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Old King Coal lives on

Oilfield Technology,

While gas – and particularly shale gas – may be making headlines around the world, a combination of low coal prices and government support for renewables has seen gas being driven out of the electricity market in Europe and Australia. Only in the US, where gas production has boomed, has it replaced coal – but this too may be about to change.

Europe: a coal renaissance

Despite priding itself on its environmental record, Europe has been a minor boom in coal-fired power generation over the past 12 months. A combination of high gas prices, low thermal coal prices and an ultra-low carbon price has made coal-fired generation more profitable in a number of European countries, with many gas-fired power plants operating at a loss.

Moreover, older coal-fired plants scheduled to close under the EU’s Large Combustion Plant Directive have been using up their allowed hours quicker than expected in order to take advantage of the positive dark spreads, boosting demand for coal. In the UK, the pressure to run coal-fired power plants ahead of gas was intensified by the introduction of the UK carbon tax. Three power plants – Kingsnorth, Cockenzie and Didcot – due to close next year under the LCPD closed at the end of March having raced through their hours to avoid the tax.

Gas is also suffering from the rise of renewables. Backed by government subsidies and often generating most electricity during times of peak demand – traditionally the time when flexible gas-fired plants were called upon – renewables have pushed gas aside, leaving it between black rock and a solar panel.

Australia: an ineffective tax

Similar trends – although with different drivers – can be seen in the Australian electricity market. Here, the startup of three new LNG plants is pushing the price of gas up, while government targets require that 41 TWh be generated by renewable sources by 2020. That figure once represented 20% of the energy mix, but with falling demand for electricity, it is now a hefty 26 – 27% of the total.

Nor is the carbon tax helping. This controversial tax was designed to help force coal out of the energy mix in favour of gas and renewables, its current level of AU$ 24.15/tCO2e is well below the AU$ 40 – 60/tCO2e that industry experts reckon is needed to push the shift from coal to gas. Should Kevin Rudd make good on his promise to switch the tax to an EU-linked emissions trading scheme, the price could plummet to AU$ 6.50-7.50/tCO2e next year, making it as ineffective as the current European emissions trading scheme. Gas again would find itself squeezed between a tough renewables mandate and lower-cost coal-generated electricity.

The US: the land of the shale gas revolution

Only in the US has gas been able to drive coal out of the electricity mix – and this without a carbon tax or emissions trading scheme to artificially inflate the cost of coal. But even in the home of the shale gas revolution, it does not take much change in the price of gas to allow coal back in. Recent date from the Energy Information Administration (EIA) showed that coal demand increased 13% in the first four months of 2013 compared to the same period last year as the continued rise in gas prices started to reverse some of the coal-to-gas switching that occurred at the height of the shale gas boom last year.

As a result, the EIA expects total coal demand to rise by 60 million t this year, accounting for 40% of US electricity generation. Although well below its peak of 51%, it is still the leading fuel in the US electricity market.

Conclusion: economics vs the environment

While the world may talk about the environment, the economy still wears the trousers. Coal is still used because it is still cheap – even in regions that have introduced measures to make it more expensive. Until that fact is properly addressed and coal made more expensive than its alternatives in the long term, it will continue to dominate global electricity generation.

Written by Jonathan Rowland

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