Edward Bell, The Economist Intelligence Unit, Hong Kong, argues that, for the time being, coal will have no challengers in meeting Asia’s fast rising energy needs.
Asia’s dominance of global coal markets is unquestionable. The region now accounts for nearly two thirds of global coal demand, up from less than 50% in 2000. But The Economist Intelligence Unit (EIU) estimates that regional coal consumption is slowing, expanding by around just 2% in 2013. This figure is down from an average of over 6% in the previous five years, according to data from the US Energy Information Administration (EIA). Part of this slowdown in coal use is coming as more regional economies turn to natural gas. The most critical regional economy in this transition will of course be China. It accounts for the lion’s share of regional and global coal demand; however, as the Chinese Government responds to popular pressure to rebalance the country’s energy mix, slower coal use in China will bring regional coal consumption growth rates down to around 4% in 2014 – 15. Despite this slowdown, cheap prices and accommodative policies will ensure that coal will remain paramount in meeting Asia’s energy needs.
China targets rising gas usage but coal will remain dominant fuel source
Policymakers in Asia are balancing the costs – both economic and environmental – of the region’s heavy reliance on coal-fired power. In China, the government is targeting much slower coal demand growth of just 1.6% in 2014, compared with double digit levels during the late 2000s. Here, the focus is on tackling the country’s dangerous pollution levels. Pilot projects are underway in several Chinese cities to set up carbon markets but a nationwide scheme is at least several years away. The government will likely make some headway in cutting back on pollution levels in 2014 – 15, but the sheer size of China’s coal capacity means that we think a new target for 2014 of cutting coal’s share of the total energy mix to 65% (from around 67% in 2013) is out of reach.
At the same time, China is laying the groundwork for a greater role for natural gas. The EIU estimates that gas consumption rose by over 14% in 2013 and expects that rate to grow by over 11% on average in 2014 – 15. The announcements from the third plenum of the Communist Party in November 2013 aimed to increase the role of market forces on China’s resources sectors. This should eventually lead to higher prices for natural gas, helping to improve onshore exploration and production. Meanwhile, China is continuing to add liquefied natural gas (LNG) import terminals and is increasing its ability to import gas through regional pipelines. Despite the attention natural gas in China has received recently, however, the fuel will still likely meet around just 13% of China’s power generating needs by 2020, while coal will provide over 63%.
Coal remains in play in Japan and South Korea
In Japan and South Korea, policy choices are also impacting the countries’ balance between coal and gas. Japan returned wholeheartedly to fossil fuel-fired power after the 2011 earthquake led to a shutdown of the county’s nuclear capacity. Coal imports hit a near record level of over 191 million t in 2013 and coal use by the ten largest utilities rose 16% last year. Coal demand growth will pip gas as the government continues its inflation boosting policies, making already expensive imported LNG pinch even further: Japan’s gas import bill hit a record high US$ 72.3 billion in 2013. Coal will also receive a boost from Japan’s government revising its CO2 emissions target to a reduction of 3.8% by 2020 from their 2005 levels, rather than a 25% drop from their 1990 levels.
The biggest obstacle to increasing coal’s share of Japan’s energy mix will not come from gas in the near term. Rather, the coal industry must face uncertainty over when the country’s nuclear capacity will be switched back on. The EIU expects the economic and social pressures of using greater fossil fuel power will mean the government will cautiously restart nuclear reactors in the next few years. Meanwhile, in South Korea, general energy conservation efforts will see both coal and gas come under pressure. Like Japan, South Korea is vulnerable to the high cost of imported LNG but a strengthening currency will help to alleviate some of these cost pressures. The government has also introduced taxes on imports of thermal coal that will come into effect from mid-2014 and is lowering taxes on natural gas products.
Coal's low price is key determinant
A dominant factor supporting coal use in Asia is price. Mid-grade Indonesian coal traded at less than a fifth of the cost of north Asia LNG in late March. For many markets in Asia, this discount will prove too appealing to allow for a substantial replacement of coal with cleaner – and more expensive – gas in the near term.
The cheaper cost of coal will be a major factor in spurring higher use in India. An expanding electricity network and rising industrial output will mean that coal demand will continue to stay strong in the next few years. India is the second largest thermal coal market in Asia, accounting for around 15% of regional demand in 2013. But consumption will be at risk of bureaucratic barriers to increasing domestic output and, despite having the fifth largest reserves in the world, India has come to rely on the global market. A weak rupee will ensure coal stays attractive compared with costly natural gas imports.
In Southeast Asia, coal’s prospects also remain linked to its relative affordability compared with natural gas. Many countries are increasing their share of coal-fired capacity, as fast rising energy demand drains domestic natural gas resources and leads to the region importing LNG to fuel existing infrastructure. But regional energy balances will start to show greater coal use, as many countries prioritise exporting their more lucrative gas into global markets. Indonesia and Malaysia, both major LNG exporters, are ramping up plans to expand their coal-fired generating capacity and The EIU expects coal consumption to rise at a faster rate than gas in these countries.
The low cost and regional availability of coal is part of the reason Asia’s energy efficiency lags behind North America and Europe. Efficiency is improving – China now consumes around six times as much energy as Japan to reach the same level of economic output, down from 10 times as much in the early 1990s – and many countries are investing in more technologically advanced supercritical generating capacity. Malaysia will host the first facility in Southeast Asia, while China continues to invest in upgrading its coal-fired capacity with more ultra-supercritical power plants.
No challengers to coal's throne... for now
As global gas markets develop – particularly with the emergence of new LNG supplies from the US, Australia and Africa – The EIU expects a gradual convergence of international gas prices, which will improve the allure of gas in the longer term. Until then, however, coal will have no challengers in meeting Asia’s fast rising energy needs.
This article first appeared in World Coal Asia 2014.
Read the article online at: https://www.worldcoal.com/special-reports/28052014/coal_has_no_challengers_in_the_asian_energy_mix_coal902/