Are Renewable Energy Resources Really Disrupting the Coal Market?

Owners and operators of electricity generation assets and potential investors in new ones must take a dispassionate view of the tectonic forces reshaping the coal landscape globally. These drivers consist primarily of competition from other fuels, such as renewable energy resources and unconventional natural gas, and environmental policy on climate change and local air quality. They vary in relative importance from region to region, but they matter everywhere.

The future of a nation's coal-mining industry has long been fueled by the common economic principles of production cost, supply, and demand, but the rise of renewable energies and growing environmental concerns play an ever-larger role in coal's fate.

Previously, renewable energy resources and political policies that favor them have taken a backseat to economic factors in determining coal consumption. Today, that balance is shifting in some regions of the world, where economic and environmental factors are increasingly reinforcing each other, magnifying their disruptive influence on coal.

Global coal consumption has grown strongly since 2000 but is expected to level off over the medium term. Growing coal consumption in some Asian countries (Japan, Korea, India, and Indonesia, for example) is being offset by steep declines in North America and Europe.

Coal Landscape in the US

In the US specifically, coal consumption has fallen dramatically over the past decade. Last year's 15 percent decline was the largest ever­­, and both the US Energy Information Administration (EIA) and the Paris-based International Energy Agency (IEA) expect this trend to continue. Production and exports have been falling. Some of the nation's largest coal companies have gone bust. Of those left, some are struggling to survive.

Most of the coal burnt in the US is for electricity generation, and until last year coal had been the largest component of the electricity fuel mix for decades. That is now changing and understanding the drivers is vital.

Competition From Cheap Gas

The common perception that coal's decline in the US is due to the rise of renewables like wind and solar power is only partly correct. While both have played a role, until now the biggest factor has been competition from cheaper natural gas. The unleashing of gas from shale rock by hydraulic fracturing technology has led to widespread fuel switching. Last year, for the first time, gas took a larger share than coal of the US electricity fuel mix.

Today, this economic driver of coal decline is being rivaled by political policies that discourage coal production and/or favor renewable energy resources. Environmental policies such as the Mercury and Air Toxic Standards (MATS) and the Clean Power Plan (assuming it is implemented) will increasingly prompt utilities to close down coal-fired power plants and discourage investment in new plants.

"Moving forward we see [US] coal demand declining," said Keisuke Sadamori, director of the IEA's energy markets and security directorate, during a webinar in advance of the Beijing launch of the Medium-Term Coal Market Report 2016, "but the gains will be more in renewable energy resources rather than gas. The coal-to-gas switching potential has been rather exhausted."

The IEA expects further declines in US demand for coal from 2017 onward, adding up to an average decline of 1.6 percent/year between now and 2021.

The Global Picture

Coal decline in Europe is also set to continue thanks to environmental policy making. The European Union has set challenging greenhouse gas emissions targets for 2030 and is reforming its Emissions Trading System to support carbon dioxide prices and reduce volatility. Meanwhile, the UK plans to phase out coal-fired power by 2025 and other nations are planning similar curbs.

The declines in North America and Europe are also part of a long-term trend that has seen coal demand shift eastwards to the emerging economies of Asia.

"In 2000 Europe and North America combined accounted for roughly half of global coal demand whereas Asia represented less than half," said Sadamori. "Now Europe and the US combined represent less than a quarter, whereas Asia represents almost three-quarters—and this trend will continue."

Still, as in the US and Europe, renewable energy resources are making giant strides into electricity generation in Asia, not least because of environmental imperatives related to both greenhouse gas emissions and local air quality. This is especially true in the case of the two biggest coal consumers—China and India—both of which have jaw-dropping ambitions to grow wind and solar power.

Nevertheless, coal will remain one of the most economical fuels for electricity generation in growing Asian countries with an electricity shortage for the foreseeable future. Also, as the share of renewable energy resources grows, coal's dispatchability means it will play an increasingly important role in helping to maintain the stability of power grids.

This is why the IEA is just one of many voices calling for Asian countries to adopt the best possible coal technologies, such as the ultra-supercritical power plant technology commissioned this year at the TPower Plant in Malaysia. It can achieve efficiencies of up to 47 percent, compared with a global average of 30 percent, which means much lower carbon dioxide emissions.

The word "critical" could hardly be more apt.