Coal: Rolling with the Punches, on the Ropes, or Down for the Count?

These days, prognostications about the future of coal abound—ranging widely on the spectrum from optimistic to bleak. The diversity of opinions stem in part from the evidence, which supports predictions at both ends of the spectrum and a host of views in between. For example, pessimists point to the recent global coal price decline, which has led to significant loss of market capitalization among global coal companies and several bankruptcies. Unlike during previous downturns, the potential for more stringent climate policy and its impact on coal use is hampering a significant revival. The optimists, on the other hand, point to projections showing that coal is likely to remain an important part of the energy mix for decades to come, especially in the developing world, where over 500 new coal plants were under construction this year. In the United States, the Environmental Protection Agency (EPA) projections show coal retaining a nearly 30 percent market share of electric generation, while developing countries in Asia are projected to increase their coal use.

Is coal on the ropes, or is it poised for a significant resurgence? The outlook depends on the time period over which coal’s fate is analyzed. In the short term, coal has suffered and will likely continue to suffer significant setbacks. In the medium term, the outlook for coal is sunnier. In the long-term, the jury is still out—but important policy, technology, and commercial factors over the next several years could impact the position of coal in the energy mix in the long term.

On the Ropes

In the short term, it certainly looks like coal’s outlook is bleak. Headline after headline trumpets bad news for the industry—slower demand growth from China, competition from natural gas in North America, and uncertain demand prospects due to the twin factors of low economic growth and a more sustained climate effort. Global coal prices are down significantly compared to a few years ago, and coal’s two primary markets—China and the United States—appear to be oversupplied. These oversupplies are driven by market and policy factors.

Natural gas is taking significant market share from coal in North America. Natural gas burn exceeded coal in the United States during the months of April and July. Four major U.S. coal companies have filed for bankruptcy protection since 2014 and another just announced that it may soon file for bankruptcy. Coal closure announcements keep coming; Michigan expects to close 25 of the state’s coal plants by 2020, while utility Appalachian Power is seeking permission to close one coal plant in West Virginia and one in Virginia. Coal assets are also up for sale, but the appetite among buyers—usually quick to snap up coal in the downturn of a commodity cycle—is weak. The U.S. Energy Information Administration (EIA) recently reported that the number of new and reactivated coal mines that began production in 2013 was at the lowest level in 10 years.

While low gas prices are certainly a key driver of coal’s current woes, the industry has also taken a hit as a result of policy. In the United States, the Mercury Air Toxics Standard (MATS) went into effect on January 1 of this year, and the EIA projects that MATS (along with other factors) will lead to 60 gigawatts (GW) of coal retirements by 2020, including 13 GW this year alone. Although the rule was successfully challenged in court, the judicial victory was only technical and will not change the reality of plant closures. EPA’s regulation of greenhouse gas (GHG) emissions from power plants is also viewed in negative terms among many coal industry stakeholders. In addition, the Obama administration announced in 2014 that it would no longer provide overseas public financing for coal plants without carbon capture and storage (CCS), except in rare circumstances; several other member countries of the Organization of Economic Cooperation and Development (OECD) have followed suit.

More recently, China publicly announced a commitment to strictly limit the use of public financing for low efficiency coal plants abroad. As one of the major financers of coal plants (along with Japan, Korea, and Germany), and the primary financers of low efficiency technology, China’s action appears to be a significant signal. Having successfully brought China into the discussion of overseas public coal financing, the Obama administration has reportedly struck a deal with Japan—the leading OECD provider of public export finance for coal—to support a proposal among OECD countries to reduce the amount of public export agency financing available for low efficiency coal power plants. This, if successful, would be no small victory, as OECD financing for overseas coal plant exports amounted to an estimated $34 billion between 2007 and 2014.The administration’s proposal strives to set common rules for public financing for coal that will be voted on during an OECD meeting in the third week of November. If agreed to by member countries, up to 80 percent of coal projects currently in the pipeline at member government export credit agencies could be blocked. While there has been some opposition among South Korea and Australia, even these countries have put forward competing proposals to limit at least some coal financing.

Perhaps more significant from a coal markets perspective was China’s announcement last year that it would peak absolute carbon dioxide use around 2030. Since coal is far and away the largest contributor to China’s carbon dioxide emissions, this means that coal use will have to continue to slow. The Chinese government appears resolute in efforts to curb the national use of coal, including plans to set caps on coal consumption by 2020. In fact, Chinese coal use appears to be slowing down already, partly due to the desire among Chinese officials to reduce air pollution but also due to the attempts to accelerate what appears to be a structural economic shift.

Rolling with the Punches

In the medium term, the fate of coal is more uncertain. Despite low prices and bleak short-term prospects, the fundamentals remain good. Demand for coal is growing globally ( 2.1 percent per annum , according to the International Energy Agency), and in 2013, it was the fastest growing fossil fuel.

Prospects for the fuel are uneven globally. Among OECD member countries, coal use is projected to remain flat or decline slightly, although it is projected to remain a significant source of power generation for the foreseeable future. In Germany, for example, the rapid phaseout of its nuclear power generation has meant an increased reliance on coal, which accounted for 43 percent of power generation last year . Although the German government has decided to phase out lignite-fired plants by 2021, 2.7 GW of such capacity will be kept as a reserve source of supply beyond 2017, as a backup for intermittent renewable sources like wind and solar.

Also, the U.S. Clean Power Plan—EPA’s recently released rule regulating greenhouse gases from fossil-fired power plants—will reduce coal use in the United States, but it is far from coal’s death knell. Nothing in the plan mandates coal retirements. EPA projects that coal-fired generation will shrink 25–27 percent by 2030, but it will still account for nearly 30 percent of U.S. generation.

Among OECD countries, Japan will also likely keep a healthy appetite for coal for power generation, where the post-Fukushima energy supply challenge has driven a 19 percent increase in coal consumption. Japan has over 40 coal plants planned, and the government’s 2030 power supply mix suggests coal maintaining a 26 percent share .

Among some non-OECD countries, such as China, India, Poland, South Africa, Turkey, and Vietnam, coal is seeing a significant uptick. This trend is especially strong in Asia , particularly in India and China, which account for over two-thirds of new coal plants under construction in 2014. In India, the government has significant plans for the expansion of both production and consumption of coal. In 2014, over a quarter of all new coal plants under construction were in South Asia, primarily India. The recently submitted Indian climate pledge listed efficient coal technologies as one way they will work to reduce greenhouse gas emissions and noted that “coal will continue to dominate power generation in [the] future.” Coal is seen, in this context, as part of the solution, not part of the problem; India is unlikely to be alone in this perspective.

Even in China, the medium-term forecast for coal is more mixed than it may seem at first blush. According to the recent statistical revision, China has been burning up to 17 percent more coal annually than previously thought; the revision, for example, translates into an additional 600 million tons of coal consumption—equivalent to 70 percent of annual U.S. coal consumption—in 2012. The revelation serves as a humble reminder of the scale of Chinese demand, as well as the challenge in understanding China’s emissions profile and its implications for the global climate effort. While China will curb coal use, it will still consume more coal than the rest of the world combined. Moreover, tracking China’s commitment on overseas financing will need to overcome challenges related to reporting and monitoring.

Down for the Count?

If coal’s short-term outlook is poor and its medium-term outlook mixed, where does the fuel stand in the long term?

The answer depends on the technology, financing, and regulatory issues surrounding carbon capture and storage. If CCS turns out to be an expensive but viable technology—presuming some form of carbon pricing is put in place over the next several decades—coal will likely remain a fixture on the energy landscape. If not, the outlook for both coal and decarbonization pathways in general is much cloudier.

In most long-term modeling of decarbonization scenarios, CCS technology plays a central role in meeting a long-term carbon reduction commitment. According to the Intergovernmental Panel on Climate Change (IPCC), without CCS, costs of abatement would be 114 percent higher. In August, the United States and China reaffirmed their effort to advance clean coal technologies by agreeing to share results from respective research and development activities related to carbon capture technologies. Secretary of Energy Ernest Moniz also just announced a large-scale international storage project to share best practices and operational experience with carbon sequestration internationally.

However, the fate of CCS remains uncertain. The commercial viability of coal plants with CCS is still unproven as there are so few in operation. All of the plants currently under construction or operating rely for their commercial viability not only on government assistance, but on selling the carbon for enhanced oil recovery. There are currently two CCS plants under construction—one in Kemper County, Mississippi, and another in Thompsons, Texas—and a plant that came online last fall in Saskatchewan (although this plant was recently revealed to be having potentially serious technical problems). While these are CCS on power stations, their commercial viability (and the commercial viability of nearly all CCS plants) is dependent on selling captured carbon to oil and gas companies, who use it to enhance oil recovery—resulting in further hydrocarbon extraction and GHG emissions.

The other possibility is that, due to cost, regulatory, or other reasons, CCS is never deployed on a wide scale. Kemper’s integrated gasification combined cycle plant has been plagued by cost overruns and project delays. Even assuming there are efficiency improvements that drive down the cost of the technology, CCS may never be a cheap abatement option. There are other significant hurdles as well, ranging from long-term liability, to the need to finance and build a corrosion-resistant network of pipelines to transport the carbon dioxide from point of capture to point of storage, to concerns about seismicity. Overcoming these obstacles may be possible, but the challenges are immense.

Of course, human ingenuity is vast, and in 20 years, the technology and commercial landscape may be transformed in a way that allows room for CCS. Whether coal will be more widely recognized as part of the solution than of the problem hinges upon the commercial viability of CCS in the long run. Absent CCS, coal could still enjoy a staying power in the energy mix among developing countries, but likely at a much higher social and political cost.

Michelle Melton is an associate fellow, and Jane Nakano a senior fellow, in the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2015 by the Center for Strategic and International Studies. All rights reserved.

Jane Nakano
Senior Fellow, Energy Security and Climate Change Program

Michelle Melton