After Paris, the future of coal is in doubt

16 December 2015 1:37 pm

The coal industry has been in trouble for some time but the doomsayers are getting louder after the Paris agreement.

Paris spells the end of the coal industry, or at least its growth for several reasons.

As commentator Bob Burton points out, the International Energy Agency’s (IEA) most recent World Energy Outlook spelled out in its ‘450 Scenario’ that to reach the 2°C target, the volume of coal burnt would have to shrink by about one-third by 2040. That would see the coal export trade halving over the same period.

Burton points out that the simple maths of the 2°C target means there is no space for new unabated coal power plants without massive retirements of existing plants. Taking the 1.5°C target seriously requires accelerating the shutdown of the existing fleet of power stations and absolutely no new coal. No ifs or buts.

Secondly, for financial institutions the risks of involvement in supporting new coal projects have just increased dramatically. The shift of the 1.5°C from the margins of the climate debate at Copenhagen in 2009 to being close to centre-stage in 2015 is symptomatic of how fast the political landscape is changing.

For banks, which want a high level of certainty over new coal plants being able to run profitably for 30 years, the agreement signals recognition by the world’s governments that a quick transition away from fossil fuels is required. And for financial institutions still contemplating funding fossil fuel projects, the prospect of reviews every five years is a huge red flag which warns of big risks ahead.

Even before then, coal was in trouble. Coal is headed for its biggest decline in history, according to a Greenpeace analysis, falling 2.3 percent to 4.6 percent in the first nine months of 2015 from the same period last year, a decline of as much as 180 million tons of standard coal, 40 million tons more than Japan used in the same period.

China’s appetite for coal has been shrinking, a result partly of a slowing economy and government policies to limit air pollution. It has been in a sustained decline ever since.

At the same time, there’s been the surprising trend of the growth in renewables. Long considered to be an expensive and unreliable alternative to coal power, renewables have started to drop dramatically in price, due mainly to ambitious renewables targets in countries like Germany and China, and the mass production of clean technologies to meet them. In the United States alone, such trends have brought down the cost of solar power 70 percent since 2009. And Deutsche Bank predicts solar will become cost-competitive with fossil fuel electricity in 80 percent of global markets by 2017.

Not surprisingly, the World Coal Association put out a statement after Paris which said: “Affordable, reliable and accessible electricity is the foundation of prosperity in the modern world. Each nation will choose an energy mix that best meets its needs and for most countries coal will continue to play a significant role whilst for many nations, particularly in industrialising and urbanising Asia, coal has been identified as a growing fuel source and integral to their economic growth.”

But then, the trend towards renewables and the political realities in the wake of Paris tell us that the coal industry is in serious trouble. Goldman Sachs recently put out a note to clients saying we have now reached “peak coal” and further investment in the industry won’t be required,

This is not to say that coal is finished. But the falling share prices of coal companies around the world tells us that the future of the industry is not looking good.