Coal was expected to be relegated to the dustbin of history as the world embraced renewable energy.
After all, many countries were phasing out these polluting, air-polluting power plants. Mines closed, coal companies failed, and utilities began to replace coal-fired electricity generation with natural gas, wind, and solar energy.
But, as coal’s price and demand have been revived this year, weaning the world off fossil fuels, particularly the dirtiest of them all, isn’t going to be easy or quick. Transitions are time-consuming.
Coal is likely to remain in use as countries rely on it to keep the lights on and the economy running. The resurgence of coal also highlights the need for improved battery storage for renewables if the world is to decarbonize.
Coal’s resurgence coincides with higher energy prices overall. Year to date, nearby ICE Rotterdam coal prices have increased by 140 percent, NYMEX natural gas futures prices have increased by 105 percent, and West Texas Intermediate crude oil has increased by 76 percent. In comparison, the S&P 500 is up 23%.
Earnings from Peabody Energy Corp. demonstrate coal’s resurgent fortunes, with share prices rising nearly 800% in a year. According to the company, it has had the highest level of coal sales in seven quarters.
What’s driving up coal prices is a classic supply/demand mismatch, exacerbated by the energy transition. Global demand for electrical power generation increased as countries, particularly China, reopened their economies following Covid lockdowns.
Renewable energy supply has faltered in several key areas around the world: reduced wind speeds in Europe have reduced turbine power, and poor hydrological conditions have reduced hydroelectric power output globally. Add to that a rush to secure power supplies ahead of a northern hemisphere winter, and it’s no surprise that countries have turned to coal as prices for other hydrocarbons have risen.
Even in the United States, the Energy Information Administration predicts that coal-fired power generation will increase in 2021 for the first time in seven years due to high natural gas prices, although it is expected to drop next year.
Although global coal demand has declined in recent years, coal remains an important part of China’s energy mix, with the International Energy Agency noting that the country accounts for the lion’s share of global coal growth. The following top users are India, the United States, and Europe.
China, like other countries attempting to decarbonize, is increasing renewable and nuclear capacity to supplement hydropower electricity generation. According to John Kartsonas, managing partner at Breakwave Advisors, a shipping and commodities advisory firm, this has helped reduce China’s coal use to around 65 percent from around 80 percent a few years ago. Because hydropower accounts for roughly 20% of China’s electricity supply, when river levels fell this year, the country was forced to rely on coal to support economic growth.
Because of this year’s energy-security crisis, coal-dependent countries like China may reduce capacity aggressively. “The only alternative that you can burn and immediately have electricity coming to your house or factory is coal,” he explained.
As countries try to balance energy security and economic growth, Jay Hatfield, founder of Infrastructure Capital Advisors, said he’d like to think this year’s spike in coal is the mineral’s last gasp, “but I fear it is not.”
Kartsonas agreed, predicting that India and China will be major coal users for at least a decade, noting that China can expand domestic coal production. However, he believes that expanding global coal production outside of China would be difficult.
According to Matt Breidert, portfolio manager at Ecofin, coal’s recent price increase is “the worst thing for coal” from a competitive standpoint, noting that coal has long been more expensive than wind or solar.
The fact that different countries resorted to coal highlights the need for electric grids to build resources with backup value in the overall energy mix, according to Breidert, but this does not necessarily mean coal. He stated that resources such as increased battery storage and the development of hydrogen sources are options.
However, there is some debate about whether renewables can provide baseload power. Hatfield claims that utility-scale battery storage is not feasible, but Breidert claims that the lack of large-scale battery storage is a market-design issue rather than a technological one.