The long and winding road

In a development that some might be tempted to view as the final nail in the coffin lid for coal power, wind power generation has outstripped hard coal-fired output so far this year in Germany for the first time since the industrial revolution.

German wind output hit an all-time record in October at 12.6TWh, more than double October 2016's total. This takes Jan.-Oct. 2017 wind generation to 78.5TWh, up an impressive 14TWh or 21.9% y-o-y.

During the same period, hard coal generation (excluding lignite) dropped to 73TWh, down 13.3TWh or 15.3% y-o-y. In fact, after a positive September blip, hard coal generation slumped again in October to 5.6TWh, down 26% m-o-m and a massive 39.6% lower y-o-y.

Wind generation has also been rising in other European countries. According to preliminary data, UK wind generation accounted for 17.6% of total UK generation in October, up 7.6% y-o-y. Meanwhile, coal’s share of the generation mix fell to a meagre 3.4%. This is about half the level of October 2016 and less than a tenth of its 40% share just 5 years ago.

Spanish wind generation also jumped to 3.1TWh in October, 30.3% higher y-o-y. On the other hand, after a strong start to the year, due to unusually low hydro generation, coal-fired generation has fallen by 18.3% y-o-y on average over the last 3 months.

However, the end of the coal road might be much farther off than many anticipated, as a number of significant long term factors are starting to surface, which look destined to off-set the structural decline in European coal demand, at least for the coming decades.

For starters, despite Beijing’s efforts to contain rampant growth in coal consumption, strong economic growth propelled Chinese thermal power generation (which is mostly coal-fired) to a new all-time high in July, at 433.4TWh. Thermal generation is up 6.3% y-o-y over the first 9 months of the year, which is not to be sniffed at.

South Korea has also seen an 8.2% boost in coal power this year, and this dependency has increased since the arrival of the anti-nuclear Moon Jae-in administration in May, with annual growth averaging 17.1% over Q317.

The continuing problems with Japan’s nuclear power industry have contributed to a 15.8% surge in coal-fired generation in that country over the Jan.-July period, while a staunch anti-nuclear government stance has also resulted in a 13.3% rise in Taiwanese coal power generation over Jan.- August.

Inevitably, all this additional demand has been translating into higher coal imports. We are currently projecting full year 2017 imports will be up 3.5% in Japan, 7.5% in South Korea and 7.9% in Taiwan, not to mention a massive 30.8% in the Philippines and 48% in Pakistan. In fact, overall we expect 2017 seaborne imports to be up 30m tonnes on 2016 levels.

However, we don’t expect supply to match this demand growth, forecasting a 20m tonnes increase in total global exports.

Nor do we expect this supply picture to change much in the medium term.

After years of anti-coal campaigning, it has become very difficult to find investors in greenfield coal projects. Any additional coal output looks likely to be limited to the re-opening of mines shut down in the dark days of 2015, or marginal production increases at existing mines.

At the same time, a number of Colombian and South African mines which are currently supplying the European market will be exhausted within the next few years, while rapidly growing domestic demand is set to limit the amount of Indonesian coal available for export.

These supply constraints are being compounded by a structural decline in coal quality, as good quality coal has already been used. This means that greater quantities of coal will need to be burnt to achieve the same energy value.

Taking all of this together with the increasingly vocal opposition to nuclear power that has emerged worldwide over recent years, we expect there will be many twists and turns ahead before coal power finally runs out of road.

Guillaume Perret
Founder and Director, Perret Associates Ltd
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