Let’s face it: we Humans are very poor when it comes to dealing with the intangible. We deal in obvious comparisons and in lieu of that: a real pain now is worth far more than a greater pain in the yet unseen (albeit still known) future. “One problem at a time” we say, and despite our professed post-modernism, obvious mid-term dangers and costs are completely overwhelmed by the pressing matters of the present.
Risk Management is about balancing the present intangible benefits of long-term actions, with the tangible consequences on the short-term. Ergo, we tend to be very poor at managing risk and coal is one of the most obvious examples of it. All hail “The End of Coal” yet… it keeps on failing to End.
The magnitude of the conundrum
Back in last December, the U.N. held its 24th Conference of the Parties (COP24) to address (again) the same problem: how to enforce the actions we know must be taken to limit further warming of the planet. Nevertheless, close by, a Trump-administration-supported event called “Innovative Technologies Spur Economic Dynamism” showcased what they claimed to be great innovations in basically all the technologies that generated said global warming in the first place.
Poland – the country where said COP event to take action against warming-generating technologies took place – is planning to invest on a new coal mine this year because, in the words of its Deputy Energy Minister: “Poland needs coal and either this will be our coal or from outside” and in the words of its Energy Minister “I don’t see that in 2050 there will be no coal-fuelled power plants in Poland. The life span of power plants will not end in 2050”. This comes at a time when insurance companies are dropping support to coal related businesses, reducing the support said investments require in order to operate.
This hasn’t prevented thermal coal from being one of the top-performing commodities last-year. The World’s biggest coal consumer – China – is facing real problems and is taking significant steps to overcome them (read more here or here). Nevertheless, even though imports in December tumbled, China’s desire for cheap coal still took the best of the country and coal imports rose in 2018 to its highest level since 2014.
In the opposite direction goes India which, even though it’s reducing coal power plants, it not only increased its imports, in this case they are imports of cheaper and lower-grade coal from Indonesia.
Despite the sceptics the picture is clear: Coal must go if we are to have any chance of preserving our ecosystems and way of life. But even though we practice this optimistic rhetoric regarding the end of coal, we remain locked in this Risk Management battle of future consequences vs. present impacts and, sadly, (for now) the present has the future cornered:
- Fossil fuels remain the core of the regulatable baseload in most countries which cannot invest in nuclear energy and have reached, for technical, political or environmental reasons, the limits of their hydroelectric capacity
- The (populist?) phase-out of nuclear energy will imply an even greater need for fossil fuels unless there’s a significant breakthrough in national-level energy storage facilities to support renewables
- Political divergences remain regarding the importance of reducing carbon emissions
- Increased geopolitical influence of gas-exporting countries is a real problem
- Although this resilient desire for cheap coal, associated with the closing and de-investment in mines, has caused prices to go up, coal is still way more price competitive in producing countries than any other source of fuel
- Incapacity to face the magnitude of the investments required to update existing power generation systems
- The need to implement climate policies implies a loss of jobs in the primary sector of coal mining which won’t be absorbed by a renewables-based or a gas-based economy
- Coal mining and generation is not a uniform issue, therefore impacts in the coal industry cannot be distributed evenly, and may obliterate the economy of specific locations without real alternatives for the existing populations
- The coal industry has ramifications that go far beyond mining. We are talking entire supply chains, machinery, freight, transport, storage… the list goes on and on. To many of the companies operating in these segments, particularly in coal-intensive countries, there are no easy exit routes, which have a real impact in social and economic stability
The European Picture
Europe’s progress in reducing the use of carbon-intensive power is gradual and uneven. Although not as high as in other global regions, in central and eastern Europe dependence on coal remains high (just look at the image below with data from 2017) as it remains the cheapest fuel and ensures less dependency from neighbouring Russia, which its shameless about using gas supply to advance its political interests.
Image 1 – Coal reserves, consumption and production in EU countries (2017) Source: BP
Germany and Poland combined account for 55% of total coal generation in the EU, so reducing the use of coal in these markets would have a significant impact on EU coal use overall. Before in this text we’ve already seen were Poland stands on this issue back, but where stands the might economic powerhouse Germany?
The massive German utility RWE clearly opposes plans to end coal-fired power generation in Germany around 2035, partially because of their vested interests but also because of legitimate reasons, as everyone hails more investment in renewables but not investments in the power grid (which cost a lot of money and don’t raise eyebrows during political campaigns). Other German utility – UNIPER – was milder in its reaction, but not much different – proposing the argument of keeping a power “security reserve” based on coal (although it failed to clarify how such reserve would be paid for).
Short-term effects don’t affect only companies though, as German Finance Minister shows no interest in paying a state compensation to operators of coal power plants and has voiced scepticism regarding other measures, such as lowering energy tax. These compensations are in the region of the billions of euros, as in the case of North Rhine-Westphalia, one of Germany’s coal-mining states, which is demanding at least 10 billion euros in structural support if coal power stations are phased out. The country has promised a date for its resolution on this matter, but it keeps getting pushed, with the latest push being next February.
This hasn’t prevented the EU from passing a law that says all non-profitable coal mines as well as all those that received UE funds since 2011 and don’t return them in full, must close by early 2019.
Meanwhile in Spain
And this is the case in Spain, particularly in the regions of Castilla y León, Aragón and Asturias. 26 mines have closed under this directive, which affects directly over 2 thousand jobs and indirectly many more.
The Council of Ministers released over 100 million € to support this transition and, as was to be expected, reabsorbing these employments is not a real consideration, as most of the funds comes as a compensation and stimulus to early retirements as well as a support to new employments to environmentally restore the mining zones. This leaves out all those small and medium sized companies that lived within the mining ecosystem and which are left without any support.
There are also 15 thermal coal power plants, which most likely aren’t profitable in most cases. Nevertheless, the paradox continues as we subsidise mining closures and destroy jobs in the service industry yet remain importing vast amounts of coal to sustain the system.
The current Government of Spain hopes to approve its Climate and Energy Plan soon, which apparently phases out fossil fuels until 2050. It remains to be seen what will happen to coal if nuclear power plants are closed and what the increased dependence of natural gas from North Africa and the USA will mean for the country.
Although we should all do our part, consequences included, when it comes to real climatic consequence, nothing can be achieved without Asia and, once again, despite wishful thinking, pragmatism comes crashing in.
China currently has 126 GW of coal-fired power in construction and 76 GW either announced, in pre-permit phase or with permits already in place. India has 39 GW being built and 63 GW in the approval process. Considering the lifespans of these centrals, either there are some plans to reconvert them to gas or some other plans, or the math doesn’t add up.
If we add the weight of coal in the (not so spoken of) region of South Asia, particularly Indonesia, Pakistan or the Philippines, and also in Australia, things go way deeper and become harder to solve without serious economic shifts.
Finally, if our goal is “to go green or go home”, shifting to natural gas is just a transition step. But many also want nuclear energy out and, in some cases, even hydroelectric. So, is it realistic to assume we can achieve these goals in a timely manner? One can only hope but given our tendency to suck at Risk Management, I’d say the odds are not in its favour.
Hugo Martins | Analyst