The week in energy: King Coal faces a revolution

Stock SectorMay 6, 201828min10

Britain, the Labour politician Aneurin Bevan said in 1945, is an island “made mainly of coal”. Its coal reserves fuelled the first Industrial Revolution, and the world’s first commercially viable steam engine was used in the British mining industry. So it has a particular symbolic significance that the UK is moving decisively away from burning coal to generate electricity. The British government has set a target date of October 1 2025 for ending all coal-fired power generation, but coal’s position in the energy mix is already dwindling. Last week, Britain went for three consecutive days without burning any coal to generate electricity, the longest run since the power industry was born in the 1880s. Warm weather meant that electricity consumption was relatively low, and demand could be met from gas (33 per cent), nuclear (24 per cent) and wind (20 per cent). The decline in coal use means that the UK’s carbon dioxide emissions from fossil fuel use dropped last year to their lowest level since 1890, while the UK’s retail electricity price is below average for the EU.

That does not mean that the UK’s abandonment of coal has been entirely worry-free. In the cold snap in February, the country’s remaining coal-fired plants were running flat-out, generating about a fifth of its power. Britain’s increased reliance on gas is also raising concerns, particularly because of the decision to allow the Rough storage facility to close last year. Rough provided about 70 per cent of Britain’s gas storage, giving it a critical role in underpinning security of supply, and several energy companies have warned that giving it up will result in greater price volatility and a heavier reliance on imports, by pipeline and as LNG. In a paper for the Oxford Institute for Energy Studies back in March, Jack Sharples argued that “increasing exposure to price volatility” would be the greatest challenge to the UK’s security of supply for gas.

In the US coal is also waning, despite President Donald Trump’s pledge to “put our miners back to work”. Coal-fired plants are still expected to supply about 29 per cent of US power generation this year, but the Energy Information Administration expects coal consumption to continue to fall into the early 2020s, under pressure from cheap gas and renewables. Some US coal companies have been prospering recently, but that is mostly thanks to export demand, particularly for metallurgical coal used in steelmaking. Reuters reported on how Consol Energy, a Pennsylvania-based mining group, has found a way to prosper at a tough time for the industry: it has contracts to supply large low-cost coal-fired plants that are likely to be kept open as their smaller and less efficient rivals are shut down. The latest data from the Bureau of Labor Statistics on Friday confirmed that the number of people employed in coal mining in the US has picked up slightly since Mr Trump was elected, but it is still well below its levels of 2014-15.

The decline of the coal industry continues to loom large over US politics. Don Blankenship, the former chief executive of coal producer Massey Energy, is running to be a US senator for West Virginia, despite having spent a year in gaol over the Upper Big Branch mine disaster, which killed 29 people. Chris Cillizza of CNN called him “the worst candidate in America”. Mr Blankenship and his two rivals for the Republican nomination for the seat are all positioning themselves as champions of coal, as is Joe Manchin, the Democratic incumbent. Mr Manchin has suggested that the president should use the 1950 Defense Production Act, passed at the start of the Korean war, to keep coal-fired power plants open. Coal mining employs about 14,000 people in West Virginia, less than 2 per cent of the labour force.

Meanwhile Germany, for only the second time ever, covered 100 per cent of its electricity demand from renewables for a time this week, with wind power providing 52 per cent and solar 37 per cent of supply. The feat, achieved for about two and a half hours on Monday, was helped by the fact that the day was a public holiday. The use of coal for power generation in Germany dropped sharply last year, but it still provided 37 per cent of the country’s electricity, and the industry’s future is the subject of intense debate. Allianz, Europe’s largest insurer, on Friday added to the pressure with an announcement that it would immediately pull its coverage from single coal-fired power plants and coal mines, and phase out all coverage of coal-related risks and investments in coal by 2040.

There is further pressure on coal in Europe coming from the rising price of EU carbon dioxide emissions allowances. Reform of the system to introduce a “market stability reserve”, in effect a central bank for the EU carbon credits, has helped push prices higher. The Carbon Tracker Initiative argued that by 2019-21 prices could rise to €20-€30 a tonne, up from about €13 today.

Brent crude rose above the $75 mark last week for the first time since 2014, and by the end of this week was still close to that level. The FT’s David Sheppard analysed the five factors driving the price, from the Opec-led output curbs, to the collapse of Venezuela’s oil industry, to the pipeline capacity constraints that are holding back US shale producers. Higher crude prices mean higher petrol prices, and increased fuel costs are starting to bite for US consumers. For many Americans, the rise in fuel costs since 2016 has been greater than the benefit of the tax cuts passed at the end of last year. The US is the world’s second-largest crude producer as well as its largest consumer, so the net effect of higher prices may not be noticeable, but the squeeze on consumers could be very real for politicians seeking re-election. The oil price is a complicating factor for Mr Trump’s decision on whether to pull out of the international deal over Iran’s nuclear programme. The latest IMF Regional Economic Outlook, covering the Middle East, suggested one reason why Saudi Arabia might want to see crude continuing to rise: it included an estimate that the kingdom would need oil at $87.90 this year to balance its budget.

The rise in oil prices has prompted questions over Ford’s plan to stop almost all its car production for the North American market, to focus on SUVs and trucks, which are larger, less fuel-efficient, and more profitable. GM is said to be “moving along the same lines”. The US motor industry has a history of being unprepared for oil price shocks, and some have suggested Ford could be making the same mistake all over again. Rising fuel costs also throw a different light on the Trump administration’s move to scrap the increasingly restrictive fuel economy standards agreed under President Barack Obama, a move that is going to be fought out in court. The Rhodium Group calculated that freezing the standards at 2020 levels would increase US oil consumption by 126,000-283,000 barrels a day in 2025, depending on oil prices, with a greater effect in subsequent years.

For electricity companies looking at stagnant demand in developed economies, electric cars look like one of the most exciting opportunities available to increase their sales, but in general they have been slow to embrace that potential and argue the case for EVs. Gavin Bade of Utility Dive reported on a fascinating look inside a meeting of the American Legislative Exchange Council, where a battle over EVs was fought between electric utilities and groups backed by the oil industry.

And finally, there has been alarm among British theatres and concert venues over an EU proposal that could impose energy efficiency standards on their lighting. Even though the UK is scheduled to leave the EU next March, there are expectations that it would have to adopt the standards in order to keep trading with the rest of Europe.

Other views

Nick Butler — The rise of renewables casts doubt on EU nuclear

Nick Butler — The dangers of Iraq’s oil law

FT View — Saudi Arabia’s balancing act with the price of oil

John Kemp — Saudi Arabia wants higher prices to kick oil addiction

Brian Fonseca — The Perils of a Putsch in Venezuela

David Roberts — The world’s bleak climate situation, in 3 charts

Merrill Matthews — Russian trolls are pitting Americans against the energy industry

Quote of the week

“Boring bonehead questions are not cool . . . These questions are so dry. They’re killing me.” — Elon Musk, chief executive of Tesla, dismissing analysts’ questions on a call to discuss the company’s earnings. His performance drove Tesla’s share price down 6 per cent.

Chart of the week

The IMF’s Regional Economic Outlook covering the Middle East shows estimates of the oil prices that some leading Opec members need to be able to cover their government spending from their revenues. The IMF warns that problems including rising interest rates, geopolitical tensions, trade disputes and a possible fall in the oil price “could trigger potentially significant fiscal and financing pressures for many countries in the region”.

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