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King coal retreats in Europe, but still powers global growth

Coal is having a bad time in Europe. Germany – the world’s fourth largest economy – has said it will phase out coal-fired power generation by 2038 while in the UK, the closure of another large coal plant was announced.

Despite these setbacks, the fuel of the industrial revolution still has a vital role to play powering global growth in the future.

German power plant operators have until next year to outline plans to replace lignite – often referred to as “brown coal” – as an electricity generating fuel. Last year, coal and lignite-fired power stations met 35% of German electricity demand, equivalent to generating over 200 TWh of power.

The question is whether Germany – Europe’s biggest manufacturing nation – can remain competitive without cheap coal to generate power, especially in its strategic steel sector. According to the country’s steel federation, WV Stahl, annual additional energy costs would be €250 million for the entire sector. The total cost to the economy would be much greater.

Costs for industry from higher power prices are controversial, with industry association BDI estimating a €14 billion hike at least. Germany’s big exporters are already exempt from green levies and may push hard for further exemptions, especially from rising carbon taxes. Despite these costs German industry is largely unconcerned.

Nevertheless, the phase-out recommended by Germany’s coal commission in late January effectively brings to an end over 900 years of industrial history. At their peak, pits spread across the Ruhr and Saarland helped turn the German economy become the manufacturing powerhouse it remains today. In their place will come a reliance on imported gas and renewables.

Resistance from the regions?

Politics could still extend coal’s lifespan in Germany. Some of the country’s largest opencast lignite mines are located on Germany’s eastern border with Poland where the nationalist Alternative for Germany (AfD) party has built its support base amongst the region’s working class. The AfD may seek to slow down coal’s phase-out and defend jobs if they are successful in forthcoming elections in Saxony and Brandenburg.

However, on the left bank of the Rhine a 1,000-year old forest stands in the way of a giant lignite mine and has become a high-profile environmental battle ground. For political groups in this area, the shutdown of coal can’t come quick enough. Even after Chancellor Angela Merkel steps down in 2021 they will push hard for a rapid implementation of the coal commission’s plans.

Britain – unlike Germany – depends entirely on imports to fuel its last six coal-fired electricity generation plants. Since 2007, when Prime Minister Tony Blair signed the UK up to some of Europe’s most ambitious targets for renewable energy, coal has been in rapid decline as a generating fuel. EDF Energy’s decision this week to close the 2 GW Cottam power station in the Midlands is expected soon to be followed by the shuttering of SSE’s Fiddler’s Ferry plant in Cheshire.

Rising costs for consumers are a likely by-product of King Coal’s slow death in Britain, with low-carbon replacement capacity more expensive. UK energy bills are already among the highest in Northwest Europe and token tariff caps won’t protect non-switchers from global commodity markets, as regulator Ofgem has just demonstrated with a £100-per-year hike to the cap.

“We assume that Cottam and Fiddler’s Ferry both close at the end of the summer, while also assuming neither are commercially operational for the summer itself, meaning they are focused only on meeting their capacity market commitments,” said Glenn Rickson of S&P Global Platts Analytics.

Fueling Asian industry

However, the demise of coal in the birthplace of the industrial revolution is meaningless compared to the crucial role it plays in powering Asia’s rapid economic growth, especially in China and India. Coal generates about 70% of the electricity produced in both countries. The International Energy Agency expects global coal demand to continue rising through to 2023 with Asia offsetting declines in Europe.

“The global economy needs coal,” said Alexey Danilov, director of Carbo One, a Cyprus-based coal trader with operations around the world, in an interview with S&P Global Platts this week. “Coal played a vital role in the Industrial Revolution and even today it accounts for about 40% of the global energy mix. It is used in steel production and other industries like pharmaceutical industries, paper manufacturers etc. People just need to know more about it.”

For China, cheap coal-based electricity is essential to maintaining its low-cost industrial advantage. Although China added 40 GW of solar PV last year, the country commissioned about 38 GW of new coal-fired capacity, S&P Global Platts Analytics data show. A further 57 GW are currently under construction, further underscoring the fuel’s importance to the world’s second largest economy.

Although renewables, natural gas and LNG will eat into coal’s entrenched position in Asian electricity generation the fuel continues to be the lowest-cost option for power markets in the world’s fastest growing economies.
Source: Platts

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