Coal crash coming?

The very conservative International Energy Agency has just released its closely watched annual World Energy Outlook (WEO), with forecasts for the structure of the energy market through to 2035. This year’s WEO was much anticipated, given the pace of developments in renewables and climate policy, and it didn’t disappoint. The report included the IEA’s interpretation of what major governments’ commitment to a 2°C temperature target would mean for the energy market. The contrast with what most market players assume, particularly coal companies, could hardly be more dramatic.

One global coal player, Peabody, recently told the World Coal Conference that it assumes demand for coal will increase by over 50 per cent by 2030. The IEA on the other hand tells us that if we are to have a reasonable chance of limiting warming to 2°C degrees, coal demand will have to peak by 2020, and by 2035 will have dropped to levels last seen in 2003. These are dramatically different views of the market and the implications for company valuations, and therefore for investors and corporate strategy, are considerable.

The same IEA report compares coal and oil’s current 46 per cent share of global electricity generation to what it would be in 2030 under the 2°C degree scenario. The answer is just 22 per cent. The difference would be picked up by low CO2 energy, nuclear and renewables, which would see massive growth. They assume non-hydro renewables would go from 3 per cent to 20 per cent, all the more remarkable given the assumed increase in overall energy demand. Interestingly, despite significant demand growth, even the total amount of coal-generated electricity would fall in absolute terms.

The significant thing about these forecasts is that the IEA has generally been considered to be excessively conservative and largely aligned with the views that dominate the fossil fuel industry. Indeed, the Peabody forecasts referred to above reference an earlier IEA WEO report. So what’s going on when this industry friendly body chooses to prick the coal bubble? And what does it all mean for investors and resource companies?

What it means is the coal industry is headed for a crash. This is heresy in the industry and would be dismissed by some as starry-eyed naivety. But the numbers don’t lie and this issue has cold hard rational numbers all over it.

One of these numbers is 2°C. There are many uncertainties in the detail of climate science, but there is clear consensus on that number. It is the line in the sand scientists have drawn and said, if we go past it we face catastrophic system-wide risk. While some scientists argue that number is too high and too risky, none of any consequence argue it is too low. That’s why the governments of China, India, Europe and the USA have all agreed, along with many global corporates, that 2°C is the line we can’t cross.

Not crossing it requires the numbers in the IEA report to be achieved. This is hard science. If you put any more CO2 in the atmosphere than that, we will almost certainly be heading past 3-4°C. The economic consequences of that would make the collapse of the coal industry look like a picnic. The science also tells us, supported now by the IEA, that the decision will be made this decade, by action or lack of it.

Further complicating assumptions of growth is a very interesting analysis published today in Nature by two well regarded US energy experts, Richard Heinberg and David Fridley. Their article, The End of Cheap Coal,” calls into question assumptions of endless supplies of cheap coal, using much of the same logic as earlier predictions around the end of cheap oil. It’s worth remembering that those who have been predicting the end of cheap oil since the late 90s, including Heinberg, were ridiculed for many years.

Now even the IEA supports that view with comments like “the age of cheap oil is over.” The new analysis in Nature suggests there may be a similar dynamic at play with coal, with reserves constantly being revised downwards as time passes. They also remind us that industry has a history of getting their forecasts wrong, noting that for oil, “the current price of more than $US80 per barrel is about three times higher than the upper range in official forecasts for 2010 that were being issued in the late 1990s.” Like oil, the issue is not any risk of running out, but volatile and rising prices as the peak level of quality supply is reached.

But isn’t this good news for the coal industry? Aren’t rising coal prices good? The answer is surprising – and this is where the two issues combine. In the short term the answer is yes, but ultimately higher prices will trigger the death of coal. Everyone knows the only way coal can survive in the low-carbon world the science demands, is if carbon capture (CCS) technology can make coal a zero CO2 energy source. The economic viability of CCS is already questionable and is rapidly losing support, but if it is ever to work it can only do so with cheap coal.

This is because the additional cost of CCS equipment and CO2 pipelines, along with the inherent loss of efficiency involved in its use, means that if coal prices rise, renewables will become cheaper than coal with CCS. So if Heinberg and Fridley are right, coal prices will increase, CCS will be confirmed as uneconomic and renewables will take over. This, of course, will then see coal prices drop again. But it seems likely, by then, that the market will have shifted its focus to renewables, and perhaps nuclear, with coal unlikely to recover given renewables prices will keep falling.

So why do Peabody and so many others assume levels of growth that are in such contrast to this hard logic of both the market and climate science?

Firstly, of course, because they want it be so. They sell coal and the more they can convince the market of an endless coal boom, the higher their share price. This is particularly so for resource companies that are heavily or exclusively reliant on coal like Peabody. Self-interest is a powerful driver of denial. But it’s more complicated than that.

What these people and their investors are falling for, supported by many people in government, is what I call the “economic inertia trap”. This is the belief that something that is big and moving in a certain direction will continue to do so. They simply can’t imagine the level of change required to shift that inertia could possibly occur. The argument goes: coal is cheap and plentiful, people need lots of energy, so coal will be burnt. This is delusion on a grand scale. Does anyone really believe society will calmly stand by as we head towards 3°C, then 4°C, staring economic and social collapse in the face while we focus on cheap energy as some kind of overriding objective?

Let there be no doubt, we will act on climate change – and when we do, the coal industry will face an almighty crash, as Phil Preston and I argued in our recently released paper on the financial implications of all this. Probably not this year or next, but we think before the end of this decade.

But don’t expect Peabody or their friends to come on board early. Horse and cart companies didn’t become auto companies. Amazon reshaped the book retailing business before book retailers woke up. Kodak failed to be ready for digital photography, and so on. We can safely expect coal companies to stay in denial all the way to the finish line – or in their case, their finished line. That is their choice to make. It is also their investors’ choice on whether to go with them or when to jump. The clock is now ticking.

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12 Responses to Coal crash coming?
  1. John Collee

    Great article, Paul. Required reading for all our super funds.

  2. Colin Crosbie

    Hi Paul,
    Thanks for these, really enjoy reading them and keeping informed, even if some of the content scares the shit out of me. Best wishes to you and your work.

  3. Mike Ives

    Amen to this Paul. CCS will be remembered as the coal industry’s deperate ‘clutch at straws’ by our next generation

  4. Asher Miller

    Hi Paul,

    Thanks for drawing attention to this article by Heinberg and Fridley, both Fellows at Post Carbon Institute. For those who are interested in learning more, I recommend Richard’s book on the subject, Blackout: Coal, Climate and the Last Energy Crisis: http://amzn.to/daEPaj.

    Those in Australia may be particularly interested in Richard’s article about China’s Coal Bubble, which has major implications for Australian coal: http://bit.ly/d62PWW

    best,

    Asher Miller
    Executive Director
    Post Carbon Institute

  5. salamander

    Thanks Paul, all the more reason to attack the banks who are financing this road to our destruction. With CCS not even proven technology, it is supremely ridiculous for it to be the basis of cheap coal.

    With the coal industry’s tunnel vision they are likely to lead us to destruction even faster than scientists predict, as
    recent seismic testing off Tasmanian is reputed to have been part of CCS technology. The resulting death of a large percentage of the state’s scallops is no good for the fishing industry.

  6. [...] future. It’s scary stuff for investors. You can read my full views on the topic on my website here... environment.ideasforgood.com.au/2010/11/19/coal-crash-coming
  7. Ken Fabos

    “Does anyone really believe society will calmly stand by as we head towards 3°C, then 4°C, staring economic and social collapse in the face while we focus on cheap energy as some kind of overriding objective?”
    Going on performance to date, yes.
    Two full decades of anthropogenic climate change being established science and Australia’s policy focus is fully on maximum expansion of coal and gas extraction and export with some ineffectual climate ‘policies’ to distract and pacify public concerns. Expansion of grid supply by construction of big new coal fired power plants such as in the Hunter Valley and near Lithgow are going ahead and look to me to be intended to prevent the issue of decarbonising our energy supply getting mixed up with the issue of maintaining growth and reliability of supply; we’ll have enough fossil fuel generating capacity that building low emissions capacity will remain ‘optional’ and can be deferred another decade or two. Pressed hard enough by concerned voters leaking to the Greens there might be a switch of emphasis from the LibNatLab middle to push for gas over coal despite gas being unable to deliver the long term emissions reductions needed. Screw the future, Australian’s don’t want their power bills going up and LibNatLab policy makers are sure of it.

  8. John Ward

    Decisive action from the coal industry to bcome an energy provider of all sorts of energy besides coal, seems to be paralized like the brains in charge of the NZ mine rescue. The coal industry cannot embrce the new Paradigm because the industry suffers from Paradigm Paralysis!

  9. Toby Hutcheon

    Thank you Paul.
    I had just completed writing some very similar comments. My organisation, Queensland Conservation Council, raised the alarm last week on the fact that the QLD Government has just released an infrastructure plan to service a projected 80% INCREASE in coal exports over the next 20 years. The projections are based upon the same IEA Outlook Reports you reference.

    We all know that the Queensland Government supports an increased mining sector and is very ready to accept any industry growth projections, but it is truly frightening that they should also publish an infrastructure plan to service that growth-even though it comes with a warning from the IEA that such projections, if realised, threaten the survival of the planet. This is not government merely out of touch with its constituents.

  10. Cindy Conrad

    Hi Paul, Thanks for drawing attention to this article by Heinberg and Fridley, both Fellows at Post Carbon Institute. For those who are interested in learning more, I recommend Richard’s book on the subject, Blackout: Coal, Climate and the Last Energy Crisis: http://amzn.to/daEPaj. Those in Australia may be particularly interested in Richard’s article about China’s Coal Bubble, which has major implications for Australian coal: http://bit.ly/d62PWW best, Asher Miller Executive Director Post Carbon Institute

  11. Watson

    I found my way to your website via the Friedman article in the NY Times. Thanks for your work! I’m about to order the book.

    I find it a little difficult to believe that the politicians don’t connect the dots, at least those who claim that ‘Climate Change is/was the greatest moral challenge of a generation’. But I don’t accept that hard nosed, economically and ecologically savvy mining executives and entrepreneurs don’t understand the stark projection laid out here. I arrived at a very similar conclusion myself without access to industry data.
    What I fear is, that having realized, like the tobacco industry, that their time is limited, they have decided to ride the wave of doubt for as long as it can be sustained in order to maximize their profits in the short term and to Hell with the planet. They have no intention to waste time, money and effort on CCS – they know it won’t work, certainly not before 2020.
    They are probably shredding documents already.

    “Oh but your Honour, if only we’d known!”

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