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A worker uses his walkie-talkie as he walks past a coal pile at a mining site in Berau, in Indonesia's East Kalimantan province, in this August 12, 2010 file photo. The slowdown in China's economic growth is cutting deeper into Indonesia's coal sector, forcing producers to reduce output and slash costs, and testing the resilience of a commodity boom in Southeast Asia's largest economy. The Indonesian Coal Mining Association cut its 2012 production forecast to between 340 million and 350 million tonnes, the second revision this year and 10 percent to 13 percent below its original forecast of 390 million tonnes.Credit: REUTERS

EXECUTIVE PERSPECTIVE: Is coal really on the rise in Europe?

By Jeremy Leggett, founder of UK-based Solar Century and chairman of Carbon Tracker | 7 April 2014

For the fossil fuel boosters and the climate deniers, it’s a delicious irony. Despite the EU’s much-vaunted climate leadership, its use of coal to generate power has apparently been on the rise.

It’s a useful counterblast to the growing – and increasingly compelling – ‘coal is dying’ narrative that is spreading from climate activist circles to the heart of Wall Street and the City of London.

But are the rumours of coal’s rebirth exaggerated? Does a more considered look at the facts show investors and observers that, rather than the beginning of a bull market for coal, this is a dead cat bounce for the filthy fuel?

Certainly, on the face of it, the EU’s climate policy isn’t looking too clever. Despite the spectacular growth in renewables over the last decade, and the operation of the world’s largest greenhouse gas cap-and-trade system, the power sector has been using more coal.

Even more worrying are reports of new coal plants coming into service. During 2008-09, some 19 plants were entering construction – and a wave of 118 more were announced. Given that these assets have a lifetime of 50 years or more, almost 140 new coal plants would indeed raise profound doubts about the ability of the EU to hit its climate change goals.

But a closer examination shows there is less going on than meets the eye – and instead, the likely development of pricing trends, allied with new regulations, means the future of the coal sector in the EU remains bleak.

First, the increase in coal-fired generation was short-lived. According to Eurostat figures, coal’s long-term decline in the EU reversed in mid-2010 – but that reversal lasted only 18 months.

Coal’s attractiveness over this 18-month period was driven by short-term factors. One was high gas prices in the EU. The other was US utilities having far too much coal on order that they could not use in the face of booming gas – so they dumped it cut-price on export markets.

Coal was also aided by low carbon prices. Generating power from coal requires utilities to surrender more than twice as many carbon allowances than when using gas. So, when carbon prices are low – they fell 90% between 2008 and 2013 – coal becomes relatively more attractive to power generators compared with gas.

But carbon prices are on the rise. The EU Commission, member states and parliament have agreed measures to address the supply glut in the EU Emissions Trading System by delaying the auction of 900 million allowances until 2019-20. In the first two months of 2014, prices had climbed 40%, to €7/tonne.

And the Commission has longer-term plans to bolster the carbon market, by better managing allowance supply and closing the door to international credits. If passed, these measures will lead to an average carbon price of €35/t of CO2 between 2019 and 2030, according to analysis firm Thomson Reuters Point Carbon.

Another factor was the introduction, in April 2013, of the UK’s ‘carbon floor price’ – effectively a carbon tax equivalent to €13/t of coal. This encouraged UK generators to run their coal plants hard before the floor price came into effect. And because EU emissions legislation put a limit on the number of hours old, polluting coal plants can run, many old UK coal plants reached their limit and had closed by March 2013.

As for the huge wave of new coal plants? It turned into a trickle. Of the 118 announced plants, just four reached construction stage, according to research by the European Climate Foundation. And despite those 19 historic plants now coming on line,  in net terms coal-fired capacity in the EU has in fact fallen by 19 GW since 2000.

Those coal plants that did get built have turned into an economic disaster for their owners. Vattenfall, EON, RWE and Steag have all announced impairments, cut dividends or warned shareholders about losses linked to coal-fired power plants. Trianel’s new coal plant at Lünen, for example, does not even run at the weekend, putting in question whether it will ever recover its construction costs.

Because new and old coal plants are now on the rack, utilities have launched into frantic lobbying, warning of blackouts unless they can get ‘capacity payment’ subsidies from taxpayers or ratepayers to keep their old, polluting plants open.

Such subsidies would directly contradict the purpose of the carbon price. They would simply serve to keep open dirty coal plants that are surplus to requirements, are poisoning Europe’s citizens, and are thwarting efforts to tackle climate change. Coal may not yet be dead in the EU, but investors are seeing the writing on the wall and it is time that the EU’s policymakers woke up too.



Any opinions Expressed in "Executive Perspectives" are those of external parties and not those of Thomson Reuters.


Corporate Governance, Executive Perspective

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