will not help reduce greenhouse gas emissions but it is a natural response to market forces.

Demand for the end-products of coal is likely to increase in coming years because of a growing population and expanding economic growth, giving the impression that the future of the coal industry is secure.  Not so, because electricity generated from renewable sources, primarily wind and solar, is now cheaper than electricity generated from new coal-fired power stations while old power stations are closing because essential maintenance is becoming more pervasive and expensive.

Australia is unquestionably the worlds’ leading exporter of coal.  In 2017 it exported 202 million tonnes of thermal coal which was used to generate electricity and 177 million tonnes of coking coal used for smelting and other purposes.  In addition, Australian coal mines produced and sold some 44 million tonnes for domestic consumption, mostly for power generation.  However coal production is prone to contraction due to falling internal and external demand and other factors such as price or availability of substitutes such as Liquified Natural Gas.

Domestic Demand

In 2018 Australia had 19 coal fired power stations in operation, generating about 62% of its electricity with the balance coming from oil and gas-fired power stations (23%) and renewables (15%).  

Fig 1.  Rapid expansion of large-scale solar Photovoltaic (PV) generation is expected by the end of 2019 with new capacity of 1,570 MW commissioned in 2018 and 4 – 5,000 MW likely to complete in 2019.  Source of graphic:  Wikipedia.

Australia’s coal-fired power stations have a nominal capacity to generate 24,970 MW.  With closure of 4 stations likely by 2030 (5,654 MW) and a further 11 (16,151 MW) closing by 2040, leaving 4 stations (3,165 MW) which may operate beyond 2040.  It is possible, indeed likely, that all 19 power stations could close by 2030 without causing any failure to meet national demand for electricity. The reason for this is, as shown in Fig 2. below, the investment pipeline in renewable energy has a generating capacity of 29,307 MW, exceeding the nominal capacity of coal fired power stations now in operation.

Fig. 2.  The Pipeline comprises approved projects which have commenced/not commenced but are likely to be commissioned by 2025.  It excludes mega-projects:  Snowy 2.0 (2 GW), Pilbara Power Hub (9-12 GW) and the NSW Power Hub (4 GW) since funding, start and stage completion dates are uncertain.  Source:  Authors research and Clean Energy Council data.

Proponents of coal fired power generation correctly point out that renewables only generate electricity when the sun shines or the wind blows, while demand is for reliable dispatchable energy supplied 24/7.  This problem is being overcome in three ways:  

1. The Pipeline includes pumped hydro and battery storage of 2.115 GW to help ensure continuity of supply.  

2.  Snowy 2.0 is likely to be commissioned well before 2030 and provide an additional 2 GW back-up for solar and wind.

3.  Solid State battery technology promises cheaper, more stable batteries with up to 3 times storage density of lithium-ion batteries now in use and is likely to be commercialised by 2025, possibly sooner.

It is currently estimated that 35% of Pipeline projects, with around 5-8 GW generating capacity will be completed and connect to the Grid in 2019, further eroding the use of coal which, as shown in Fig 3, has contracted by about 24% over the last decade.

Fig 3.  Decline in Australian domestic coal consumption 2007 – 18, shown in millions of metric tonnes.  Source:  CEICDATA.

Advances in solid state battery technology will result in cheaper electricity storage, expansion of small-scale solar with generating capacity of >8 GW, and fall in its dependence on the Grid for back-up.  The present cost of Grid-scale battery storage is likely to fall by as much as 50% and will be supported by larger pumped-hydro projects such as Snowy 2.0. Most of these developments are likely by 2025 and would see further, more rapid decline in the use of fossil fuels, to generate electricity.  

By 2030 domestic demand for coal to generate electricity could be reduced to zero, implying that coal mining production would be forced to contract possibly by 40 million tonnes over the next decade.

Export Demand

Australia is the largest coal exporter in the world.  In 2016/17 it exported  379 million tonnes comprising 45.7% coking coal largely used for smelting iron ore and 54.3 % thermal coal used for generating electricity.  As shown in Fig 4, the bulk of these exports were to Asian countries, with 5 countries accounting for 86.9% of all export destinations.

Coking or ‘metallurgical ‘ coal is described as a non-substitutable material used in production of steel from iron ore.  In fact hydrogen can perform the same reductive task and the Swedish Government is involved in a prototype steel works using hydrogen rather than coking coal to smelt iron ore.  However, wide-scale adoption of hydrogen for this purpose seems unlikely for at least a decade.

Other factors more likely to affect future demand and use of coking coal are a decline in demand for steel due to regional or global economic downturn or, more significantly, greater use of scrap metal as the source of steel products.  The latter is likely to grow significantly as electric vehicles begin to rapidly replace those driven by internal combustion engines after 2025, resulting in rapid increase in availability of scrap metal which is often recovered using electric furnaces.

Major importing counties, notably Japan, China, Korea and India, seek to become more self-sufficient in coking coal through increased domestic production, thereby conserving foreign exchange needed for purchase of other imports and improving self-reliance. All of these factors are likely to result in declining demand for coking coal by 2030, with more rapid decline possible thereafter as hydrogen becomes more widely used for smelting. 

Fig 4.  Coal exports to Japan, China, Korea, Taiwan and India account for 87% of all Australian coal exports so future intentions of these countries merit special attention.  Source of data:  Australian Dept. of Industry:   Thermal Tonnage.  Coking Tonnage.

Decline in demand for thermal coal may be more rapid and sustained, as evidenced by the future intentions of major importers expressed by their policies, actions and commitments under the Paris Accord.

Japan:  In 2018 climate events cost it US$27.5 billion. Severity of such events will increase in coming years unless it – and other countries – decarbonise their economies.  An added imperative is the need to generate electricity at a cost which is no more than the cost of its competitors if its trading activities are to remain competitive.  Realising this, Japan intends to reduce its emissions to 26% below 2005 levels.

The Government has determined that it should decarbonise the economy by about 2050 and to this end generate energy from renewable sources by using hydrogen for transport and steel production, increase use of renewables and possibly reopen its nuclear generators.  The net result is reduction in use of fossil fuels, particularly coal, though a timetable and targets are not specified in the Government Policy Paper.

China has indicated policies aimed at increasing size and efficiency of domestic coal production by limiting 2019 imports to 2018 level.  These policies have resulted in lower thermal and coking coal imports from Australia in 2019 and likely to further reduce in future years as China increases coal imports from Russia and Mongolia – already a matter of concern to the Minerals Council – a strong advocate of coal production.

The USA trade war with China could see reduced steel exports and possibly reduced demand for Australian coking coal and iron ore.  Demand for thermal coal may also contract due to proposed new Chinese investment ($360 billion) in renewable electricity generation and a change in policy away from an export focussed economy to one more reliant on production for the domestic market.

India was the worlds’ largest importer of Australian coking coal in 2017, accounting for over 90% of its imports. It has now reduced dependence on Australia by diversifying the source of coking coal by importing from Canada, USA, Mozambique and South Africa.  As a result future Australian exports are expected to reduce by around 36 million tonnes.

The Carmichael (Adani) coal mine in Queensland proposes exporting 10-15 million tonnes of thermal coal to India annually for use in Adani power plants for as long as permitted by the Indian government. However, the latter is pursuing a policy of self-sufficiency in thermal coal and rapidly increasing the contribution of renewable energy capacity to 175 GW by 2022 which, if achieved, would significantly reduce the need for thermal coal imports.

South Korea:  President Moon Jae-in, a reformist, has committed his government to rapid transition to renewable energy and away from fossil fuels, particularly coal.  Central to these reforms is closure of 14 coal-fired power stations, limitations on output of 42 other coal-fired power stations and increasing renewable energy generation from 8 to 48% – all by 2026, so as to exceed 2030 targets shown below. 

Fig 5. 2030 Targets for Korera’s 8thBasic Plan for Electricity Supply and Demand (8thBPE) compared with 2017 outcomes.  Source:  Blomberg NEF.

In support of these measures South Korea has increased the tax on coal imports by 28% while lowering tax on LNG imports by 75%, showing strong support for conversion of existing and building of new power stations to burn gas rather than coal and indicating continuing decline in dependence on and import of coal.  

Taiwan’s demand for electricity in 2017 was about 42 GW, generated from Gas (43.4%), Coal (39.2%), Nuclear (9.2%), Hydro (8.1%) and Renewables (<0.1%).  It has no coal deposits and relies on imports to meet its energy needs. Taiwan has a detailed plan for transition from fossil fuels to renewables which calls for replacement of nuclear and coal by solar PV and wind farms and by roof-top PV.  

The plan calls for Solar PV to contribute 20 GW in new renewable capacity by 2025, replacing firstly nuclear capacity (4GW), then coal.  Although doubts exist about capacity to achieve 2025 targets, there is far less doubt that those targets will be exceeded by 2030, resulting in significant reduction of coal imports.

Conclusions

Given the above analysis and as the effects of global warming increase in frequency and severity, popular pressure on governments will develop, forcing them to strengthen and implement policies aimed at reducing greenhouse gas emissions more rapidly, particularly from burning coal, the single largest source greenhouse gas emissions produced by human activity.

Contraction in demand for coal may initially be evidenced by falling prices rather than falling volumes of production but, when declining demand is sustained it will result in reduced production and mine closures.  In terms of volume and value, Australian coal exports may have already begun to decline and, as indicated above, are unlikely to exceed the revenue peaks estimated to be achieved for 2018-19 in the future. 

Over the next decade it is possible that the volume of coal mined in Australia could decline by 25% – 35% for both export (by up to 120 million tonnes) and domestic use (by up to 15 million tonnes) with consequent closure of the least efficient mines with loss of jobs in both coal production and its use.

It is in the interests of all parties to plan for orderly contraction of the industry both in terms of public revenues derived from the coal mining industry, employees directly and indirectly employed in it and rehabilitation of mine sites and coal fired power stations.  Alternative sources of revenue will need to be identified and legislated for, employees will require retraining and redeployment, while mine site rehabilitation will require agreed funding, legislation and supervision.