Coal and the Energy Transition
What is the future for coal-fired generation in the face of the energy transition? Even as regions move to evolve their energy mix towards primarily renewable sources, the demand for coal won’t disappear. Read our latest round up of ESG essential intelligence on coal and the energy transition.
Published: January 6, 2020
Inside Credit
If Charles Dickens were to write a classic on U.S. power generation fuels (why wouldn't he?), we think he would likely call it 'A tale of Two fuels' and it would start something like this: It is the best of times—for natural gas-fired generation; it is the worst of times—for coal-fired generation. This version could even have its own Bast(ille): the Best Available Sustainable Technology. Renewable proliferation and the inevitable advance of regulations would have stormed coal, with shale powering the revolution that overthrows king coal's reign. And at the end, a modern day Madame Lafarge—perhaps a hard-core environmentalist?—would sit knitting beside the guillotine while a polluting, inefficient, uncontrolled coal generation unit wonders if it is going to a far, far better rest than it has ever known.
What is energy transition? Energy transition refers to the global energy sector’s shift from fossil-based systems of energy production and consumption — including oil, natural gas and coal — to renewable energy sources like wind and solar, as well as lithium-ion batteries. The increasing penetration of renewable energy into the energy supply mix, the onset of electrification and improvements in energy storage are all key drivers of the energy transition. Regulation and commitment to decarbonization has been mixed, but the energy transition will continue to increase in importance as investors prioritize environmental, social and governance (ESG) factors.
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Analysis
China's voracious appetite for coal may be nearing its peak consumption level, but the country's love affair with one of the cheapest fuels is unlikely to end anytime soon, despite Beijing's efforts to turn the skies of Asia's biggest energy consumer blue.
Although China's energy mix will continue to evolve, with coal's share expected to fall gradually over the coming years, the relatively slow rate of decline in coal consumption will likely mean that China's influence on world coal prices will remain for many years to come.
Key Takeaways
- China relies heavily on coal in the power sector and many of its plants are highly efficient in terms of coal consumption and emission of pollutants. The coal sector is also an important source of government tax revenue, as well as a large employment generator.
- A more fundamental issue affecting renewables consumption in China has been the poor coordination of wind and solar installations with grid construction.
- China will continue to be the largest coal producer for the next several years, despite restructuring that has seen closure of small, less efficient mines.
Demand Outlook
Global coal power generation is expected to decline in 2019, but that is unlikely the start of a lasting trend as demand for the fuel will remain stable due to rising demand in India and other Asian countries offsetting declines in the United States and Europe, wrote the International Energy Agency in its latest analysis of coal markets.
Coal miners in the United States and Colombia will likely struggle due to the collapse of European Union coal imports and competition from Russian producers as investments in coal mining assets in general face strong headwinds. Chinese coal demand, which accounts for roughly half of the world's coal consumption, is expected to increase slightly and then plateau around 2022, but the forecasted demand from the country is sensitive to potential future policy measures.
Key Takeaways
- Particularly in the U.S. and Europe, the natural gas sector continues to pressure coal generation due to lower costs. At the same time, renewable energy resources are becoming increasingly competitive compared to fossil fuels.
- Several non-governmental organizations, such as insurers and financial institutions, are showing a commitment to acting on climate change and increasingly distancing themselves from the carbon-intensive coal industry.
Coal Valuations
The market capitalization of five of the top 10 U.S. coal companies was sliced by more than half from early January to mid-November.
Those top 10 producers' market value totaled about $4.42 billion as of Nov. 22, a 59.4% drop from $10.88 billion as of Jan. 8, according to data compiled by S&P Global Market Intelligence. The group of companies saw double-digit percentage declines in market capitalization from Jan. 8 to Nov. 22 as domestic demand waned and the seaborne market weakened. Rhino Resource Partners LP, which rounded out the top 10 as of Nov. 22, saw the smallest percentage decline between the periods, with its value falling 18.6% to $11.4 million.
Key Takeaways
- While Cloud Peak Energy Inc. and Westmoreland Coal Co. may have been among the nation's top producers previously, they were excluded because both companies filed for bankruptcy protection during the last year or so and subsequently sold off or transferred their assets.
- Peabody Energy Corp., which has been hailed as the leading U.S. coal producer, saw its value plummet 73.5% to $914.8 million on Nov. 22 from nearly $3.45 billion as of Jan. 8.
- Several analysts said Alliance is one of the strongest, if not the strongest, thermal-focused U.S. coal producer. Given declining domestic utility demand coupled with weakened export markets for U.S. miners, the company's overall strength has proven to be an anomaly in the space.
Insurance
The number of insurance companies withdrawing coverage for the coal sector doubled in 2019, activists behind a campaign to drive a wedge between coal producers and insurers reported.
U.S. insurers continue to lag peers in Europe, but a movement embracing policies that would exclude coal producers continued to gain steam in 2019. About 46% of the reinsurance market and 37% of the insurance industry's global assets fall under plans to exit involvement in the coal sector, the Unfriend Coal campaign wrote in a new scorecard of the insurance industry.
Key Takeaways
- The wildfires in California are listed as an "immediate and terrifying" example of the impact of the climate crisis that is causing insurers to raise rates and issue nonrenewals of coverage.
- Unfriend Coal reported that 17 of the world's largest insurance players have rolled out coal exit commitments as of mid-November. Most of the policies refuse to insure new mines and power plants.
- Coal producers are finding it generally more challenging to find insurance and banking services willing to take the risk on a sector plagued by financial challenges and environmental risks.
Coal Financing
Weakened U.S. coal demand, reduced seaborne pricing and a wave of insurers and financial institutions announcing plans to exit the coal arena have been dominant themes in 2019.
Coal producers may have more difficulty accessing capital as institutions increasingly move away from coal financing. The Unfriend Coal campaign, which seeks to distance coal producers and insurers, wrote in a recent report that the number of insurance companies turning away from coal coverage doubled in 2019.
Key Takeaways
- Environmental groups have targeted major firms and asset managers to end fossil fuel investment in a bid to help combat global warming.
- An August S&P Global Market Intelligence analysis found that the 20 insurers with the most coal exposure as of 2018 held $40.30 billion in related investments. Some of those investments were in coal producers while the majority were in utilities that generated more than 30% of their 2017 electricity from coal.
- Liberty Mutual Group Inc. recently outlined plans to increase focus on environmental, social and governance issues.
Energy transition refers to the global energy sector’s shift from fossil-based systems of energy production and consumption — including oil, natural gas and coal — to renewable energy sources like wind and solar, as well as lithium-ion batteries.
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