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Editorial comment

Less than nine months after European political leaders promised the ‘end of coal’ at the COP26 summit in Glasgow, demand for the highly-polluting fuel is once again surging across the continent. Fitch Solutions now forecasts 8% year-on-year growth in thermal coal consumption across Europe, pushing total demand back above 2019 levels.

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We also see moderate upside risk to this figure if supply holds up sufficiently. Even in our more pessimistic macroeconomic scenarios, in which industrial output weakens significantly in response to high energy prices and low consumer demand, we still expect coal consumption to remain robust in the medium term. Despite the logistical challenges involved in replacing the 45% of coal imports which previously came from Russia, we forecast demand to trend higher over the next 12 months at least, and only to start falling meaningfully from 2024 at the earliest.

Governments in the region have been returning to coal as part of emergency measures to maintain energy supplies and keep a lid on electricity prices as imports of Russian natural gas fall sharply. In Germany, Europe’s top coal consumer, electricity generation from coal rose by 23% in 2Q22, while legislation passed in July has allowed for the reactivation of idled coal-fired plants. In the UK, which in 2020 managed 67 consecutive days without any electricity generated from coal, the National Grid is negotiating a third deal with a coal power plant operator to keep capacity available beyond planned closures. Meanwhile, Greece has confirmed it will keep seven coal-fired stations operating longer than previously intended.

Europe’s demand for coal may continue to grow in 2023, aided by Russia’s natural gas curbs, higher coal imports, and government support to electricity providers and consumers. Improving supply prospects would aid coal consumption growth and help constrain prices, which have surged to over 400% of their pre-war five-year average at Rotterdam, a key European benchmark.

The single largest supply-side factor for this price spike has been the loss of Russian coal imports, which ended entirely when the EU ban came into force on 10 August, and will not be reversed in the foreseeable future. Nevertheless, other key supply problems will resolve themselves over time. Over the summer, cargo volumes were temporarily limited by low water levels on the Rhine, a route which supplies a third of German coal imports, but these difficulties are easing as rain returns. Fitch Solutions sees significant potential for greater exports from South Africa, once there are improvements to logistical difficulties with rail operator Transmet, which have restricted export volumes. We have also revised up our production and export forecasts in countries such as Colombia, as high prices incentivise ramp-up.

For now, uncertainty around natural gas supply will re-cement coal’s role as a backup fuel for renewable electricity generation in Europe. In the long run, however, we still expect coal demand to fall substantially. National, supranational, and investor measures will continue to incentivise the switch towards cleaner energy. The EU’s RePowerEU proposals, published in May, demonstrate ambitions for an accelerated move towards renewables across the bloc. Storage is key to the success of intermittent renewables, and declining costs of battery storage and hydrogen will encourage new investment in solar and wind generation. The EU and local carbon permit prices, which have shown extreme levels of volatility since the war began, will trend upwards, further incentivising the move away from fossil fuels and from coal in particular.

Concerns around supply, prices, and emissions have also pushed governments back towards nuclear – as we have seen, for instance, in the outgoing UK Prime Minister’s announcement of a £700 million investment in the Sizewell C nuclear plant. We expect a reversal of nuclear’s decline in France, while there is growing interest in small modular reactors in countries such as Poland and Sweden. More controversially given ongoing sanctions, Hungary has just moved ahead with the construction of two new nuclear reactors by Russian state company Rosatom.

Ultimately, the future of European power generation will look something like the vision laid out at Glasgow. For the time being, however, we can expect coal demand to remain very elevated, despite the longer-term push against the fuel from governments and climate-conscious consumers.