Last year in November, the UK, together with key partner Italy, hosted the COP26 climate summit, an event many believed to be the world’s best last chance to get runaway climate change under control. A key outcome of the summit was that dozens of nations pledged to end deforestation, curb CO2 and methane emissions and also stop public investment in coal power. Specifically regarding coal, a total of 46 countries signed the Global Coal to Clean Power Transition statement, promising to “accelerate a transition away from unabated coal power generation” and “cease issuance of new permits for new unabated coal-fired power generation projects.”
But less than a year later, all those promises have gone to the dogs, with developed countries now scrambling to resume coal-based energy generation after the Ukraine crisis triggered a global energy meltdown.
According to a report by the Observer Research Foundation, energy supply disruptions triggered by Russia’s war on Ukraine took LNG prices even higher leaving coal as the only option for dispatchable and affordable power in much of Europe, including the tough markets of Western Europe and North America that have explicit policies to phase out coal.
According to the Washington Post, coal mines and power plants that closed 10 years ago have begun to be repaired in Germany. In what industry observers have dubbed a “spring” for Germany’s coal-fired power plants, the country is expected to burn at least 100,000 tons of coal per month by winter. That’s a big U-turn considering that Germany's goal had been to phase out all coal-generated electricity by 2038.
Other European countries such as Austria, Poland, the Netherlands and Greece have also started restarting coal plants.
Meanwhile, China’s coal imports have been surging, increasing 24% month-to-month in July as power generators increased purchases to provide for peak summer electricity demand. China has the largest number of operational coal power plants with 3,037 while Germany, the largest economy in the EU has 63.
The situation has led to soaring global coal consumption that could reach levels we haven’t seen in a decade, though there will be a limit to growth considering that investment in any new coal-powered plants has stalled. But that only makes the coal market tighter, pushing the energy source into an outperforming category.
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Thermal coal, which is the variety used to generate power, has seen a 170% rise in price since the end of 2021–most of those gains made following Russia’s invasion of Ukraine.
The German Dilemma
Germany is among the hardest hit by the growing energy crisis after effectively boxing itself into a corner with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximizing the country’s dependence on Russian oil and gas, and almost completely ditched nuclear energy with the final two functional reactors set to be turned off in 2022. As a result, Germany has become heavily reliant on natural gas, with the fuel accounting for 25% of the country’s total primary energy consumption. Although Germany has substantial supplies of natural gas of its own that could be accessed by fracking, Berlin has banned the technology, meaning it has to import 97% of its gas mainly from Russia, Netherlands and Norway.
In a worst-case scenario in which Russia stops all pipeline exports, Goldman Sachs’ Chief European Economist Sven Jari Stehn and his team say Euro area GDP growth is likely to fall by 2.2pp in 2022, with sizable impacts in Germany (-3.4pp) and Italy (-2.6pp).
Germany's woes are partly excusable. The dramatic nuclear phase-out is as much part of the country’s Energiewende (energy transition) as the move towards a low-carbon economy. Natural gas is cheap and reliable, produces only half as much emissions as coal, and is a critical input in many sectors. In Germany, 44% of gas was used for heating buildings in 2020, while industrial processes consumed 28%. Gas is the best and cheapest feedstock for the manufacture of synthetic nitrogen fertilizer, of which Germany is a critical supplier. Gas is also used in refining, the production of chemicals, and many other types of manufacturing. All these are difficult--if not impossible--to completely replace with green energy anytime soon.
With a calamitous energy crisis unfolding, Germany will join the bandwagon of nations rolling back their climate goals by increasing its use of coal, which overtook wind to become the biggest input for electricity production globally in 2021. Indeed, Germany is left with little choice than to burn lignite in its power plants--widely regarded as one of the dirtiest fossil fuels and extracted in vast open-pit mines that litter the German countryside. The European Commission has already given its absolution to countries replacing Russian gas with coal and producing higher emissions as a result.
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But coal is merely a stop-gap solution, and Germany must also be clear-eyed about its long-term energy future--a future without Russia’s gas. Nuclear energy is out of the question considering that few, if any, European nations are as opposed to nuclear energy as Germany is. Back in February, German politicians vehemently denounced the EU’s attempt to label nuclear energy as sustainable.
By Alex Kimani for Oilprice.com
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