Coal still king, at least outside the OECD

1 February 2013

Paradoxically, in a world apparently preoccupied with the curbing of CO2 emissions, the International Energy Agency's latest projections show global coal consumption increasing substantially over the next five years, mainly due to demand growth in China and India.

Coal's share of the global energy mix continues to rise, and by 2017 coal will come close to surpassing oil as the world's top energy source, the International Energy Agency concludes in its latest annual Medium-Term Coal Market Report (MCMR), covering the period 2012-2017*.
Although the growth rate of coal slows from the breakneck pace of the last decade, global coal consumption by 2017 is estimated to be some 4.32 billion tonnes of oil equivalent (btoe), versus around 4.4 btoe for oil, based on IEA medium-term projections. The IEA expects that coal demand will increase in every region of the world except in the United States, where coal is being pushed out by natural gas.
"Thanks to abundant supplies and insatiable demand for power from emerging markets, coal met nearly half of the rise in global energy demand during the first decade of the 21st Century," said IEA Executive Director Maria van der Hoeven, launching the report. "This report sees that trend continuing. In fact, the world will burn around 1.2 billion more tonnes of coal per year by 2017 compared to today - equivalent to the current coal consumption of Russia and the United States combined. Coal's share of the global energy mix continues to grow each year, and if no changes are made to current policies, coal will catch oil within a decade."
China and India lead the growth in coal consumption over the next five years. The report says China will surpass the rest of the world in coal demand during the outlook period, ie, by 2017, while India will become the largest seaborne coal importer and second-largest consumer, surpassing the USA.
The report notes that in the absence of a high carbon price, only fierce competition from low-priced gas can effectively reduce coal demand. "The US experience suggests that a more efficient gas market, marked by flexible pricing and fueled by indigenous unconventional resources that are produced sustainably, can reduce coal use, CO2 emissions and consumers' electricity bills, without harming energy security," observed Ms Van der Hoeven. "Europe, China and other regions should take note."
She noted that the report's forecasts are based on a troubling assumption, namely, that carbon capture and sequestration (CCS) will not be available during the outlook period. "CCS technologies are not taking off as once expected, which means CO2 emissions will keep growing substantially. Without progress in CCS, and if other countries cannot replicate the US experience and reduce coal demand, coal faces the risk of a potential climate policy backlash," she said.
As US coal demand declines, more US coal is going to Europe, where low CO2 prices and high gas prices are increasing the competitiveness of coal in the power generation system. This trend, however, is close to peaking, and coal demand by 2017 in Europe is projected to drop to levels slightly above those in 2011, due to increasing renewable generation and decommissioning of old coal plants.
Amid concern about the impact of Chinese uncertainty on coal markets, the report offers a Chinese Slowdown Case. This scenario shows that even if Chinese GDP growth were to slow to a 4.6% average over the period, coal demand would still increase both globally and in China - indicating that coal demand is not likely to stop growing even with more bearish economic perspectives.

Main points from the report:

Coal's position strengthened
In line with the trend over the last decade, coal was once again the fastest growing source of primary energy in 2011, with incremental consumption over 50% higher than oil and gas incremental demand combined. Coal demand grew by 4.3% from 7080 million t in 2010 to 7384 million t in 2011. Consequently, coal strengthened its position as the second most important source of primary energy behind oil, accounting for approximately 28% of total primary energy consumption.
Growth in coal consumption is almost exclusively determined by non-OECD countries, particularly China and India, where demand continued to surge in 2011. Population growth and rising per-capita electricity consumption - fuelled by strong economic performance - are key drivers of coal consumption among these emerging economies.
In contrast, coal demand among OECD countries decreased in 2011, falling below consumption levels reached in 2000.

China dominates
China is coal. Coal is China.
China is by far the world's largest producer and consumer of coal, and accounts for more than 45% of both global totals. China accounted for more than three-quarters of incremental coal production in 2011 and domestic consumption was more than three times that of global trade in the same year. Domestic coal transport by rail was more than twice as high as consumption in the United States, the world's second-largest consumer of coal. Domestically shipped coal in China comprises more than half of the global seaborne trade.
As China's primary supply of energy, coal dominates the country's power generation, power capacity and indigenous energy production. Therefore, development of the global coal market will largely be driven by China through its economic growth, investments in infrastructure, energy diversification and energy efficiency programmes and policies, coal-electricity pricing policy and developments in the Chinese coal mining sector.

Changing places in 2011
China replaced Japan as the largest coal importer in 2011. Similarly, Indonesia replaced Australia as the largest coal exporter in 2011 on a tonnage basis. Japan and Australia had both held their lead positions for nearly three decades.
Since the turn of the 21st century, Indonesian coal exports have increased on average by 18.4% per year. Due to abundant reserves, cost competitiveness, transport infrastructure availability and, in particular, its proximity to coal importing countries in Asia, Indonesia accounted for almost half of the total seaborne coal market growth over the last 11 years.
In 2011, both Japan and Australia experienced natural disasters that hampered their coal consumption and supply, respectively. The Great East Japan Earthquake destroyed part of the Japanese fleet of coal-fired power generation plants, while heavy floods in Australia cut exports from Queensland for several months.

Off-spec coal gains in importance
The global trade in "off-spec" coal gained more importance in 2011, with trade volumes exceeding 200 million t. This includes sub-bituminous Indonesian coal and high-sulphur coal from the Illinois basin in the USA, as well as low calorific value coal from traditional exporters such as Australia, South Africa and Colombia. Triggered by low freight rates, flexible boilers, increased use of blending and utilities struggling to avoid financial losses in countries with low regulated electricity prices, the demand for off-spec coals increased further in 2011. Utilities in China, India and Korea, for example, can often burn these coals without losing much in terms of efficiency, and thus take advantage of the relative price discount this lower-quality coal usually provides.

Gas-to-coal switch in Europe due to US shale gas
The shale gas revolution in the USA has resulted in a significant gas-to-coal switch in Europe. The abundance of natural gas in USA (an increase of 127 billion cubic metres from 2006 to 2011) put downward pressure on US natural gas prices, with monthly Henry Hub prices dropping below the USD 2/MBtu line in April 2012. This has caused a marked switch from coal to natural gas in power generation in the USA over the past two years. As a consequence, miners announced production cuts and layoffs, and some mines in the United States were mothballed. At the same time, large quantities of thermal coal found their way into European markets.
With US coal exports to Europe rising, the Atlantic market, particularly Europe, faced a situation of oversupply, which caused coal prices in Europe to plummet from USD 130/tonne in March 2011 to USD 85/tonne in May 2012. Subsequently, low coal prices, supported by a low CO2 price, resulted in a significant gas-to-coal switch in Europe.
While a gas-to-coal switch in Europe is a rather short-term phenomenon according to the IEA projections, the coal-to-gas switch in the United States is a sustained trend. Price assumptions for coal and gas price development offset the current imbalance in favour of coal in Europe, with gas recovering its position by 2017. Coal demand among OECD countries in Europe is projected to increase on average by a mere 0.4% per year during the period 2012 to 2017, with the bulk of this increase due to growth of coal demand in Turkey.
In the United States, however, the decline in coal consumption is projected to continue as a consequence of the relative price of both gas and coal, and the retirement of coal-fired power plants due to environmental regulation.
Indian imports grow
In the IEA's Base Case Scenario, India is the second-largest coal consumer by 2017 and the largest seaborne coal importer by 2016. Coal consumption increases strongly over the period 2012-2017 in India, driven by rising power generation. With a decline in US consumption, India becomes the world's second-largest coal consumer. However, this surge in coal consumption is not matched by production growth from domestic mines, causing strong growth in imports.
This trend is consistent with the expectation that Coal India Limited, India's largest coal producer, is not likely to significantly improve its operational efficiency. As a result, India's imports are projected to grow faster than any other country.
Yet, in terms of total import volume, ie, overland imports from Mongolia, China holds its position as the world's largest importer in the Base Case.
In the Chinese Slow-Down Case, India is by far the world's top importer of coal by the end of the outlook period.

Australia remains biggest exporter
Australia is the world's largest exporter of coal in the Base Case. With energy adjusted exports, Australia remains the world's largest exporter of coal and will hold on to its top position until the end of the outlook period (ie around 2017) in the Base Case Scenario.
Australia's export strength is underpinned by investments in both existing mining regions, such as the Hunter Valley, Bowen and Gunnedah basins, and in new basins, such as the Surat and Galilee basins.
Hence, export growth in Australia is projected to outperform Indonesian export growth if China's import demand remains strong. In the Chinese Slow-Down Case, some high-cost operations in Australia are expected to become extramarginal, and hence, Australian exports decrease relative to the Base Case.
In contrast, Indonesian coal exports profit from a lower cost structure throughout the entire coal value chain and, consequently, are less affected by any projected Chinese slow-down.

Effects of a Chinese slow-down
In the Base Case, Chinese coal consumption is projected to account for more than 50% of global coal demand by 2014. In this scenario, global coal demand grows from 5279 million tonnes of coal equivalent (Mtce) in 2011 to 6169 Mtce in 2017 (17%) and is driven by non-OECD countries over the outlook period, with an annual growth rate of 3.9%.
China leads this growth in absolute terms with additional coal use of 638 Mtce. Remarkably, this figure is just 5 Mtce lower than demand in India in 2017, which is the second-largest consumer and has the fastest growth in demand over the outlook period (6.3% per year).
In the Chinese Slow-Down Case, total coal use in China grows on average by 2% per year over the outlook period to reach 2881 Mtce in 2017. Total Chinese coal use is 309 Mtce lower in 2017 in this scenario than in the Base Case.
In the Chinese Slow-Down scenario, seaborne coal trade peaks in 2016 and declines thereafter. Yet, total seaborne coal trade still grows on average by 2.3% per year over the outlook period, whereas coal demand is projected to increase on average by only 1.8%. After three decades of near continuous growth (with a minor exception in 2008), the seaborne coal trade is projected to decline in the Chinese Slow-Down Case, as a consequence of falling Chinese imports in 2017, to one-third of their 2011 levels.

Figure 1. IEA projections for global primary energy supply from fossil fuels, business as usual


Figure 2. Coal-based gross electricity generation in selected OECD countries, 2009-11 (Source: IEA, Medium-Term Coal Market Review 2012)

In 2011, coal-based gross electricity generation among OECD countries stood at an estimated 3710 TWh, down from 3747 TWh in the year before (1.0%). In relative terms, total gross electricity production among OECD countries decreased by the same magnitude on a year-to-year basis, equivalent to a change in absolute terms from 10922 TWh in 2010 to 10817 TWh in 2011. Consequently, coal's share of total electricity production remained at 34.2% in 2011.
Low CO2 prices and hydro production were contributing factors to the increase in coal-based electricity generation among OECD Europe countries in 2011, despite a continued expansion of renewables.
OECD countries in Europe, despite a slight decrease in total gross electricity production (59 TWh) and continued gains in electricity supply from wind and solar plants, increased their coal-based electricity generation by more than 33 TWh to an estimated 908 TWh in 2011. This increase can be explained by lower hydro production compared to 2010 (down by 43 TWh from 588 TWh in 2010), increased competitiveness of hard-coal based electricity generation due to low CO2 prices throughout 2011 as well as the nuclear phase-out in Germany. Consequently, coal-based electricity grew in Germany by almost 5 TWh and in Spain by 19 TWh, or 70.7% on a year-to-year basis, which recorded a decrease in hydro production by approximately 13 TWh from 2010.
Increasing electricity demand in Turkey, which resulted from high GDP growth (8.5% in 2011), was largely met by incremental supply from coal-fired power generation plants (10 TWh out of a total incremental supply of 17 TWh in 2011).
In the aftermath of the Great East Japan Earthquake at the beginning of March 2011 and the ensuing nuclear accident in Fukushima, all nuclear power plants in Japan were gradually shut down, with the nuclear contribution going to zero by May 2012. This resulted in a loss of nuclear electricity generation of more than 186 TWh in 2011 compared with the total of 288 TWh produced in 2010. Missing electricity supply from nuclear plants in Japan was compensated for by a reduction in overall electricity demand, and additional supply from coal (52 TWh) and natural gas-based (58 TWh) electricity generation, plus some oil-based generation.
Coal demand from OECD Asia Oceania was fuelled by the sustained growth in coal-based electricity production in Korea. In the past 11 years, Korea's electricity generation from coal-fired power plants has more than doubled, growing on average by 6.9% per year, from 111 TWh in 2000 to an estimated 233 TWh in 2011.
In contrast to OECD Europe and OECD Asia Oceania, total electricity generation from coal-fired plants fell by 5.7% in OECD Americas in 2011. Rising shale gas production in the United States led to a further decrease in US natural gas prices in 2010 and 2011, thereby rendering gas-fired power plants more competitive in some regions and moving it ahead of hard coal in the merit order, at least in some states of the United States. Consequently, coal-based power generation plummeted by 6% in 2011 against 2010, down by 120 TWh from 1994 TWh in 2010 to 1874 TWh in 2011.


Figure 3. Evolution of coal-based electricity generation in non-OECD countries

Total electricity production in non-OECD countries amounted to 10589 TWh in 2010, of which 4890 TWh was coal-based (46.2%), up by 9.7% from 4458 TWh in 2009. Therefore 56.6% of the world's coal-based electricity was generated in non-OECD countries, with more than one-third of the total supplied by Chinese coal-fired power plants.
China accounted for two-thirds of total non-OECD coal-based electricity supply, ie, 3256 TWh in 2010. Compared with 2009, when output of Chinese coal-fired power generation plants stood at 2919 TWh, it increased by almost 337 TWh, or 11.5%, well above the total power output of Spain.
India is the world's third-largest producer of coal-based electricity, only surpassed by China and the USA. It produced 652 TWh of electricity from coal, of which more than 96% was generated from hard coal, the remainder from brown coal. On a year-to-year basis, India's coal-based electricity supply grew by 37 TWh (6%) from 615 TWh in 2009, meeting more than two-thirds of incremental electricity demand.
Malaysia experienced the largest growth of coal-based power generation in relative terms among non-OECD countries, with an increase of 31.8% (10 TWh) from 33 TWh in 2009 to 43 TWh in 2010, largely met by imports.

TABLE 1 Gas-fired power generation in Europe.
Gas-fired power generation in Europe is shrinking in absolute and relative terms. Power generation is where gas competes directly with coal. While combustible fuels (coal, gas and oil) have lost market share to renewables in power generation throughout Europe, gas has suffered the tightest squeeze.
Over the first six months of 2012, the amount of power produced by natural gas-fired plants dropped severely in three major European consuming countries, as the table below clearly shows. Compared to the same period in 2011, these countries all showed falls, with the UK dropping by 33%.
In Europe, natural gas has been most affected by decreasing overall power demand, increasing renewable generation, and low coal and carbon prices in comparison to oil-indexed gas prices. While coal also suffers from decreasing power generation and increased renewables, it gained a price advantage over gas in 2011, and this effect was stronger in 2012 due to cheaper US coal exports to Europe and decreasing prices.
In the UK and Spain, markets with sufficient gas and coal-fired generation capacity to enable significant switching, producers have been moving away from natural gas to coal. Since late 2011, gas prices are no longer in a range that enables gas-fired power generation plants to be competitive against coal-fired plants. Decisions on gas-to-coal switch are more complex and made on a plant-by-plant basis, however even very efficient CCGT cannot produce baseload power competitively if coal-fired capacity is still available.

*Medium Term Coal Market Review 2012
Medium-Term Coal Market Review 2012 is part of the IEA's medium-term market report series, which also includes editions on renewable energy, natural gas and oil. MCMR offers a complete view of recent trends and projections to 2017 on coal demand, supply and trade and complements the coal chapter of the IEA's annual World Energy Outlook, which has a longer-term focus.
The MCMR is for sale at the IEA bookshop

Fig 3. Evolution of coal-based generation
TABLE 1 Gas-firing in Europe
Fig 1. IEA supply projections
Fig 2. Coal-based generation

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