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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Coal Will Struggle To Survive Australian Solar Surge

Coal Will Struggle To Survive Australian Solar Surge

Anyone looking for evidence that solar power is more than just a passing fad need only look at Australia’s newest solar plants. Recently, the country saw two new solar plants officially open in the sunny state of New South Wales. The mammoth projects cover nearly 1,000 acres and are owned and operated by AGL Energy. Between them, the two plants will generate roughly 360,000 megawatt hours of electricity - enough power for more than 50,000 homes.

Australia is uniquely positioned to capitalize on solar energy and it is entirely possible that the country will be mostly reliant on solar power rather than coal within a decade or two. Australia is much like the American west – vast, sunny, and with a relatively small population compared to its size. Australia actually receives more solar radiation per square foot than anywhere else on the planet. Between that fact, and the reality that much of the Australian outback is simply desolate uninhabited desert, Australia has a natural confluence of advantages that align with solar. Related: Saudi Aramco Chairman Talks Oil Down

Australia has vacillated between taking advantage of its abundance of opportunity in solar, and looking beneath the surface for opportunity with coal. The national government put forth a Clean Energy Plan legislating that 20 percent of power for electricity come from renewables by 2020. It’s unclear if that mandate will survive in the long run, but Australia clearly has the potential to economically produce renewable energy unlike many other areas of the globe.

Australian coal operators recognize the potential damage to their industry that solar can do and are actively interested in squashing that competition. Currently coal companies have a near monopoly in many areas of Australia when it comes to generation capacity. To the extent that solar is a fundamentally cheaper way to generate electricity, coal generators are in trouble. Environmental concerns are largely irrelevant in this case – the situation is being driven by economics. Solar power becomes cheaper as larger and more efficient solar farms are developed, but coal operators and those with a stake in coal power realize this and are naturally interested in doing whatever they can to avoid growth in this nascent competition. Related: Oil Crash Only The Tip Of The Iceberg

But solar power is cheap in Australia and getting cheaper. As solar panel costs have fallen dramatically, up-front capital costs for generating solar have declined. This is critical because unlike coal, solar’s costs are mostly front-end loaded. Eventually, then, solar might win a significant market share against coal on its own anyway.

Solar has another advantage going for it though – the slowdown of China. As China has slowed down, demand for Australian produced commodities from iron ore to metallurgical coal has fallen through the floor. As this has occurred, many existing Australian mines for these products have become uneconomical. That wouldn’t normally affect Australian thermal coal used for electrical generation. But it does in this case. Coal mining requires large upfront investment and it also requires significant on-going expenses over time. As the price of complementary commodities like thermal coal falls, Australian coal miners lose economies of scale. With miners in Australia and everywhere else looking to any possible project to make money, thermal coal prices are also way down (since supply is up). The result is that thermal coal producers are under tremendous pressure. Related: How Soon Could A Sustained Oil Price Rally Occur?

Coal producers today are fighting like cornered animals to keep their market share, but external factors from commodity prices to financial market conditions are conspiring against them. As this difficult macroeconomic environment continues, coal producers may eventually find themselves forced into financial distress and unable to marshal the resources needed to hold onto their market clout. When that happens, it will create an opening for Australian solar power. The start-up of these two vast new Australian solar plants suggest that solar’s opportunity may be closer than many assume.

By Michel McDonald of Oilprice.com

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  • Philip Branton on January 27 2016 said:
    Dear Michael McDonald,

    Would you do a follow up article? Considering that you possess a Phd, when you hear about Carbon Nano-tube technology and economic potential, how would coal become more valuable as a manufacturing commodity than an energy commodity..? How would this knowledge be used to corner the market on a commodity? Great things are being done in this field. What if a "switch" was thrown that resulted in COAL and graphite being the primary source of 3D Nano-tube enhanced printer "ink" that turned central source manufacturing into localized personal manufacturing ..? How would that send shock waves through the financial commodity sector and energy sector..? Thank you for your consideration.....

    Philip Branton

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