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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Coal’s Long Goodbye

King Coal’s reign has been long and relentless. The world’s most important source of energy was essential during the industrial revolution for the modernization of agrarian societies. However, the negative fallout of coal’s usage has become more apparent as global warming is having a catastrophic effect on the planet. 

Most countries have accepted their responsibility and signed the Paris Climate Agreement to mitigate the effects of climate change. Recently, a remarkable decline in coal consumption was noted in several industrialized countries with contradicting government policies concerning the energy transition. The two biggest Western economies, U.S. and Germany, have consumed significantly less coal this year. It might reassure environmentalists and other concerned citizens, but some underlying factors seem cyclical and therefore temporary.

In spite of Trump, King Coal is losing

The election of Trump was a significant boost for coal producers in the U.S. Despite his promise to support miners in their economic activities for what he called “beautiful, clean coal”, the American coal industry has failed to reap the rewards of presidential political support.

It wasn’t the effort of miners, which failed to produce tangible results, but technological and market developments that have made alternative sources cheaper. Advances in drilling technology provide access to previously unreachable oil and gas reserves through hydraulic fracking. Due to the shale revolution the U.S. has become the largest oil and gas producer in the world. The flooding of the market with natural gas has dropped prices to a historic low, making it an attractive alternative for power producers. Related: Why This Oil Rally Won’t Last

Also, advances in PV and wind turbine technology have reduced the costs of renewables. Therefore, energy companies have been installing new units at a relentless pace, in spite of President Trump's focus on the fossil fuel industry. According to the U.S. Energy Information Administration (EIA), in April, “U.S. monthly electricity generation from renewable sources exceeded coal-fired generation for the first time.”

Germany’s path to a cleaner future

In contrast to Washington, Berlin is firmly in favour of renewables and the energy transition. Therefore, the decision to shut down heavy polluting coal-fired power plants is in line with societal expectations and political goals. Besides closing individual facilities, the price tag of permits to emit CO2 have also risen due to new legislation. The more pollutant an energy source is, the higher the financial burden for producers. Burning coal emits almost twice as much CO2 compared to natural gas, which creates a financial incentive for producers to burn cleaner fuel sources.

Europe has been awash with cheap natural gas as inventories haven’t been drained during the winter burning season due to favourable weather conditions. Additionally, the competition between Russian gas and LNG is pushing prices even lower, which benefits the European customer. According to the IEA, the struggle between shipped and piped natural gas has saved Europe $8 billion on the energy bill. Energy companies, therefore, substitute coal with cleaner and cheaper gas. Related: Is A Crude Glut Looming?

Furthermore, innovation and decreasing costs of renewables have also benefitted consumers in Europe and Germany. The ever-larger production capacity of wind and solar energy, and regulation that favours cleaner sources of energy has increased the share of renewables in the energy mix.

Stubborn coal

Despite the good news, the situation is likely of a temporary nature. The perfect storm of innovation, legislation, and affordable alternative fuels has hit coal producers hard, but the end is not in sight yet. Despite Germany’s tough stance on CO2 emissions, the country is going for a slow phasing out of its coal-fired power plants until 2038.

Furthermore, China still maintains the largest fleet of coal-fired power plants in the world. Despite Beijing's enormous investments in the domestic renewables sector, the country is also the largest investor in new coal-fired power plants in developing countries.

Therefore, it seems that coal’s time is not over, for now.

By Vanand Meliksetian for Oilprice.com

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