Posts tagged “coal”
China’s Production of Synthetic Natural Gas Has Global Implications
In its latest Medium-Term Coal Market Report the International Energy Agency (IEA) forecasts a slowing of coal demand growth but no retreat in its global use. That won’t surprise energy realists, but the item I wasn’t expecting was the reference in the IEA press release to growing efforts in China to convert coal into liquid fuels and especially synthetic natural gas (SNG).
It’s not hard to imagine China’s planners viewing SNG as a promising avenue for addressing the severe local air pollution in that country’s major cities, but the resulting increase in CO2 emissions could be substantial. It could also affect the economics of natural gas projects around the Pacific Rim.
A Solution for China’s Smog?
Air quality in China’s cities has fallen to levels not seen in developed countries for many decades. There’s even a smartphone app to help residents and visitors avoid the worst exposures. Much of this pollution, in the form of oxides of sulfur and nitrogen and particulate matter, is the result of coal combustion in power plants. Although China is adding wind and solar power capacity at a rapid clip, after years of exporting most of their solar panel output, the scale of the country’s coal use doesn’t lend itself to easy or quick substitution by these renewables.
Supporters of coal have called the planned new rules from the EPA on CO2 emissions from coal-fired power generation a war on coal and have pledged to fight the rule-making process. It is true that there will almost certainly not be a new coal-fired electric generating station built in the U.S. for at least the next several years, but the hiatus won’t be caused by any specific rule. The real danger to the coal industry is uncertainty.
Investing in the electric business is about long stable returns. Electricity assets last a long time, are expensive to install, and are typically expected to provide long-term stable, if modest, returns. Since returns are spread over a long period and are stable, with limited upside (10x returns on energy infrastructure don’t exist) investors and lenders require a quantifiable and manageable amount of risk. Uncertainty in any form makes the quantification and valuation of risk in an electric generation investment much more difficult (or impossible) and severely limits investor interest.
An excellent illustration of the impact of uncertainty on electric generation investment is a recent history of the wind industry. Despite a pattern of consistent, and even retroactive extensions, the uncertainty created by the political fight over extending the Production Tax Credit for wind power has caused nearly complete cessation of new wind facilities being brought on line each time the credit wasn’t extended well in advance of expiration.
The impact of the PTC on the economic case for a wind project has been substantial and was (and still is for some projects) the difference between a profitable and an unprofitable project, so the uncertainty regarding the availability of the credit was a threshold requirement for an investor. An investor simply could not have certainty that it could earn the necessary return (or in most cases any return) without realizing value from the credit, so no investments were made. The result of this uncertainty in 1999, 2001 and 2003 is stark, as investment dropped precipitously from year to year, even though any project would have qualified for the credit because of retroactivity of the extensions.
This is the 5th installment in a series that examines data from the recently released 2013 BP Statistical Review of World Energy. Next week’s installment will be on carbon dioxide emissions, and that will wrap up the series.
The previous posts were:
- Renewable Energy Status Update 2013
- Hydropower and Geothermal Status Update 2013
- The State of Oil According to BP
- The US is the Gassiest Country
Today’s post delves into the global coal picture. The highlights are:
- Global coal consumption reached an all-time high in 2012
- China continues to dominate the global supply and demand picture in coal
- Outside of China, coal consumption has been on the decline
- The US has recently had the largest declines in coal consumption of any country in the world
- Many European countries have experienced strong percentage gains in their coal consumption
In the most recent issue of our subscriber-only newsletter, Energy Trends Report (ETR), I took a look at the lessons learned from the decline of the US coal industry. As we have done previously, we would like to share a story from ETR with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Report.
Lessons From the Beginning of the End of America’s Coal Industry
Only a few short years ago the U.S. coal industry enjoyed a mini-renaissance with several new large power plants brought on line in 2010 and 2011, which at the time firmly entrenched coal as the dominant source of electric generation in the U.S. Since then, coal’s share of the electric market has contracted sharply, and against the backdrop of the White House’s new position on climate change is why many see an industry in serious trouble.
The U.S. coal industry has been left to fight an uphill battle with the EPA over the agency’s authority to set rules on CO2 emissions from power plants. The coal industry is fighting this battle virtually alone, as traditional fossil fuel allies sit on the sidelines (oil) with no direct stake, or wait eagerly to absorb market share (natural gas). In parallel to this new policy reality, technology developments – from advances in unconventional gas extraction to startling declines in the cost of renewable energy generation and efficiency – are redefining the economics of electricity markets.
An article I wrote was published yesterday, Why a Global Shale Gas Boom is Key to Combating Climate Change. Because I had actually written the article a week ago, I didn’t know that it would come out at the same time as the release of the President’s big speech on climate change. As I demonstrated in the post, the U.S. has been the most successful country over the last decade in reducing its emissions; most of that is due to fuel switching from coal to natural gas. Natural gas generates more than 50% less greenhouse gas emissions than coal, not even including the many harmful particulate pollutants coal emits. To achieve similar benefits around the world, we need to replicate America’s shale gas revolution around the world.
While most of the news about the speech will be about how Obama is planning to accelerate renewable energy, I believe the biggest area of near-term action on reducing emissions will come from some underreported sections that will encourage the replacement of coal with natural gas for energy generation, both in the U.S. and globally.
Reduction in Energy-Related CO2 Emissions
The United States has seen a remarkable run in reducing its greenhouse gas emissions over the last five years, reducing energy-related CO2 emissions from 2007 to 2012 by 12%, from six billion tons to 5.29 billion tons. While part of this reduction in emissions is attributable to a reduction in energy demand due to the economic downturn, another reason for this huge reduction is an increase in the use of natural gas for electricity.
In a story that is now familiar to most readers, the shale gas revolution in the United States has dramatically reduced the cost of natural gas. From a peak of $10.54 per million btu (mbtu) in July 2008, the spot price of gas at the well-head had fallen to less than $2/mbtu by April 2012.
Because utilities respond to price incentives, this caused fuel-switching of baseload electricity production from coal to natural gas, leading to a time in April 2012 when natural gas equaled coal as an energy source for the first time. This switch has partially been undone, with coal now producing 40% of electricity and natural gas 26% as gas prices have bounced back to $3.85/mbtu. Because burning natural gas for electricity produces half as much carbon emissions as coal, fuel switching is one of the main causes in the U.S. reduction in emissions.
An Oft-Used Energy Slogan
Last week, Real Clear Politics and API hosted an energy summit in Washington, DC entitled, “Fueling America’s Future”. It was intended to provide a quick overview of most of the key technologies and issues associated with an all-of-the-above energy strategy for the United States. Going through the highlights of the webcast gives me an opportunity to introduce my point of view to a new audience at Energy Trends Insider. I’d sum that up as “All of the Above”, with asterisks for the proportions and situations that make sense.
This slogan, at least in the manner in which it has been espoused by politicians in both parties, has attracted fair criticism for being overly bland and safe. I suspect that critique reflects a general sense that our energy mix has always been composed of all of the above, or all of the technologies that were sufficiently proven and economic to contribute at scale at any point in time. However, as both our technology options and choice criteria expand, our understanding of the evolving energy mix is hampered by metrics and assumptions that are overdue to be revisited.
The battle for market share in power generation is primarily between historically abundant and relatively cheap coal and environmentally cleaner but increasingly abundant Natural Gas (NG).
The increasing supplies of NG driven by the productivity of unconventional shale exploration and drilling has pushed NG prices lower over the last few years. With lower NG prices has come greater NG use as a fuel source in power generation.
While many in the media have sounded the death knell for coal as a power fuel source, and in the very long-term I think coal usage will gradually diminish, it will take years — perhaps even decades — for coal to be relegated to an insignificant role in power generation, but I am convinced it will occur.
Europe’s Emissions Cap
This shows a fundamental misunderstanding of the European Emissions Trading Scheme (ETS) in particular, and the nature of a market-based emissions cap (AKA cap-and-trade) system in general.
Granted, the ETS is an imperfect cap because it only covers about 45% of total emissions in the EU – most notably it does not include emissions from home heating or automobile transportation. Importantly, though, it does cover major industrial emitters and utility-scale electricity production, which are the major users of coal.
(Read More: Global Carbon Dioxide Emissions — Facts and Figures)
However, the articles continually say things like this, in Friday’s Washington Post: “Green-friendly Europe has a dirty secret: It is burning a lot more coal.” The schadenfreude exhibited in these articles is unrelated to Europe’s actual record on climate policy.
A report issued by the International Energy Agency (IEA) suggests that coal will surpass oil as the world’s most popular fuel source within 10 years, threatening to inject more greenhouse gases into the air than ever before if policy changes don’t follow the warning.
The boost in coal use is due to extreme growth in emerging markets like China and India, countries that require cheap fuel sources for electricity production in order to support their quickly growing infrastructures and populations. At current rates of growth, the IEA says that it expects that coal consumption will rise to 4.32 billion tonnes of oil equivalent versus 4.4 billions tonnes of oil per year worldwide within only four years; with that trend continuing, coal would quickly overtake oil as the world’s fuel source of choice. (Read More: Global Carbon Dioxide Emissions — Facts and Figures)
The IEA is the energy advisory arm of the Organization for Economic Cooperation and Development (OECD), a group that oversees the economic activities of 34 industrialized nations, including Canada and the United States.