Why King Coal won’t pay to clean the throne

Print Friendly, PDF & Email

Why the coal industry, and many investors, have their heads in the ground. And no, it’s not just because that’s where you find coal.

share
Print Friendly, PDF & Email

One of the most stunning comments to come from the coal industry in the ABC TV’s 7.30 investigation into carbon capture and storage this week was not the admission that the technology would not be commercially viable for at least another two decades. That much is known. It was the contention from the coal industry that it believes it has no obligation to increase its contribution to funding the development of the only technology that it says would appear capable of guaranteeing its future.

“If you want to wait for the carbon price to rise to levels where these will be commercially viable we’re probably into the 2030s,” Dick Wells, the chairman of the National Low Emissions Coal Council, told the program. “The question is how you fix that financial gap. How do you get the biggest bang for the buck for taxpayers’ dollars in filling that gap? Because in the absence of it, companies with shareholders – I mean, people have their superannuation with these companies – aren’t going to do things which aren’t sensible commercially.”

Coal companies are not the only ones with shareholders. Renewables companies have them too, even solar companies. So do the biggest industrial companies in the world, such as GE or Siemens, and myriad others. They all believe that investment in R&D is a necessity to guarantee their future. It seems, though, that Wells believes the coal industry should take a leaf out of the Kodak business manual for self destruction.

R&D and the development of new technologies is inherently expensive. Most of the large industrial companies in the world spend between 3 and 5 per cent of their revenues on R&D and investing in new technologies. Because, as the head of Samsung noted last year, most of what they have now won’t be worth much in a decade or two. This is the lesson that Kodak failed to absorb – it feared the cost of developing digital technology (which it had apparently invented) – and so it went bankrupt, because other companies saw that their shareholder interests were best served by investing in a new technology.

This scenario is now being played out in the energy sector. The percentage of revenue invested by renewables companies, particularly those in the solar sector, is considerably higher. But the coal industry, despite its near $1 trillion of annual global revenues, chooses to invest less than one tenth of one per cent in the technology that could best secure the place of coal in a low-carbon economy.

It seems a massive bet (of said shareholder funds) against a) the ability of other technologies to provide a reliable and cost-competitive solution over the same time frame; and/or b) the belief that governments will act to reduce emissions in accordance with the science, rather than what is currently “politically acceptable.”

This scenario, although a core part of the International Energy Agency’s 2011 World Energy Outlook, is not factored in to either the Australian government’s draft energy white paper, or other independent assessments – not even the otherwise excellent Grattan Institute report that was recently released. Just to recap on the IEA report, its message was that unless governments act now to reduce emissions, and attempt to meet the 450 parts per million target that is regarded by scientists as the benchmark to give the world half a chance of escaping runaway global warming, then by 2017 the global “carbon budget’ would disallow any new fossil fuel plants without the closure of another equivalent.

Such a scenario seems improbable to most people, even though it is a choice that may need to be made within half a decade. But even a panicked reaction at half that scope would have major implications for these industries, their shareholders and their superannuation. This is one of the reasons for the formation of the Carbon Tracker Initiative in the UK, which is warning against the potential of systemic risk from the exposure of investors to carbon-intensive listed firms.

“As the recent IEA World Energy Outlook 2011 confirmed, only a fraction of these reserves can be exploited without busting the remaining “safe” global carbon budget,” it wrote in an update report released in London in January. It said that UK investors, through their pension plans, insurance policies or savings, will be exposed to this substantial carbon risk as their funds either passively track the market, or benchmark against it. And one third of the carbon exposure on the UK’s FTSE 100 came from the coal industry in Australia.

Carbon Tracker wrote to the Bank of England Mervyn King warning that “the depth and breadth of our collective financial exposure to high carbon, extractive and environmentally unsustainable investments could become a major problem as we transition to a low-carbon economy. Five of the top 10 FTSE 100 companies are almost exclusively high carbon and alone account for 25 per cent of the index’s entire market capitalisation.”

King wrote them a letter thanking them for raising “interesting issues” and suggesting that regulators could investigate whether exposure to fossil fuel-related assets pose a long-term risk to financial stability. He said this would need to meet several criteria. First, he said the exposures of financial institutions to carbon-intensive sectors would have to be large, relative to overall assets. Secondly, it would have to be demonstrated that the impact of policy and technology working to reduce returns in high carbon areas is not already being priced into the market assets; and then there would need to be evidence that any market correction would take place too quickly for financial institutions to adjust their portfolios.

“The necessity of all three conditions being met raises a question in our minds as to whether or not this is a potential threat to financial stability,” King wrote. “Nevertheless, there is clearly scope for further evaluation of these issues, in particular the potential scale of the risk and transmission mechanisms through which it might impact UK financial stability.”

In response to that, Ben Caldecott, head of policy at Climate Change Capital, and James Leaton, project director at the Carbon Tracker Initiative, said there was already evidence that King’s conditions for further investigation had been met.

Print Friendly, PDF & Email

7 Comments
  1. D. John Hunwick 8 years ago

    Greater publlicity needs to be given to the community that super funds are investing in coal at the very time when world-wide efforts are aimed at making coal (virtually) redundant. Investors in super funds need to contact their various institutions and urge a reduction in relaince on such technology no matter how attractive such investment might appear in the short term.

  2. Beat Odermatt 8 years ago

    There is a very good reason why the coal industry spends very little on research on environmental issues. Coal mines are run by a mine manager and by mining engineers. They are all paid a handsome salary plus a bonus. The bonus depends on the profits made by the mine during the past financial year. There is no incentive for the mine manager or the mining engineer to spend a single cent more than absolutely necessary to keep the mine running and to meet legal obligations. If expenditure can be delayed into the future, it will be delayed as a future expenditure. If a coal mines starts investing money into research or environmental issues not strictly mandated by the State, its profits will fall and they will lose their engineers, managers and skilled workers to other mines.
    I personally find it abhorrent that for example the Playford Power Station is being considered for a payout financed by the carbon tax. The Playford Power Station was already virtually mothballed during the 90th because it was considered by its operators as uneconomical and “too dirty”. The promise of windfall gains during hot spells and acute power shortage during hot summer month made the operator to gamble a few more millions to “refurnish” the plant. If you and I gamble and we lose, it is bad luck. If a coal power station operator gambles and loses, we always have Julia Gillard to pick up the tab.
    Why do coal mines do it? Because they can.

  3. Alastair L 8 years ago

    It should be pointed out Kodak did All the R&D into digital sensors for cameras. They invented the things and provided most of them to most of the industry initially. Then they seemed to lose their way but it’s a mistake to characterise them as having their heads in the sand. They had the majority of the consumer-level digi camera market for about a decade in Australia — a little respect please!

  4. Richard Aldous 8 years ago

    We are not comparing apples with apples. There are two elements here.
    One is the resources that are used to produce the energy ( viz wind , coal , gas , sunlight, U3O5 );

    the other is the industry groups (with their special technologies) that make electricity.

    The latter group contain the renewable companies that are investing in their technologies and the electricity generators.

    Many of the OEMs that offer power stations for fossil fuels are also developing their technology and spending money on that; particularly the capture technologies and more efficient combustion processes with lower emissions. Renewawable technolgy developers are doing the same.

    The energy generators are then buying and installing the technologies- if there are adequate returns. Returns on energy generation are not that high at the moment. Here is where some of the problem start.

    The renewable energy generators have massive subsidies such that deployment of thier technology is viable commercially, without this it would not happen.

    Australians are putting a subsidy of $20-30 billion on the table to subsidise renewable energy through the Large scale Mandatory Renewable Energy scheme. The clean energy finance corporation is a further assistance to them. CCS has nothing like that. The $1.6 billion on offer, through CCS flagships is a good start but it is insufficent to get serious traction from equity and finaiciers. Renewables are bing favoured on ideology rather than logic.

    Waiting for the carbon price to rise to get CCS to kick in commercially will be a long wait. Even when the carbon price gets to a point where CCS could be viable, the long lead times associated with developing large resource projects are such that it could take a further 10-15 years before they get into production under market forces. Australia will not meet its 2050 targets with a strategy that just relies on the carbon price, without incurring significant unnecessary stress on the economy caused by forcing higher cost renewables and gas into the mix.

    We urgently need to create enough incentives to get 5-6 moderate scale post combusiton capture projects going. These are much lower cost subsidies than thsoe required to build new integrated power stations with CCS. This will ensure that the technogy, the regulatory regimes and investing community and banks are ready to let CCS play its part in the the level playing field that will emerge when the carbon price is at a level that will allow all technoloies to play their part without niche subsidies.

    CEO CO2CRC

    • Giles Parkinson 8 years ago

      Richard.
      You make some interesting points. I don’t doubt that for CCS to be given a chance to work that 5-6 moderate scale post combustion projects are needed. And I understand why generators would be cautios. What I cannot understand is the defence of the coal mining industry in contributing so little. They supply the key material for the industry, don’t they have an interest to ensure that demand continues? And they are making revenues and profits beyond imagination right now.
      As for subsidies, the $20-$30 billion subsidy for renewables under the RET is over 20 years, and doesn’t include the impact of the merit order effect, as documented by the IEA. The fossil fuel industry in Australia is estimated to receive subsidies of up to $9 billion or more each year. ($500 billion world wide, and a fraction of that for renewables).
      Perhaps the best way to get the carbon price up is to push for more ambitious abatement targets to reflect the science. That will focus people’s attention!

  5. Mic Rahme 8 years ago

    That is a good article

  6. Michael Peck 8 years ago

    One reason why King Coal has very little interest in pursuing CCS is that, when you do the maths, it’s just not ever to going to make a significant contribution to reducing CO2 emissions.

    Vaclav Smil has calculated that to sequester just one third of the carbon dioxide emitted from the world’s coal-fired power stations in 2010 would have required burying a volume of compressed CO2 almost one-and-three-quarter times that of the crude oil produced that year.

    The scale of required infrastructure is vast (roughly comparable to that of the existing oil industry) and it would need to be built without any commercial profitability obviating the costs.

    Furthermore, an MIT study showed CCS reduces the generating efficiency of power plants by some 27–36 percent, thus both increasing coal consumption and the volume of CO2 to be sequestered.

    CCS does not require any huge R&D effort – technology to extract CO2 from flues and to compress and pipe the gas to reservoirs is already available. It is simply not a viable technological fix.

Comments are closed.

Get up to 3 quotes from pre-vetted solar (and battery) installers.