The contrasting stories of the US and European energy markets over the past year provide an opportunity to inject some realism into the debate over coal’s future.
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In the US, the shale gas boom has seen a dramatic drop in coal-fired generation as utilities have swapped to gas. One of the coincidental benefits of this has been a drop in US CO2 emissions to their lowest levels since 1994. Bloomberg New Energy Finance has gone as far as calling this a “revolution […] in how Americans produce, consume and even think about energy”. But the key drivers behind this have been economic, not environmental. If coal had remained cheaper than gas, the great coal-to-gas switch would not have happened. As gas prices recover and coal regains some competitiveness, the situation will reverse.
On the other side of the Atlantic, the EU – the leader in political environmental action – has actually seen a dramatic rise in its coal burn: according to Wood Mackenzie, coal-fired power’s share in the energy mix jumped by 15% in 2012. There are a number of causes for this, but again the main factor is economic. Low coal prices have made it much more profitable for utilities to run their coal-fired power plants than the alternatives, with gas-fired power plants actually making losses in much of the EU. E.ON, Germany’s largest utility, announced it would close its Irsching-5 gas-fired power plant after only three years of operation because it was losing so much money.
All this is a reminder that, for all the political babble, the energy industry is still subject to economic imperatives that are often uncoupled from environmental concerns. This is why Europe is still burning coal despite its reputation for environmental concern; this is why China and India and many other emerging markets use vast amounts of it to generate electricity for billions of their citizens. But it is also why coal use in the US has dropped. In the end, money talks loudest.
This is the reality the world must come to terms with. Where coal is cheap, it will be used; where it is not, another fuel will take its place. It just happens to be that coal is cheap in a lot of places. If politicians are going to try to move away from coal-fired power, they will have to face the fact that this will make electricity more expensive. In the UK, 7 GW of coal-fired capacity will be retired this year alone on the back of various environmental regulations and a new carbon tax. The results will be higher cost electricity. Commenting on the new carbon tax, Catherine Airlie, an analyst at IHS, said it would “raise the cost of generating electricity, pushing consumer energy bills higher. That may increase the number of people that suffer fuel poverty.”
There is no easy solution to the challenges of energy supply and climate change – yet it seems to be made harder when economic realities are ignored. The environmental lobby may like to portray the continued use of coal as somehow illogical, but it is far from it. The reason the world continues to use coal is not difficult to understand: it is abundant and it is cheap. But it is not some sacred cow: when it can be replaced with something cheaper, as last year in the US, it will be. It is simple economics. But these simple economics are the reason it will be so very difficult for the world turn its back on coal.