The Economist has declared that Europe is in the midst of a ‘coal renaissance’ – an odd term to use to describe something so unwelcome.
But is it really a fundamental shift in Europe’s energy landscape or is it actually the last gasps of an industry that remains on the decline?
How the US fracking revolution has pushed up coal burn in Europe.
As The Economist notes, “the story starts… with American shale gas.”
Whilst fracking, along with a big boost in wind power, has helped reduce US coal use, this shift has flooded the market with US coal and seen European purchases of American coal rise by a third in the first six months of 2012.
Put simply, as the US switched across from coal to gas and renewables instead, they have simply dumped their coal onto Europe.
This has coincided with rocketing European gas prices.
As EnergyDesk has illustrated before, gas prices in Europe have risen significantly in the last few years – and, whilst global shale gas may moderate price rises no independent projection sees them falling.
Fukushima and the war in Libya drove prices up in 2011 – and that is where they have stayed ever since.
Burning gas in Germany was profitable in December 2011. In contrast, by December 2012 German gas producers stood to lose more than 11 Euros for every Mwh of electricity they produced from gas. Burning gas was, in short, a one way ticket to bankruptcy.
Germany’s main industry association has acknowledged this disparity between the profitability of coal relative to gas as being the main driver for coal use in the country.
Whilst other factors (see below) made the German situation especially acute, gas burning has become less profitable everywhere.
Data from Platts for the UK shows the profitability of burning coal in the UK increased by 171% from the start to the end of the year of 2012 whilst gas barely broke even. The ‘clean dark spread’ is the net revenue a generator makes from selling power after taking into account the carbon price and can be seen to rise through 2012 to over £20 by year end. The same measure for gas sits between £1.50 and £3.20 .
It’s not that coal prices from the US have fallen significantly. Data from the US Environmental Information Agency suggests otherwise, but that a combination of high gas prices and the availability of relatively cheap US coal has been the primary driver for the recent spike in European coal-fired generation.
But high gas prices alone aren’t enough to drive coal use, because generating power from coal should be more expensive than gas.
Coal plants release approximately double the emissions of a modern gas plant per unit of power, so the European Emissions Trading Scheme (ETS) should make burning coal more expensive.
European carbon prices have dropped off a cliff so Europe’s flagship policy to make dirty power generation unprofitable has become worthless.
The whole point of the ETS was that the more carbon emissions were produced across Europe, the more the price of carbon pollution permits was meant to rise, and so make coal burning become unprofitable relative to less polluting alternatives.
But over the past year, even as emissions from coal-fired generation have risen, the carbon price has become almost worthless.
The Financial Times reported a few days ago that carbon prices have lost 70% of their value since mid-2011 as economic weakness exacerbated a glut in the supply of carbon permits. This week carbon has been trading at a record low of less than 3 Euros a ton, and this is the culmination of a dramatic drop off in the price of carbon – as you can see in this graph.
According to research by Bloomberg New Energy Finance, this drop in the carbon price has also partly been caused by a surge in the issuance of UN-approved carbon offset credits.
An executive of one of the major fossil fuel corporations told me only this week that he doesn’t even think about the price of carbon because it’s become irrelevant to his company’s decision making.
But at least in the UK dirty coal is going to be illegal soon, right?
Here in the UK, the government’s soon-to-be-introduced ‘Emissions Performance Standard’ (EPS) for power stations will make it illegal for highly polluting new coal stations to be built.
Therefore, the serious issue that remains is not about new coal but about how many of the existing, dirty old coal-fired power stations stay on the grid – for how long, and how much they’re allowed to be used if at all. This is crucial since coal usage here has been shooting up more between 2009 and 2012 than anywhere else in Europe.
According to The Economist, “In April 2012 coal took over from gas as Britain’s dominant fuel for electricity for the first time since early 2007. The amount of the country’s electricity provided by coal in the third quarter of last year was 50% greater than the year before.”
In addition to simple economics there are two main factors, which could be driving the recent increase in coal burning in the UK.
Several of the existing coal plants here are due to close between now and 2015 under separate EU rules designed to deal with acid rain-causing pollutants and so they have a limited number of hours they are permitted left to run.
And in April, the UK government will begin imposing a floor price on carbon (‘carbon price support’). This in practice sets a carbon price that is higher than the price in Europe, and so it should seriously hit coal’s profitability.
For this reason the utilities have had an incentive to use up their permitted hours before this extra cost comes in.
But look beyond the immediate spike we’re seeing, and there is a way to limit the use of existing coal in the UK. Ministers could extend the new Emissions Performance Standard so that it covers any coal plant that remains on the system beyond a certain date – say 2020.
Together with including a legal commitment to near zero-carbon electricity by 2030 in the new Energy Bill, this could quickly and simply deal with the threat from high coal emissions in the UK.
And what about new coal across the rest of Europe?
In the EU the situation isn’t so simple – neither a carbon floor price, nor an Emissions Performance Standard exist.
Research by the World Resources Institute (WRI) identified 1,200 plants in planning across 59 countries – with three quarters of those in India and China.
But to the surprise of many it also identified new coal build in the EU with 10 plants in Germany, a further 10 in Poland and 4 in Italy as well as 4 plants in the Czech Republic.
Few doubt the economics of ongoing coal build outside of the EU – but inside the bloc the expectation had been that Emissions Trading Scheme (ETS) would put paid to new build.
The question is, has the enfeeblement of the ETS, along with the availability of cheaper US coaland the rise in the price of gas prompted a change?
2012 has hardly seen a boom in new coal build.
Just one plant came onto the system in Neurath, Germany – but this was planned more than four years ago.
In fact, in 2011, the most recent year for which data is available, 71% of new capacity in was renewables (though this must be adjusted for load factor) with 22% gas.
That plant that was built in Neurath was one of 20 under construction in 2008.
Of those an analysis by the European Climate Foundation (ECF) has found that 14 have been built, 5 are in the courts and one was converted to a gas plant (very much against today’s economic trends).
Since 2008 just three more plants have started construction across Europe – one in Poland, one in Slovenia and a third – also in Poland – is currently suspended.
Around 22 plants are still actively seeking permits for construction – but even if these are granted the economics are stacked against them.
The difficulty for coal investors is two-fold.
Low coal prices and increased renewable generation have reduced wholesale electricity prices and challenge the business model of coal plant, which rely on providing ‘always on’, so-called ‘base load power’ to repay their capital costs, which are far higher than for gas.
That means gas, which is quicker and cheaper to build, can play a better balancing role alongside renewables than coal.
Put bluntly, the very same dynamic which has driven up coal burn, at the expense of gas, now makes it difficult to justify building any new coal plants.
At the same time there remains significant policy risk. The carbon price may go up as well as down and other countries such as Germany may adopt policies, similar in intent to the UK’s Emissions Performance Standard, which effectively ban new build coal.
It’s a very brave investor, in short, who decides to build a new coal plant, designed to last 30-40 years, without government support.
So how about Germany’s nuclear phase-out?
In the wake of the 2011 Fukushima disaster Germany took the controversial decision to phase out its nuclear power programme due to safety concerns.
Nuclear power generation in Germany did fall last year - by 1.7% between 2011 and 2012.
The fall was matched by a 1.6% rise in renewable generation, according to data from the German Federal Association of Energy and Water Industries. Overall gas and coal use was down by 0.7%, whilst the ‘other’ category - including pumped storage and heating oil - increased by 0.7%.
Whilst without a fall overall fossil fuel use would have been lower still, the nuclear phase out can’t explain the jump in the use of coal and lignite. As with elsewhere in Europe, that comes down to switching between gas and coal.
As the cost of Germany electricity fell, gas prices rose and the cost of carbon more than halved. Gas generation fell by 2.3% with generation from coal and lignite up by 1.5%.
In the absence of any policy on coal, a sufficiently high carbon price, or restrictions on coal burning – the market worked against the climate.
And the future?
As renewable generation in Germany goes up the wholesale price of power will continue to fall and the economics of new high capital cost generation – such as coal – will become increasingly dire; unless the state intervenes to support it.
The upcoming election could well see it swing against.
Throughout Europe the politics appear to be moving away from supporting coal – with the important exception of Poland which continues to oppose moves towards strengthening the ETS.
Whilst the UK has its carbon floor price and Emissions Performance Standard, the Dutch are soon to introduce a tax on coal and have already made it compulsory to co-fire coal and biomass.
The Danes and Finish have both announced coal phase outs.
Spain introduced a subsidy for burning Spanish coal and so-called ‘capacity payments’ for Spanish coal plants – but Platts recently reported that coal sales have been halted as subsidies have run dry in the face of mounting austerity.
The future of coal across Europe depends on policy at a European level.
Whilst little new coal is expected to be built the amount that will come offline is also unknown. The utilities with existing European coal-burning stations – around 104GW – have not yet decided whether to make the necessary changes that would enable them to comply with up-coming EU pollution laws and stay in operation burning coal.
Whether or not they do will probably depend on whether Europe acts to make carbon more expensive.