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Coal and security of energy supply in Germany

by Dr Günter Dach, German Hard Coal Association, Essen, August 2004. 1. Today coal is essentially used in two different ways: to generate electricity and to produce pig iron for making steel.

2. In one of the most sensitive areas of energy supply, namely electricity generation, every second kilowatt-hour generated in Germany comes from coal. Another third is supplied by nuclear power, though this is gradually being reduced in accordance with the decision taken on nuclear run-down. The rest is met mainly by imported gas and renewables. It is doubtful whether renewables can ever make up for the dwindling nuclear component – and they will certainly not be able to do so by 2020, despite the ambitious plans that have been laid, for renewables-based energy is an unstable product that remains dependent on natural conditions and, moreover, continues to be much more expensive than German coal.

3. At least half of the electricity currently produced is generated in fairly equal measure by indigenous lignite and coal, with just below 50% of the latter coming from the domestic mining industry. Indigenous production alone provides a guarantee against the supply vagaries of the international market and ensures permanent access to the country’s largest energy reserve – both now and for future generations. Two-thirds of Germany’s recoverable energy deposits are contained in the coal measures. Having access to a domestic energy source not only protects against supply shortages but also ensures a certain degree of predictability given that, in spite of fixed-price supply contracts, there is still much volatility in world market prices. This applies not only to imported coal but also, and indeed much more, to imported gas, which is subject to massive price swings.

4. Competition for oil and gas supplies in the Persian Gulf and Caspian Sea areas has now even resulted in military action – without German involvement. Though coal is abundantly available around the world it is not a primary trading commodity. Much of the global reserves are difficult to access and only about 15% of world production is traded on the international markets – and this is the situation even before the development of any crisis. In principle the international coal market is not immune from the effects of political crises, conflicts or even wars. Furthermore, we are now seeing intense international competition between purchasers in the global coal marketplace combined with a high and increasing level of concentration of supply, as demonstrated by the fact that Australia and Canada alone account for nearly 75% of all the seaborne coking-coal trade. Two-thirds of the steam coal imported by western Europe is sourced from just three countries (South African, Colombia and Australia), and according to US predictions this figure is set to increase. What is more, these exports, like nearly half of all the world’s mining projects, are controlled by the so-called “big four” of the international coal business; it has been proved that these four companies have engaged in cartel practices and they are already being labelled in German consumer circles as the “coal OPEC”.

5. Steelmakers, and more especially their customers, are now feeling the effects of miscalculations in the international coal market. Coal remains indispensable as a raw material for making pig iron. Prior to 1997 an average of € 0.5 bn a year was paid as a state insurance premium, in the form of aid to the coking-coal sector, in order to ensure that the German steel industry would always have sufficient quantities of indigenous coal under the terms of the so-called “steel contract”. This agreement was not extended because at that time it was thought too expensive and, in any case, coal was for a while available in abundance on the world market. However: recent global developments in the raw-materials sector – and especially the rising coke and coking-coal prices as a result of the meteoric increase in consumption in China – have this year alone imposed a burden of several billion euros on the national economy. Meanwhile the coal industry has been forced to shut much of its coke making capacity, and this includes a number of state-of-the-art coke works.

6. From today’s perspective the steel industry itself has said that it was a mistake to go on reducing German coke-making capacity in the 1990s. This has not only affected the steelmakers but the entire steel processing sector along with it, right up to and including the automotive and engineering industries.

7. Similar miscalculations in the power generation sector would have had far more serious economic and social repercussions. The occasional power cuts and the serious blackouts that hit the USA and other countries last summer, along with the ongoing problems in China and southern Europe, are clear evidence of this. It hardly bears thinking what the consequences would be for us were we to suffer such events as a result of continuous fuel supply shortages, or again if we were threatened by economic and political pressure as a result of our reliance on foreign suppliers. Permanent security of supply in electricity and raw materials means making proper provisions for the future. And this in turn means a balanced energy mix with a core indigenous coal industry!