Why coal is here to stay

For climate change activists and those hoping for an energy future dominated by renewables or even less-polluting natural gas, the death of coal cannot come quickly enough. But with coal still the dominant form of cheap electricity throughout the world, it is unlikely the bogeyman of climate change will disappear anytime soon.

That's because the price of coal, compared to other fuels, is just too good to refuse. Just look at China, where the country's double-digit economic growth has largely been fueled by coal, which fulfills 60 percent of its energy mix.

According to a chart showing the levelized cost of energy -- the price at which electricity must be generated from a source to break even -- coal is the second-cheapest form of energy behind hydropower, at $40 per megawatt hour.

Compare that to the cost of nuclear at $60, natural gas at $70, and solar -- which at $280 per MWH, is seven times the cost of coal. Coal is also plentiful, relatively easy to extract -- though admittedly dangerous if mined underground -- and requires minimal processing. And it can be used for power generation (thermal coal) or steelmaking (metallurgical coal).

Of course, coal-fired plants have exacted an enormous price on air quality, and the Chinese government – which has declared war on pollution -- recently banned the use of coal in smog-cloaked Beijing. Last week, it was announced that for the first time in over a decade, Chinese coal imports and coal consumption both dropped.

While that may seem like a dart in coal's balloon, coal's continued use elsewhere is more than making up for China’s restraint.

Germany doesn't like to talk about it, but the world leader in the use of renewable energy, particularly solar, is also a big consumer of coal. As The Economist recently pointed out, Germany's production of power from lignite coal is now at 162 billion kilowatts, the highest level since the smokestack-belching days of East Germany.

The same article notes that Japan, which has no natural energy resources of its own and is scrambling to meet electricity demand -- most of its nuclear reactors have been offline since the 2011 Fukushima disaster -- approved a new energy plan in April that includes coal as a long-term electricity source. The Japanese have also invested almost $20 billion in overseas coal projects in the past seven years, according to the Natural Resources Defense Council.

In the United States, even though a shale-gas supply boom has seen many utilities shift to cheaper natural gas, the country will still be generating a third of its energy from coal by 2040 (only 10 percent less than now), according to the U.S. Energy Information Administration (EIA). That’s despite a concerted effort by the Obama administration to force the nation's coal-burning power plants to reduce their carbon emissions by a third over the next 15 years.

U.S. coal producers have responded to the trend of falling domestic consumption by exporting more coal overseas. A Wall Street Journal chart shows exports of U.S. coal grew from around 50 million metric tons in 2000 to 106.7 million MT in 2013. Most U.S. coal is destined for Europe, with Brazil, South Korea and China close behind.

All of this is not to suggest that coal producers haven't had their problems. The price of benchmark thermal coal over the past three years has dropped from more than $130 a ton to around $80. Metallurgical coal is also at a six-year low.

Despite a huge cutback in production, the coal market continues to be oversupplied. As Oilprice.com pointed out recently, waning steel demand in China has forced mines in Australia to close. Australian producers are also threatened by Chinese plans to build more rail capacity for its domestic coal, which would undermine its coal imports.

In the United States, coal producers are finding it increasingly difficult to lock utilities into long-term contracts that provide stability and protection from price fluctuations. That's because the utilities want the flexibility to have short-term contracts, or even buy coal on the spot market, since natural gas continues to be a competitive option.

Looking ahead, though, there doesn't appear to be a declining demand curve for coal. Consider this: in Africa, some 60 percent of the continent's population, or more than 600 million people, do not have access to electricity. The EIA predicts African coal consumption will rise by 70 percent by 2040. In India, another big consumer of coal, 300 million people remain disconnected to the electricity grid. The country plans to increase its use of renewable energy by 15 percent by 2020, but still faces the challenge of energy demand exceeding supply by 10 percent.

Coal is a likely contender to fill that gap. A recent article in Australian Mining states that by 2025, India's electricity generation from coal will be reduced from 60 percent to “only 50 percent of installed generation – but that doesn't necessarily mean less coal generation.”

In the end, it all comes down to price and government policies. If the economics of coal can be beaten by other electricity sources, the old-school fuel will face pressure, as it already has in the U.S. But as market forces continue to drive the various options available for utilities, coal use -- particularly in developing nations -- is almost certain to go up. Unless governments enact American-style laws to sharply curtail coal power plant emissions, expect King Coal to retain its crown.

Source: http://oilprice.com/Energy/Coal/Why-King-Coal-Will-Keep-Its-Crown.html