What do rising coal prices mean for the energy transition?

The character Faust, dissatisfied with his life, made a bargain with the Devil.

In return for unlimited knowledge and worldly pleasures, he sold his soul to the Devil.

This Faustian pact turned sour, and though I am not the first to use this analogy, I believe I might be the first to use it regarding the current developments in the coal industry.

Allow me to explain…

It all started back in early 2019, when I joined James Allen’s Exponential Energy Fortunes. I remember that on the wall opposite my desk was a newspaper cutting.

It had a big picture of a huge electricity tower, warped into the shape of a dinosaur, and the headline was something crap along the lines of “Fossil fuel utilities are becoming the dinosaurs of the industry”.

One of the earliest pieces of work I did for James was writing up a piece of research on why Centrica, which owns British Gas, was a terrible investment and why people needed to check their ISAs and pensions and whatever to make sure it wasn’t hidden in there.

Utilities were moving on, James explained to me, and at the time we were investing in a brilliant little renewable utility that has grown its customer base about as fast as British Gas’ has shrunk.

Centrica duly fell from 130p per share all the way down to the mid-30s.

Then, during the first lockdown last year, James and I were recording a podcast in which he described the state of the energy sector as a “postcard from the future”.

This was at a time when the UK hadn’t used coal to generate power for months, and we were breaking records for solar and wind contributions to daily demand. This was the future of the energy system, right in front of our eyes. Probably, no one noticed. Our kettles still boiled, our toasters still had the power to melt butter.

Since the late 2000s, the coal sector has been in an existential decline. The UK has led the charge, but it has not been alone. I’m mainly talking about thermal coal here, which is used in power generation.

Renewables sources like solar, wind, and energy storage have fallen (respectively) 85%, 50%, and 80% since 2010.

That means the renewable power is now cheaper than coal power in over 2/3rds of the global population. This number represents 71% of land mass, and 85% of electricity generation today.

This is based on a levelised cost analysis, by the way, which includes all costs from inception to retirement. Please, don’t go thinking oh, but what about how much it costs to move a wind turbine blade? It’s all included.

And yes, before you ask, it does require some fossil-fuelled energy to get these things off the ground. But the latest research shows that wind farms, for example, are carbon positive by about the sixth month of operation. Everything after that is a reduction.

It is, clearly, better for the planet than a coal plant.

In many cases, it would be cheaper to raze a coal plant to the ground and replace it with solar or wind plus storage. Some utilities are doing just that.

The marginal cost of solar and wind is obviously zero – sunshine and wind are free. Small operational expenses are required for plant maintenance.

It is the economics of renewables which are driving this change. This is a fact I just cannot repeat enough. It’s extraordinary how many people aren’t aware of it.

Google “Mark Lewis” for more on this topic. He was my first ever interviewee and the opening speaker at our Beyond Oil online investor conference last year, and pioneered the concept of stranded assets for oil majors. He is, perhaps, peerless when discussing the economics of renewables.

Many are probably also not aware that in Q1 of 2020, the UK generated 45% of its electricity from renewables, a new record. That doesn’t include the 15% from nuclear. Coal was only 3.7. We also went 67 days without using any coal, toppling the last record set in 1882.

Why? Not for any moral, environmental reasons.

Because gas and renewables are cheaper and cleaner.

Don’t forget that cleaning up coal use isn’t just about the climate anyway. Pollution is responsible for 10% of premature deaths in the world each year. That number (about 9 million people) is three times higher than for malaria, AIDS and TB combined.

And coal is not just losing out to renewables, but to gas too. Gas is cheaper, and much cleaner.

Generating a single megawatt of power from coal emits a third of a tonne of carbon dioxide. For power generated by gas, that number is cut in half.

That’s one reason why Rob West, a favoured energy analyst of this letter, sees coal to gas switching as the most important part of a successful transition to Net Zero 2050.

He sees gas generation tripling by 2050, while coal falls to very low levels.

In 2020, global coal generation fell by 7%. To meet the goals set by all nations in Paris, we need to repeat that feat every year for the next decade. We might not succeed, but we’re certainly going to try.

Ultimately though, economics have driven this shift more than any other. And it’s happening across the globe. Last year, renewables reached 10% penetration of global electricity generation. Germany and Poland, the last coal bastions of Europe, are finally caving into the new reality and shifting their energy mix towards renewables.

This is an economically driven change. I can’t emphasise this strongly enough. Solar and wind are cheaper, cleaner, and better. That’s why I’m so keen on the energy transition as an investment sector, and don’t buy into the argument’s that it’s all just virtue signalling nonsense. It’s not, it’s capturing the attention of big investors everywhere, and it’s here to stay.  

This is not some green agenda bull***t. Solar plants are being auctioned off at prices which are cheaper than any other form of electricity in history.

In 2020, more coal plants were retired than built for the first time this millennium.

Challenges like intermittency have been vastly overstated so far, and have been proven wrong. That won’t last forever but we in the UK have shown that 50% renewable penetration is doable, and more will surely come.

It’s game over for coal.

Done.

So… why is China building over 300 coal plants at the moment?

Pffftt… This is where it gets a bit tricky.

China’s also bickering with Australia, leading to a trade fallout and lower Australian exports.

So suddenly, coal is in short supply, and prices are… soaring. Damn.

Source: Koyfin

They have risen 60% since the middle of last year.

On Monday, I’ll delve into whether China’s new coal plants and surging price can challenge the current momentum.

Here’s a clue – it’s a Faustian bargain.

Until then, have a great weekend everyone.

It’s a time for lie-ins, long reads and lazy dinners.

Enjoy,

Kit Winder
Editor, UK Uncensored

PS If you’re more of an energy transition advocate like me, you should really read this instead.

1 Comment
  1. […] Friday, I wrote about the economics which are driving the decline of coal power (here). I’d suggest it’s reading that one before continuing, if you haven’t […]

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