A new series of reports from global investment bank Citigroup has highlighted the dramatic changes that are sweeping the world’s largest energy markets, and which will have a significant impact on the future of the coal industry in Australia.
The reports – titled “A new balance of power”, “A short gas bridge to renewables” and “Global Thermal Coal: When cyclical supply met structural demand” – come to several key conclusions.
The first is that emission standards and rising costs will force a mass closure of coal-fired generation (more than 60GW) in the next few years in the world’s biggest market, the United States. And contrary to most expectations, it says gas will play only a minor role in this “energy transformation,” because it will be usurped by the falling costs of renewables.
The second conclusion is that increasingly strict environmental measures are severely limiting the feasibility of opening new coal plants, not just in the US and Europe, but also in China – which for the past few years has dominated the global coal market and has been the world’s biggest consumer and importer.
In short, Citigroup says, the evolution in electricity markets is being driven by a combination of regulatory and technology changes.
This, it says, has major implications for Australia’s vast coal resources, which require huge investments in infrastructure (rail lines and ports), and may simply not make economic sense. It already notes that financiers are absorbing these lessons, and many Australian projects have been delayed as a result.
The assessment – part of a growing flow of such reports from the world’s financial community – notes the growing risk to fossil fuels, and what Citigroup itself described in an earlier report as the impending “Age of Renewables.”
Australia, however, seems determined to ignore these headwinds completely, or fight against them: the new Abbott government is dismantling its signals for clean energy investment, is imposing no emissions standards or pricing signals, is removing energy efficiency goals and support schemes, and is determined to invest in new coal projects despite the global market signals.
It may be disappointed.
“(Coal) demand is in structural decline as environmental pressures rise and costs of alternative energy sources decline,” the Citi analysts write.
“The shale gas revolution was the first blow, but rapidly declining wind and solar costs and the spread of unconventional gas production techniques are set to erode coal’s long-time cost advantage over alternative electricity sources.”
To illustrate the changing nature of the US market, Citi published these graphs below. The first, on the left, highlights the trends identified by Citi, a short-term burst of gas-fired generation in coming years, before all new capacity is taken up by wind or solar. Some reports suggest solar is already substituting for peaking gas plants. The graph on the right illustrates the scale of closures in the coal industry, with the biggest hits to come from regulatory moves in the next four years.
“Increasingly strict environmental measures are also severely limiting the feasibility of opening new coal power plants not only in Europe and North America, but in China as well.”
It says Australia does not lack coal resources, but the reality is that new projects require billions in long-term infrastructure commitments, which increases the cost and creates a higher return hurdle. The global coal price, meanwhile, is sinking further, with Citi predicting a price of just $US72/tonne this year – well below the break even estimates of most Australian coal mines, particularly the mega projects envisaged in the Galilee Basin.
“Investors are increasingly considering whether some fossil-fuel related assets might become “stranded”, with significant loss of value, if stronger carbon constraints are imposed to mitigate the risk of dangerous climate change, or if alternative energy solutions become technically and economically more attractive,” Citi notes.
As a result of this, financiers are taking a cautious view, which explains the delay in many Australian coal projects – where there are more than $60 billion of projects either publicly announced or in feasibility study, but only one – the controversial Whitehaven development at Maules Creek – is in development.
“Where once there was a long list of projects that should have been underway by now in Australia, projects have dramatically succumbed to the reality of lower prices and high capex/capex intensity,” Citigroup notes.
It says China is no longer paying lip service to environmental issues, and it represents the most significant shift in environmental policy related to coal. Demand will slow as the China economy
transitions away from investment and manufacturing led growth, as alternative power capacity is built out, and environmental measures are enacted to discourage coal usage. It may cease to become an importer.
“To reduce China’s dependence on coal, the government is pursuing an “everything but” strategy,” Citi notes. “This includes rapid build out of solar, wind, nuclear, and natural gas generating capacity.” Solar, it says, will provide the fastest growth while the largest volume growth will come from hydro.
It also means a renewed focus on carbon markets. Citi includes this graph to highlight the recent growth in volumes on the country’s nascent carbon exchanges, which are coming into play just as Australia looks to end its carbon price.
In India, the other great hope for coal producers, Citi says imports are likely to be capped at lower-than-expected levels because coal consumption will be lower than forecast.
Here are some other key takeaways from the reports:
“The transition period from now to 2020 could give utilities time to evolve until new technology and a new paradigm begin to play a much larger role in energy consumption and power generation. At first glance, more rooftop solar and distributed generation, along with slowdown in power sales, and lower peak power prices and heat rates, are headwinds to merchant power generators. But it still takes time for new sources to fully develop and integrate into the market.”
And on gas:
“The growth in gas demand for power generation could be less significant than is commonly believed. Gas is commonly thought of as the substitute fuel for coal in power generation once coal plants retire. But rising renewables generation should increasingly take over market shares of coal and gas-fired generation, particularly in an environment of slow electricity demand growth.”