When the world talks about coal, it is often focused on its environmental impact. What is often missed is the essential role that coal plays in maintaining price stability. A new report from the International Energy Agency’s Coal Industry Advisory Board (CIAB) aims to highlight this issue – and provides a welcome addition to the debate over coal’s continued role in the electricity market (see this month’s Coal News, p. 5).
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Looking at the power markets in six regions – Europe, the US, Australia, China, South Africa and Japan – the report provides an analysis of the impact hard coal has had on electricity prices. It concludes that: “irrespective of hard coal’s share of power generation in a region, the influence of coal prices on electricity prices is nearly always considerable.”
Take the US as an example. Traditionally, the price of electricity for all sectors has consistently followed the annual real price of coal: a major stabilising factor on the US electricity market and a key competitive advantage for energy intensive manufacturers and industries. Recently, however, this historic trend has been disrupted by the abundance of low-cost natural gas that has resulted from the shale gas boom. Couple this with an increasing number of coal-fired power plant retirements caused by tightening regulatory control and the US power market has been thrown into flux.
This is all well and good when natural gas prices are low. But natural gas prices are notoriously volatile – as was seen this winter, when electricity bills soared amid the harshest winter in recent memory. In a far from uncommon story, the New York Times recently reported that the Rhode Island utility National Grid received permission to raise its electricity rates by 12.1% in January on the back of higher natural gas prices. Others saw far higher price rises. There are now real fears that such spikes will become more common as coal’s influence on the US power market declines.
Since November 2013, there have been a total of 5.4 GW of coal-fired power retirements, the US Energy Information Administration (EIA) said recently. By 2020, the EIA expects a further 60 GW of coal-fired generating capacity to be closed. New emissions rules for new-build coal-fired capacity make it unlikely that the retired plants will be replaced by coal: more gas is the likely option – only exacerbating the problem.
The problem is not limited to the US. Around the world, the environmental imperative is pushing a switch to inherently unreliable or price-volatile energy sources at the expense of coal. But within this trend, there lies a serious risk to the reliability and affordability of our electricity. To counter this, coal must remain a part of the energy mix – at least for the foreseeable future. As Ross McCracken concluded in a recent article for Platts Energy Economist: “Even if zero coal becomes the stated ambition, coal’s role in the transition to a low carbon generation system should not be measured by emissions alone.”