By Paul Gilding | November 18th, 2010 | Category: Cockatoo Chronicles | 6 comments
The very conservative International Energy Agency has just released its closely watched annual World Energy Outlook (WEO), with forecasts for the structure of the energy market through to 2035. This year’s WEO was much anticipated, given the pace of developments in renewables and climate policy, and it didn’t disappoint. The report included the IEA’s interpretation of what major governments’ commitment to a 2°C temperature target would mean for the energy market. The contrast with what most market players assume, particularly coal companies, could hardly be more dramatic.
One global coal player, Peabody, recently told the World Coal Conference that it assumes demand for coal will increase by over 50 per cent by 2030. The IEA on the other hand tells us that if we are to have a reasonable chance of limiting warming to 2°C degrees, coal demand will have to peak by 2020, and by 2035 will have dropped to levels last seen in 2003. These are dramatically different views of the market and the implications for company valuations, and therefore for investors and corporate strategy, are considerable.
The same IEA report compares coal and oil’s current 46 per cent share of global electricity generation to what it would be in 2030 under the 2°C degree scenario. The answer is just 22 per cent. The difference would be picked up by low CO2 energy, nuclear and renewables, which would see massive growth. They assume non-hydro renewables would go from 3 per cent to 20 per cent, all the more remarkable given the assumed increase in overall energy demand. Interestingly, despite significant demand growth, even the total amount of coal-generated electricity would fall in absolute terms.
The significant thing about these forecasts is that the IEA has generally been considered to be excessively conservative and largely aligned with the views that dominate the fossil fuel industry. Indeed, the Peabody forecasts referred to above reference an earlier IEA WEO report. So what’s going on when this industry friendly body chooses to prick the coal bubble? And what does it all mean for investors and resource companies?
What it means is the coal industry is headed for a crash. This is heresy in the industry and would be dismissed by some as starry-eyed naivety. But the numbers don’t lie and this issue has cold hard rational numbers all over it.
One of these numbers is 2°C. There are many uncertainties in the detail of climate science, but there is clear consensus on that number. It is the line in the sand scientists have drawn and said, if we go past it we face catastrophic system-wide risk. While some scientists argue that number is too high and too risky, none of any consequence argue it is too low. That’s why the governments of China, India, Europe and the USA have all agreed, along with many global corporates, that 2°C is the line we can’t cross.
Not crossing it requires the numbers in the IEA report to be achieved. This is hard science. If you put any more CO2 in the atmosphere than that, we will almost certainly be heading past 3-4°C. The economic consequences of that would make the collapse of the coal industry look like a picnic. The science also tells us, supported now by the IEA, that the decision will be made this decade, by action or lack of it.
Further complicating assumptions of growth is a very interesting analysis published today in Nature by two well regarded US energy experts, Richard Heinberg and David Fridley. Their article, “The End of Cheap Coal,” calls into question assumptions of endless supplies of cheap coal, using much of the same logic as earlier predictions around the end of cheap oil. It’s worth remembering that those who have been predicting the end of cheap oil since the late 90s, including Heinberg, were ridiculed for many years.
Now even the IEA supports that view with comments like “the age of cheap oil is over.” The new analysis in Nature suggests there may be a similar dynamic at play with coal, with reserves constantly being revised downwards as time passes. They also remind us that industry has a history of getting their forecasts wrong, noting that for oil, “the current price of more than $US80 per barrel is about three times higher than the upper range in official forecasts for 2010 that were being issued in the late 1990s.” Like oil, the issue is not any risk of running out, but volatile and rising prices as the peak level of quality supply is reached.
But isn’t this good news for the coal industry? Aren’t rising coal prices good? The answer is surprising – and this is where the two issues combine. In the short term the answer is yes, but ultimately higher prices will trigger the death of coal. Everyone knows the only way coal can survive in the low-carbon world the science demands, is if carbon capture (CCS) technology can make coal a zero CO2 energy source. The economic viability of CCS is already questionable and is rapidly losing support, but if it is ever to work it can only do so with cheap coal.
Full story HERE
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