On September 2, 2021, the benchmark spot price for thermal coal reached US $ 182 per tonne. The previous all-time high was in July 2008 at US $ 184.50, but in the meantime black hydrocarbon fell to US $ 43.60 in January 2016 and hit US $ 47.20 again in August 2020. In the past twelve months, the price of thermal coal has almost quadrupled in international markets.
This unprecedented volatility was caused by what now appears to be a perfect storm for the coal market: Australia, the second largest coal producer in the world, has been hit by Covid and by China’s ban on its production on background of growing political tensions and a trade war; Indonesia, the number one coal exporter, was hit by an unusually wet summer monsoon due to the Niña in the Pacific and restricted its exports to keep its local market supplied, Russia, the world’s third largest exporter, has given its shipments affected by floods, and finally India, the second largest importer of coal, is expected by the ADB to see its GDP rebound by 11% by March 2022, and massively buys coal before the dry season.
Since the peak of coal’s share of the global energy mix in 2008, when coal accounted for 30% of global energy production, many countries have committed to phasing out coal from their energy mix despite estimates that reserves of projected coal would have the capacity to last for centuries at current consumption levels.
Latest on the list were the Philippines and Indonesia, which declared a moratorium on new coal-fired power plants in 2021. As Sheikh Yamani, former Saudi Minister of Petroleum and Mineral Resources from 1995 to 2016, said, “L ‘stone age was not ended for lack of stones’, the coal age will not end with a coal shortage.
What is often identified as the dirtiest fossil fuel is responsible for more than 30% of the rise in global average temperature above pre-industrial levels according to the International Energy Agency (IEA). The continued shutdown of coal-fired power plants in North America, Australia and Europe over the past 10 years has prevented any further investment in coal mines around the world.
In 2016, two of America’s largest coal miners, Arch Coal and Peabody Energy, declared bankruptcy. Given the number of fatal accidents at its national coal mines, China has discouraged small-scale mining and curtailed its domestic extraction, putting even more pressure on international markets to supply its power sector.
Even if it is temporary, the real volatility in coal prices could be a boon to demonstrate to utilities that not only the largest anthropogenic source of carbon dioxide is damaging the planet, but also that it cannot be trusted. for 40 years for investment decisions.
A typical coal-fired power purchase contract has its power purchase price indexed to the price of coal (except in very rare cases), the current surge in the cost of fossil fuels (mainly imported) will impact inflationary on the income statement of public services because as well as on the trade balance of the importing country.
For the plant operator, the cost of fuel generally represents 60% of its operating costs, the 2021 peak actually multiplies its cost of production by 2.25, pushing the price per kWh of coal much higher than intermittent renewable sources (solar and wind) + storage.
For the utility, the typical power purchase agreement being a firm purchase contract, this will force them to purchase inflated coal-fired power regardless of the international price of the commodity and reduce their profitability while their own sales contracts are mostly fixed price.
Even if this highly unpredictable and potentially bankruptcy cost of coal power does not deter utilities from using it, perhaps the future carbon tax implemented by the EU will.
On July 14, 2021, the European Commission adopted a proposal for new carbon border adjustment mechanism that will put a carbon price on imports a targeted selection of products. This will ensure that European efforts and targets to reduce CO2 emissions contribute to lowering global emissions, rather than pushing carbon-intensive production outside of Europe.
“It also aims to encourage industry outside the EU and our international partners to take steps in the same direction,” declared the European Commission in July 2021. This is the first time that the largest economic bloc on the planet has decided to tax externalities. The potential impact of this EU green deal will be felt in the future by the export-oriented Southeast Asian economies and will support their expected renewable energy push.
This would mean for countries like Cambodia, where 44% of its electricity came from coal in 2019 and 32% of its exports to the European Union, that the carbon footprint of goods produced in Cambodia must be offset for the upper part than those produced in the EU. Thus, not only Electricité du Cambodge (EDC), the local utility, may have to buy expensive and volatile coal-fired electricity in the future, but some of its customers exporting to the EU could be taxed on the carbon share. of its electricity.
Several of these clients, H&M, Adidas, Puma and Gap among others, have already sent a letter to the Cambodian government in August 2020 to raise the issue. As H&M said, “Countries that see coal as a viable energy source for the future will lose.” Neighboring Thailand, on the contrary, sets a target of net zero in its strategic emissions plan and aims to reduce CO2 emissions from the energy sector by 60% by 2050 by pushing the share of renewables above 50% of its mix and by replacing coal with LNG.
Only wind, hydro and solar energies offer unbeatable price stability for electricity over 25-30 years with fixed price PPAs (only the part in local currency could be indexed to local inflation in some cases), without no air or water pollution and no impact on global warming. Wind and solar are already the cheapest energy suppliers in China and Western countries. It is time to get out of coal as the energy of the 19th century and to build the energy mix of the 21st century.
Chairman and CEO
Le Cercle Bleu Pte Ltd