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Russia’s war sets in motion the world’s dependence on coal

In Germany and Italy, coal-fired power plants that were once decommissioned are now being considered for a new life. In South Africa, several coal-laden ships are on their way out on what is typically a quiet route around the Cape of Good Hope to Europe. Coal burning in the US is in the midst of its biggest revival in a decade, while China is reopening closed mines and planning new ones.

The world’s dependence on coal, a fuel many thought would soon be on the way out, is now stronger than ever.

Demand has been rising since last year amid a shortage of natural gas, and as electricity consumption increased, pandemic restrictions were rolled back. But Russia’s invasion of Ukraine turbocharged the coal market, triggering a domino effect that leaves electricity producers struggling for supply and pushing prices to record levels.

The boom in the world’s dirtiest fossil fuel has enormous consequences for the global economy.

The higher prices will continue to contribute to rising inflation. But even with the recent rise, analysts say coal is still one of the relatively cheapest fuels. This makes it more critical for power supplies at a time when coal burning is also the biggest single obstacle in the fight against climate change. Meanwhile, miners are struggling to dig up additional tonnes as utilities around the world continue to demand more, setting the stage for the next phase of the global energy crisis.

“When you try to balance decarbonization and energy security, everyone knows which winner: Keeping the light on,” said Steve Hulton, senior vice president of coal markets at market research firm Rystad Energy in Sydney. “It’s what keeps people in power and prevents people from rioting in the streets.”

By 2021, the world was producing more electricity from coal than ever before, with a 9% increase from the previous year, according to the International Energy Agency. By 2022, total coal consumption – to produce electricity, steel and other industrial uses – is expected to increase by almost 2% to a record high of just over 8 billion tonnes and remain there through at least 2024.

“All evidence points to a growing gap between political ambitions and goals on the one hand and the realities of the current energy system on the other,” the IEA said, estimating that carbon dioxide emissions from coal in 2024 will be at least 3 billion tonnes higher. than in a scenario that reaches net zero in 2050.

Coal history is inextricably linked to natural gas, which is often promoted as the cleaner burning alternative.

Europe’s energy crisis and the coal comeback

As the world began to emerge from the pandemic in mid-2021, power demand increased as shops and factories reopened. But Europe, which had led the global charge away from coal, faced an unprecedented crisis of electricity and natural gas shortages. At the same time, renewable energy was tight in the region and in some other parts of the world. The confluence of events triggered power outages in some regions and sent gas prices to extremes around the world, heralding the energy crisis.

Suddenly, coal was back in vogue as a less expensive alternative. Thermal coal, the type burned by power plants, is one of the cheapest fuel sources “on the planet”, costing around $ 15 per million British thermal units, according to a report dated April 1 from Bank of America. That compares with about $ 25 for crude oil and the global price of $ 35 for natural gas, the report said.

The European Union, which has some of the world’s most ambitious climate goals, saw its coal consumption jump by 12% last year, the first increase since 2017 – although that gain was from low 2020 levels. Coal consumption increased by 17% in the United States and also increased in Asia, Africa and Latin America. India and China, which dominate global markets, were also major drivers of rising world demand.

The EU saw its coal consumption increase by 12% last year, the first increase since 2012. Photographer: Alex Kraus / Bloomberg

Just a few months ago, negotiators arrived in Glasgow for the COP26 climate conference, optimistic that they could “transfer coal to history.”

Instead, the climate negotiations ended in November with a dilution of the language on the use of coal. China, the United States and India are the three biggest polluters, and all three have now promised to reset their emissions in the coming decades. Yet India and China pursued last-ditch efforts to mitigate language use in coal consumption, and the United States played a role in accepting the weaker position, questioning the nations’ short-term commitment to curb coal.

And that was all before the recent further revival of the market.

The IEA released its annual demand outlook back in December. The agency now plans to release a half-yearly audit in July – this is the first time ever to do so – to analyze the impact of the war. In all likelihood, demand will be higher than forecast in December, as Russia’s invasion of Ukraine sets in motion a chain reaction in global energy markets that further puts coal in the spotlight.

Can the EU give up Russian energy?

Europe is desperate for a way to reduce its dependence on Russia, a key supplier of fossil fuels. The EU is moving to ban Russian coal while increasing its overall use of fuel, while at the same time trying to reduce its use of Russian natural gas. Europe’s move is centered on the idea that it will be able to pay more for non-Russian coal supplies than other buyers, a venture that drives global markets up and can price developing countries that may face shortages.

To help secure energy next winter, the German government is considering collaborating with utilities such as RWE AG to reactivate decommissioned coal-fired power plants and delay the decommissioning of active facilities.

In Denmark, Ørsted A / S strengthens coal supplies for use instead of biomass, because the supplies of the carbon-neutral wood pellets have been disrupted by the war. And the UK is exploring options to strengthen energy security, including keeping Drax Group Plc’s ball units open.

“This is the last hurray for coal in Europe,” said Emma Champion, head of regional energy transition at BloombergNEF.

Even before Europe’s risky move, coal supply was already uncertain. A power plant in Germany had to shut down last year when it ran out of coal. The shortage also led to power outages in India and China, which together account for about two-thirds of global coal consumption.

Price increase on coal

Prices hit stratospheric levels. Futures prices for the Australian benchmark, which rarely breaks $ 100 per. tons, rose to $ 280 in October as utilities searched the planet for fuel. It fell back slightly as relatively mild winter temperatures in the northern hemisphere reduced some demand for electricity. But when Russia invaded Ukraine, supply concerns drove prices all the way up to $ 440, which is a record high.

Europe’s market followed the same pattern, and even in the US, which is more driven by domestic demand, prices reached a 13-year high this month.

“The coal supply chain was just not ready for that kind of shock,” said Xizhou Zhou, CEO of Global Energy and Renewable Energy at S&P Global.

As coal grows in importance, supplies are unlikely to follow suit.

Miners remain concerned about long-term demand prospects, especially as the UN reiterates its position that the world needs to phase out fuel. The report from the Intergovernmental Panel on Climate Change released this month showed that coal combustion must reach zero by 2050 to achieve the goal of limiting global warming to 1.5 ° Celsius (2.7 ° Fahrenheit).

In the United States, coal prices this month reached their highest level in 13 years. Photographer: Dane Rhys / Bloomberg

“To say in the long run, there is no demand for your product, but in the short term, you can please increase it – that’s a lot to demand from a supply chain,” said Ethan Zindler, head of Americas Research at BloombergNEF.

To increase the chaos, policy makers and companies in Japan and South Korea are also taking steps to curb Russian coal imports. It will leave even more of the world looking for alternatives to the 187 million tonnes that Russia exported to power plants last year, equivalent to about 18% of the world’s thermal coal trade.

It will not be easy to replace.

Global supply problems

Global production has still not returned to pre-pandemic levels. Miners have been hampered by weather problems, labor shortages and transport problems, as well as a lack of investment in new capacity.

Indonesia, the largest shipper of coal to power plants, halted coal exports earlier this year to secure domestic supplies. Manufacturers in Australia, another major exporter, have indicated that they have limited ability to increase sales. State-owned Coal India Ltd., the world’s largest miner, restricts supplies to industrial users to prioritize power plants in an effort to avoid power outages for millions of households. Exports from South Africa’s Richards Bay Coal Terminal fell to 58.7 million tonnes in 2021, the lowest in 25 years.

“The global oceanborne coal market remains very tight this year,” said Shirley Zhang, an analyst at Wood Mackenzie Ltd. “So finding alternative supply would be extremely challenging regardless of high prices.”

As global coal supplies tighten and prices rise, emerging market nations may no longer be able to afford fuel to keep their economies running. Countries with cash in South Asia, such as Pakistan, Sri Lanka and Bangladesh, are particularly prone to price shocks and are already struggling with energy shortages.

Indonesia, the largest shipper of coal to power plants, halted coal exports earlier this year to secure domestic supplies. Photographer: Dimas Ardian / Bloomberg

If the rise in coal prices continues, it could, of course, in the long run encourage countries to get rid of the fuel and replace it with more renewable energy. And the greater geopolitical tensions caused by Russia’s war strengthen the argument that adding more electric vehicles to the roads and installing additional wind turbines and solar panels can increase energy dependence.

The impact of China’s fuel demand

China is also in the midst of a boom in fossil fuel production. Growing coal production has been an occupation of Beijing since fuel shortages caused last year’s extensive power outages. The nation is extracting half of the world’s coal, and production has increased, just as a recent new series of pandemic shutdowns slowed economic activity and slowed power demand. But it is unclear whether production increases are sustainable, and a top industry official recently said the pressure has reached its limits.

For now, the most immediate dynamic is a global battle for available coal supplies to avoid power shortages.

“I do not know if I myself have 200 tons extra,” said Ernie Thrasher, CEO of Xcoal Energy & Resources LLC, the largest U.S. exporter. “There is physically no production capacity.”

(Michael Bloomberg, founder and majority owner of Bloomberg LP – Bloomberg News’ parent company) committed $ 500 million to Beyond Carbon, a campaign aimed at shutting down the remaining coal-fired power plants in the United States by 2030 and halting the development of new natural gas-fired plants He also launched a campaign to close a quarter of the world’s remaining coal plants and cancel all proposed coal plants by 2025.)

© 2022 Bloomberg

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