Reality Check: The Stubbornness of Coal Consumption
Despite frequent pronouncements that the world should stop using coal, it still consumes vast amounts of black rocks. According to the Energy Institute’s Statistical Review of World Energy, coal’s global primary energy consumption was about 15% above natural gas in 2022 and only 15% lower than crude oil.
Coal consumption has yet to decline. Instead, coal use has plateaued for the better part of the last decade. Because of its carbon intensity and large consumption, Peter and Jackie describe coal as the “herd of elephants” in the room for meeting aggressive decarbonization and climate goals under the 2015 Paris Agreement.
This week, our guest is Lara Dong, Senior Director, Global Coal Research, S&P Global Commodity Insights. Lara explains why coal demand has been resilient and what to expect in the future.
Here are some of the questions Peter and Jackie ask Lara: Is coal consumption expected to stay strong? Why is China still building new coal power plants? How does this compare to clean electricity additions in China, including wind, solar, and hydro? Is there still ongoing new investment in coal mines to add supply? Why was 2021 a pivotal year for Chinese energy policy? How did the 2022 energy crisis impact China’s and India’s energy policy for coal? Do you think the IEA Net Zero scenario, which assumes a 90% drop in coal consumption by 2050, is likely? If Canada were to increase its LNG exports to Asia, would this decrease coal consumption (and greenhouse gas emissions) in the region?
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Episode 242 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. Jackie, how long have we been doing this? I think it’s like four years. Is it?
Jackie Forrest:
It’s a good question.
Peter Tertzakian:
I know it’s well over 200 episodes.
Jackie Forrest:
Yes, it is.
Peter Tertzakian:
Yeah, yeah. We’ve discussed a lot of contentious, or I would call them difficult topics with all sorts of interesting guests. And today I don’t want to discuss the elephant in the room. I want to discuss the herd of elephants in the room because it’s something that actually a lot of energy talk shows or podcasts don’t address, and that major topic is coal. I think we need to have a conversation on coal.
Jackie Forrest:
Yeah. Well, coal is still used a lot in the world. I have a chart here and we’ll put it out on social media, so if you follow our accounts, you’ll find it. But today, coal, and it’s showing the use of coal from 2000 to 2022 compared to other sources of primary energy. But let’s just focus on other hydrocarbons. It may surprise people to know coal use is 13% higher than natural gas even today, and that oil is only about 15% more than coal. So, we talk about using over a hundred million barrels a day of oil and how much hydrocarbons that is, but coal is not far off. And I don’t know if it’s peaked or not.
Peter Tertzakian:
Well-
Jackie Forrest:
I mean 2022 was not quite peak consumption, but it wasn’t far off the actual peak of 2014.
Peter Tertzakian:
Well, again, we’ll post this chart, but if you look back 10 years before the Paris Agreement was signed, or on the eve of the Paris agreement, that there was some notion that okay, coal is peaked and it’s going to retreat. And indeed, there was a couple years there that it retreated as it was substituted out aggressively in places like the United States. A little bit of a dip during the pandemic, but that’s true of many of the energy sources. But it’s rising again, and it’s certainly back at levels pre–Paris Agreement, and I think at the current rate. And this is the herd of elephants in the room, it’s set to continue growing. I mean, coal is one of these things that it’s just like it has nine lives of a cat. I mean, it’s been tried to be substituted out many times over the course of the past 700 years actually. It goes all the way back to the 14th century when they realized that toxic emissions from coal were actually a health hazard in pre-industrial Europe.
And so here we are thinking that it’s going away, but no, actually every time you think it’s dead, it keeps coming back. And I think talking about energy and environment and sustainability, it’s a discussion we need to have. And so, who better to help us with this discussion then Lara Dong, she is senior director Global Coal Research at S&P Global Commodity Insights. So, Lara, we’re delighted to have you. Welcome.
Lara Dong:
Thanks, Peter. Thanks for having me.
Jackie Forrest:
Okay, well, we’re excited to learn more about your background. So maybe just tell us a little bit about the work you do in the coal markets and where you’re based.
Lara Dong:
Sure. Yes, I’m currently based in Toronto, and I moved back last year and transferred to this current role on coal research. Before that, I spent four years in China leading the Greater China power and renewables research. And prior to that, I worked in the global mining companies for 13 years covering commodity market fun research ranging from coal to iron ore steel to copper and aluminium. It feels like closing a loop. Now I’m back in coal and doing the coal research.
Jackie Forrest:
Great. And your time in China is going to really help in terms of understanding coal markets because Asia is where the demand is growing. So maybe we’ll start with our first question. Is coal demand still growing? I mean, the data we just looked at shows that it is. I wanted to highlight an article that we’ll put a link to in the show notes from oilprice.com. I guess they’re covering coal too, but they talk about coal plant capacity increased by 69.5 gigawatts dominated by China last year, and only 21 gigawatts was retired. So actually, we’re still growing in terms of our consumption of coal when you look at power plants.
Lara Dong:
Jackie, I think you’re actually commenting on two distinctive issues. One is on the coal demand and the other is actually about building the coal-fired power plants because they’re correlated, but they’re separate issues in our perspective.
So, a comment on that building coal-fired power plants first before then coming back to talk about the coal demand increase. So, I would say China is building coal-fired power plants mostly for flexibility and
reliability purpose. You see, the majority of the new coal fleet in China are being built as some flexible power source to balance the intermittent renewable power and to address the power load fluctuations, adding the firm capacity to maintain the reliability of the power supply system. So, my colleagues in China would say coal in China is the gas in Europe and North America.
So meanwhile, as the coal fleet shifting its role of base load to flexible power source, its capacity utilization rate will materially decline over time, estimated to be roughly halved by 2050. So reducing its contribution to emissions.
Peter Tertzakian:
Lara, what you’re saying is that, okay, coal plant capacity increased by 69.5 gigawatts last year dominated by China, but that’s the capacity. It’s not the utilization of the plants?
Lara Dong:
Exactly. Yeah. But having said that, the utilization or the generation also increased last year in China that actually contributes to the global coal demand increase. We’ve seen China, the coal-fired power generation increased by 6% last year. It is pretty much the result of a combination of relatively strong electricity demand growth and weak hydropower generation. This is actually a good formula that describes the major dynamics in China’s power sector to date. Whenever there’s a supply gap due to underperforming hydropower, which is the second-largest power source in China, coal will fill in the gap to meet demand as coal plays the role as a balancer in the electricity supply system in China, a similar role that coal plays in many other power markets.
Peter Tertzakian:
Right. And so, with drought conditions in many countries that are dependent on hydropower, what you’re saying is that that’s in large part also a contributor to the rise in the use of coal and power generation?
Lara Dong:
Yeah, coal and gas I would say in many gas-rich power markets.
Jackie Forrest:
Okay. Well, we’re going to come back to the demand a bit more, but it is interesting. I think a lot of our listeners won’t realize, and I didn’t, that they’re building coal plants that act like what we call natural gas peakers that can ramp up very quickly to offset the loss of wind or solar power. Is that right, Laura?
Lara Dong:
Yeah, I would say so.
Jackie Forrest:
Okay. Well, let’s talk about the markets then. It seems like there’s still a lot of demand, but a lot of people believe that there’s not a big future for coal. And so, is there people still investing in new supplier? We’re starting to get into a situation where the market is very tight because consumption is staying higher than people’s perceptions and people aren’t investing in new mines and new supply.
Lara Dong:
Well, let me contradict you in that question. We actually don’t see a tight market this year. We see 2024 is another year of price correction from the record high levels in 2022. It was surely an extremely tight co-market back then. We see Northern Europe delivered thermal coal price surge beyond $400 per ton in the summer of 2022, but the tightness already started loosening last year. And for 2024, we expect same on thermal coal price to continue moderating an average at somewhere between 110 to $120 per ton driven by decline in demand. You could imagine against such a backdrop of overall weak demand outlook; we have been having difficulty finding thermal coal suppliers expanding their capacities. There can be production increase by some coal suppliers, depending on their respective competitiveness, but capital investment is rare. That said, China and India markets are exceptions. Both countries are increasing domestic coal mining capacities to fulfill their respective strategies to secure the affordable energy supply. And they can only rely on import to feed a small portion of their coal consumption.
Jackie Forrest:
Okay, so it’s those particular countries and maybe not private capital that’s investing in the new mining capacity. Is that right?
Lara Dong:
Well, I would say both. There are state-owned enterprises being investing, but also, I think India has been trying to bring in private capital into the coal mining development.
Peter Tertzakian:
And coal mining is a very important industry in places like India and China because they employ so many people. So that has to be a consideration as well, isn’t it? It’s difficult to find alternate employment for… my understanding in China is that something like a couple of million people work in mining industries. Does that number ring true to you?
Lara Dong:
Yeah, I would say that’s kind of close. I do see the correlation between the protecting jobs and maintaining coal mining and coal consumption. But I think this correlation could be a weak one because, by nature, mining is a capital-intensive industry, and it’s much less effective in creating jobs than labour-intensive sectors like service. It’s hard to imagine that policymakers decide to maintain the coal industry, or the coal consumption levels just to keep the employment rate. There are way better measures to meet the purpose. And for the policy setting about the coal mining industry and the coal consumption, economic development, energy security, environmental protection, or sustainability will be major considerations.
Jackie Forrest:
All right, well, let’s talk about 2021. A lot of people think about 2022 as a very pivotal year for energy policy, but in China, 2021 was also very important. The country experienced a number of power brownouts and blackouts, and an energy shortage that year. Tell us why that happened and how that has changed China’s strategy as it relates to energy.
Lara Dong:
Sure. 2021, it’s a very important year for China’s energy policy formation. During the year, economic recovery was phenomenal into the summer from a low base in 2020, the year of pandemic. But then in
the fall, a serious power shortage hit the nation that led to power rationing in more than two thirds of the provinces. So, it caught everyone off guard because China has been, to a large extent, maintaining power supply security during the past two decades of robust growth. There are multiple factors behind this power shortage, but one root cause is coal shortage, which is a real shock to this coal-rich country.
While there has been a lot of review of why and how this happened, to be fair, a series of domestic coal supply disruptions in 2021 contributed to the shortage. That includes multiple rounds of heightened safety inspections, environmental checks, and new production regulations that banned the coal mines from producing beyond their approved nameplate capacity, a practice that has been allowed for decades.
So, in our view, all these supply disruptions took place under an overarching policy framework towards coal reduction, which started more than a decade ago, to address the severe air pollution issues, and it was significantly emphasized as a key measure to achieve China’s climate goals announced in the year of 2020. So right after the energy crisis in 2021 there were obvious policy adjustments. The Chinese policymakers explicitly positioned coal as the backstop to energy security of China, and coal reduction takes a much more cautious pace than the previous years to ensure the energy shortage does not reoccur.
So, our policy interpretation is that the nation is still committed to climate goals, which is to peak emissions by 2030 and net-zero emissions by 2060. But they want to manage the pace more carefully so that decarbonization is not achieved at the expense of energy security or economic development.
Peter Tertzakian:
Right. So, it’s a very holistic view on balancing all the dimensions of energy. Basically, people want cheap, clean, safe, and secure energy, and that energy security often really trumps all of the above. But we know that China has also a very strong commitment to environmental protection, especially when it comes to things like coal, where there’s actually toxic emissions, for which now there’s technologies, of course, to mitigate against those toxic emissions. Can you talk about the commitment to CCS, carbon capture and storage, in some of these new power plants that are be building? Is it happening?
Lara Dong:
For the CCS, I think it’s kind of at a very early-stage development in China. We see a handful of pilot projects, and they are proof of concept. Pilots usually do not go beyond the capturing phase because of a lack of viable downstream opportunities. So, it’s fair to say that CCS is still in the early phase in China, but we expect that, with the continued policy support and the industries moving along the learning curve, the role of CCS will grow larger with declining costs and growing capacity in China. But most likely into the 2040s. Not in the near future.
Peter Tertzakian:
Can you give us a sense of scale, then, on the clean energy, whether it’s dollars or gigawatts or both? The amount of resources going into wind, solar, other clean energy technologies versus how much is going into the coal.
Lara Dong:
Well, you talked about the coal capacity expansion in 2023. I believe it’s around 40 gigawatts. And for wind and solar as a comparison, wind and solar additions reached 300 gigawatts in 2023, more than six times of coal additions.
Jackie Forrest:
Yeah, I think that’s important for… we’re talking about the coal, but to put in context that they’re adding a lot of renewable energy. And that doesn’t even include, maybe, hydro. I don’t know if hydro additions are also occurring.
Lara Dong:
It is, but hydro is a different story because convention of hydro, it is currently the second-largest power source in China. And they can typically provide an 18% share in China’s annual generation mix in a year with normal rainfall. But extreme weather events such as drought and low rainfall can prevent hydro power from generating as much output as expected in a normal year.
In those cases, we’ll see supply tensions and dispatching of more thermal power. So actually the two past years, both 2022 and 2023, are good examples for such situation. So hydro power is a major source of volatility in China’s power supply today. And going forward, given that hydro power capacity growth is close to hitting the limit. So by 2050, its share in the power supply mix will fall below 10% versus wind and solar will be dominant in the long-term power mix and taking more than 50% of the total power generation.
Peter Tertzakian:
Right. Now you follow the global coal, and we talked a lot about China to this point. Can you comment on India too because India now also has a very much restated policy that it is pursuing coal again.
Lara Dong:
True, it is pursuing coal again, but I would say India has been pursuing coal, right? And to a large extent for all the developing economies, India would be a good example. It is developing its economy at a rate of 5% or even higher. And how to feed that growth with a secure and reliable energy source, that is a critical question. And then the main part of both China and India’s answer to that energy supply question is coal because it’s reaching coal short of oil and gas and has limited hydropower resource. So in our view, this natural resource endowment coupled with economic growth resulted into the energy structure of India today.
Jackie Forrest:
So India never stopped being interested in coal, but they need to continue to grow it, I guess, to meet that growing energy demand.
Well, let’s talk about 2022. I wonder if that was an important year in both India and China in terms of their commitment to coal. Because in 2022, as all of our listeners know, that’s when Russia invaded Ukraine and then there was a global shortage of LNG as a result because Europe stopped taking Russian gas and started to buy up a lot of LNG. The prices soared and some countries could not even access LNG because the Europeans bought it all and made it too expensive for a lot of developing countries. Did 2022 make China, India, and other developing countries less interested in gas and pivot towards developing their own coal since they knew from an energy security perspective after that experience that coal was probably a better fuel?
Lara Dong:
Well Jackie, I share all your observations about 2022. It isn’t a crisis this year for energy, but in terms of the energy security policy change, I think it’s an inflection point for Europe, but not for China and India.
Instead, it’s more of policy reinforcement because for both markets, natural gas has always been considered a premium fuel. They don’t have much natural gas resource domestically, and they can afford some gas procurement from the global market, but don’t have the wealth to buy so much as to make gas a major energy source to carry their economy forward.
But because of the scale of the economy and the energy demand for China, there has been an interesting phenomenon between China and the global gas market. For China, gas is a very small share in power mix, just 3% also. Gas will continue playing a complementary role into the long term. But at the same time, China is already the largest LNG importer in the global market and will be a big part of the demand growth for LNG into the future.
Compared with gas, coal is more affordable for emerging markets. But the surging coal prices in 2022 did ring the bell and created challenges for coal import for those markets, and that reinforced their strategies of relying on domestic coal supply to achieve energy supply security.
Peter Tertzakian:
Let’s talk about global coal demand as a whole again, just elevating the discussion to coal usage in general because as we said at the beginning of the podcast, it doesn’t look like coal demand is falling. At best, it’s leveled out relative to 10 years ago. And so the G7 countries recently pledged to phase out coal power, at least unabated carbon emissions, coal power by 2035, which is not that far away. So does that change your longer-term outlook for coal demand? And is it possible that coal consumption is going to roll over as a consequence?
Lara Dong:
Not really. This new pledge has limited impact on our long-term coal demand view because G7 countries have been leading the energy transition and coal exit. So in our existing outlook, we have built in the expectation that their consumption will be minimal by 2035, even before the pledge.
But in terms of the question, when will the global coal demand peak or start declining? I think in our view, the answer will still sit in Asia, particularly for China. To our observation, the global coal demand is on the plateau today. So the key inflection point is about when the coal demand can move down from the plateau. And this depends on when China’s coal demand materially declines and in a sustainable manner. But the timing is not determined by coal itself, but literally by everything else. Like we mentioned, the coal is the balancer in China’s electricity supply system. So it will only be dispatched if the clean energy sources can’t meet total demand.
So this is the fundamental dynamics that determines the pace of coal reduction. In other words, when the clean energy sources, especially renewables, grow to the extent that less and less coal will be needed, then the coal is down will become a structural trend. Well, the good news is since there’s a good news, it could take place as early as within a year or two based on our current outlook, assuming the back-to-normal hydropower and moderating economic growth.
Jackie Forrest:
Okay, so maybe it’s coming soon. Now, what do you think about the IEA net-zero scenario? I’m not sure if you’re familiar with that one, but it sees coal demand dropping by 90% by 2050. Do you think that’s a likely scenario?
Lara Dong:
Well, S&P Global Commodity Insights also maintain to net-zero cases. Similar to the IEA net-zero scenario, these two cases assume the achievement of net-zero emissions by 2050 and investigate what could be the pathways to achieve that. And one of the two S&P global cases also has over 90% coal demand drop by 2050.
And to answer your question, I will use the shortcut. In our base case analysis, China will achieve net-zero target by 2060, not 2050. And this is already a closer task by pulling all stops and with a vast amount of uncertainties. A big part of this task is about transforming a coal-dominant power system of 9,000 terawatt hour today, nearly twice as large as the size of North America. And a scale won’t be stagnant, but to almost double by 2050 at the same time. Also cut the emissions by 90% from today, but still not zero coal. This is our base case for China. And for India, the net-zero target is 2070, and it’s very hard to achieve that from our current perspective. We also see many other emerging markets announce their net-zero targets, but no one set a target as early as 2050.
So to reach a global net-zero emissions by 2050, either all emerging economies considerably accelerate their expected decarbonization pace, or the rest of the countries help them to absorb the enormous extra cost to reconfigure the energy system. Either case seems to be challenging to me.
Peter Tertzakian:
Well, yeah, challenging is a kind word. Honestly, I’m just scribbling out on my paper here some numbers. So to reduce coal consumption by 90% in 25 years, on a linear trend, it would be basically just under 4% per year off today’s numbers. 4%. The pandemic, I’m looking at the chart, saw a coal drop of I think just under 6%. So it would be like a continuous series of pandemics for 25 years or some massive substitution, which would require probably tripling of expenditures globally on alternatives to coal. I just don’t see it. I mean, I think the IEA is going to necessarily have to redefine these scenarios.
Lara Dong:
I think the IEA scenario is not aiming at a plausible future. It’s more of a black cast. So it’s more of a thinking of, to achieve that goal, what needs to happen thing. But I do agree with you.
Peter Tertzakian:
But what is the other part of this, why it is so challenging? And the elephant in the room is that coal is so cheap. I mean, that’s why it has nine lives. It’s so cheap and abundant and plentiful. And it’s just very difficult to substitute out in the energy systems.
Jackie Forrest:
Well, and also the point that in any of these countries, it’s also a domestically available fuel.
Peter Tertzakian:
Domestically available. It’s underneath your feet.
Jackie Forrest:
Yeah. We have cheap natural gas in North America, but they don’t have that. They have to import LNG, which is, as Lara described, a premium fuel. Lara, this has been a really interesting discussion. Now you’re back in Canada after being away, but if you haven’t heard this question yet, you’re going to hear it soon because it’s a question that comes up in Canada often. So, in Canada, we have a great debate about building our West Coast LNG export business.
One camp says we shouldn’t build any more new LNG supplies since they increase domestic emissions and add more fossil fuels into the world and they add to the climate issues. That’s a pretty big camp actually in Canada. Now, the other group says that by adding Canadian LNG to the global market, we’re displacing the use of coal. And that there is a positive impact on global emissions because, for example, if more LNG from Canada comes to China, they maybe would consume less coal. Maybe they’d use more natural gas as backing up their wind and solar and hydro. So what argument do you agree with? Do you think that Canada should develop its LNG and that that would have a positive contribution overall to global emissions?
Lara Dong:
Wow, it’s a big question. I tend to agree that more LNG export to global market, especially to Asia, will result in less coal use than otherwise. Although I think to understand its overall impact on the global emissions, it will take some holistic assessment on not only the emissions reduction by replacing coal use, but also the emissions increase by developing those new LNG projects. In terms of the market for LNG export, I would say the entire Asian market will be interesting, including China, but not only. As a matter of fact, Vietnam and the Philippines started importing LNG since 2023. You see, Asia has a high coal reliance level at 45%, much higher than 12% in Europe and 8% in North America. And accounts for 65% of the global energy demand growth from now through 2050. So we expect Asia’s LNG import to double from today to 2050. So Asia needs a lot more energy supply and LNG will help Asia decarbonize, given the current coal reliance and energy demand growth.
Peter Tertzakian:
And I don’t think LNG substitution is going to substitute out brand new coal plants that are being built. What we really want is for them to substitute out old inefficient coal plants. To what extent, in China and developing countries, are there’s still a lot of these old inefficient coal plants?
Lara Dong:
I’d say after more than 10 years of closing down the small, out of date, the old coal plants, in China’s coal feed, I think they’re relatively higher efficiency and I wouldn’t say it will be sitting in that group. In some smaller emerging economies, there may be some. But to reach their climate goals and to closing down smaller, low efficiency coal power generation plants, it’ll be part of the efforts too.
Peter Tertzakian:
Well, it’s been a fascinating discussion, Lara, thanks for talking about such an important topic. Because the reality of the numbers and the charts and the graphs is that coal use is not going down aggressively. The ability to reach net zero in 25 years from a coal perspective seems unlikely, in my opinion, Jackie, to go down 90% based on the numbers and the discussion we’ve just had from Lara. So where does that leave us with these scenarios in the United Nations and the IEA? I sense something’s going to have to change in terms of the thinking.
Jackie Forrest:
Well, Lara, this was great information, and you talk about maybe in the next few years we’ll see peak coal. But from everything you say, it’s not declining rapidly after that, it’s declining more slowly. So I think it’s very similar to the discussion around oil and gas. The reality is that we’re going to be using more of these hydrocarbons than these net-zero scenarios when we look at it practically, what’s possible. And I think the folks that go to those climate meetings have to get away from looking at these
net-zero scenarios that aren’t realistic and saying, “Okay, well, if the world is going to use more fossil fuels, then what are we going to do about long-term warming? Are we going to invest in more direct air capture, more carbon capture storage, more geoengineering?” I mean, I’ve said this number of times on the podcast, Peter, but it seems that we’re almost like zombies walking towards this net-zero scenario and ignoring the fact that it doesn’t seem realistic at all that we can achieve these goals.
Peter Tertzakian:
Yeah. I would say that approaching the 10th anniversary of the Paris Agreement in 2025, so we’re on the eve of the 10th anniversary, there’s going to have to be a major rethink in terms of what I call plan A. Plan A is all the policies that are in place. The STEPS policies that the IEA refers to, the stated policies, which have grown exponentially over the course of the last 10 years. But if you look at these charts, really they’re not working. These policies are not making a dent. And so I think there has to be a rethink. I certainly don’t have all the answers, but step one is to address the elephant or the herd of elephants in the room.
And Lara, thank you so much for taking the time to talk with us and educating us on what’s going on the other side of the world. I mean, I certainly didn’t realize, for example, that the bulk of these new coal firepower plants were meant to be peakers. But still as peakers when there’s droughts going on and so on, I mean, the coal consumption is still huge. Well, thanks again, Lara Dong, senior director Global Coal Research, S&P Global Commodity Insights. And we hope to have you back again in future as the coal markets develop.
Lara Dong:
Thank You. Thanks for having me here.
Jackie Forrest:
And thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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