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Coal - Basis for the future?

While the world watches the conflict in Iraq with bated breath and tension grips international oil prices, the coal market continues to take a back seat in the public debate. This neither reflects its importance as a source of Germany’s energy supply nor the actual risks affecting the coal industry worldwide. What the sector really needs is a reliable political framework that can be costed out over the long term.

Energy policy is regional economic policy in the widest sense. The availability of energy resources also bestows political power. This aspect of energy, that is to say risk and conflict, is not a popular subject for discussion in Germany and is at the very most only debated superficially. We tend to keep out of it. As a result, Germany’s decision to opt out of atomic power has not been used as an opportunity to identify the world’s growing energy needs and security of energy supply as a top-priority political problem. It is as if the security of rich nations, whose energy needs appear satisfied and covered for the foreseeable future, will never be threatened or even touched by the growing energy demands of the rest of the planet. At European level, on the other hand, there is a new awareness dawning.

EU shows awareness

 

Prospects for world energy supply

The European Commission, which under the terms of the Treaty on European Union has no responsibility of its own for energy policy, has described Europe’s growing dependence on imports as no longer acceptable. The Commission, or to be more exact its Vice-President for Energy and Transport, Loyola de Palacio, was prompted by the activities of those bodies responsible for environmental protection to raise – ahead of EU enlargement - the pressing issue of future security of supply in a Green Paper that also deals with the question surrounding the future role of coal in Europe.

The findings of the Green Paper concur with the well-researched predictions of major energy supply companies and international organisations:

 As long as the world’s population continues to grow, global energy demand will also increase over the coming 40 to 50 years. This growth in population combined with the "catch-up" demand of many developing countries will result in a twofold or even greater rise in energy consumption.

 Most of this growth in demand must be met by oil, gas and coal – and these three vital fuels will have to be capable of rising to the challenge. This does not conflict with the fundamental recognition that fossil-fuel reserves are in finite supply. Of course regional distribution problems and price risks cannot be ruled out of the equation. The dependence on imported energy is growing both in Europe as well as in the USA.

 We cannot just increase the amount of energy produced from renewable sources at will, neither can we stabilize this supply at the level we want. This applies particularly to countries in the northern latitudes. Meteorological and other physical parameters cannot be cancelled out by political decisions.

 Nevertheless it is still right for us to push ahead with energy research, and not just in the area of renewables.

According to the Spanish Commissioner, phasing-out indigenous coal is not a welcome development, and the fact that EU enlargement will include several coal producing countries gives this argument added weight.

 

The global risk to the coal market: getting the assessment right

World energy consumption currently stands at about 3.2 billion tonnes coal-equivalent (tce) a year. According to the International Energy Agency (IEA) this is expected to rise by almost 60% in the next 30 years to reach a figure of nearly 5.2 billion tce.

While for oil and gas there is a general realization that our high and increasing dependence on imports holds certain price and supply risks, which could have certain ecological, social and economic repercussions, it is often said that the global coal market functions very well. However, a closer inspection of the situation shows that this is a somewhat oversimplified view. Whereas oil and gas have been global, or at least inter-regional commodities since they were first used, only about 17% of the coal produced is currently traded on the world market. More than 80% of the planet’s widely distributed coal output is used in the producer country. About 60% of the world’s coal reserves are to be found in the USA, China, India and Australia, which also currently produce about 60% of the global output. And the coal industry is also essentially affected by supplier risks and country risks that cannot be controlled by German policy making. This fact also limits the availability of overseas-mined coal that is extracted by German companies in the USA, Australia or Venezuela – fuel which is not generally destined for the German market. Such a situation occurred recently at Paso Diablo in Venezuela, where the general strike halted coal production.

The ongoing concentration of companies on the supplier side of the world coal trading market and the competition from other purchasing regions, including the developing and newly-industrialised countries, makes it difficult to predict whether those industrialised nations that have abandoned their own coal deposits will continue to have access to a favourable supply of imported fuel in the long term. The outlook for prices and profits on the world coal market determines whether sufficient investment in new export capacity will be made in the near future. The prospects here are now more uncertain then ever. For one thing the environmental debate and the deregulation of the energy market is expected to exert increasing pressure on coal prices and possibly also on sales. For another, costs are being driven upwards by the need for new mining projects and infrastructure investments, which have to be carried out against a background of increasingly difficult geological conditions, and the constraints imposed by current environmental and work-safety legislation.

Finally there is the great unknown factor of how oil and gas prices will develop on the world markets. Who could seriously believe that political influences will not be brought to bear on the price of these fuels. This is an area in which global competition has many facets.

Imported coal predominates in Germany

Disparity between energy reserves and consumption patterns

The German coal market, which now consumes some 62 million tonnes a year, is the largest in the EU. In 2001 something occurred that had been predictable since the political agreements on coal of 1997: imported coal overtook indigenous coal by gaining a 55% share of the German market. Only a few years before the same development had taken place in the EU energy market. The restructuring of western Europe’s coal industry is now a political fait accompli and this situation offers real growth opportunities for imported coal. Moreover, the market for steam coal is now a growth sector worldwide and German companies are keen to get involved in this business.

Current forecasts suggest that coal consumption in Germany will fall slightly between now and 2010. These predictions are based on likely developments in the steel industry, where some major technological restructuring is anticipated, accompanied by a decline in coke and coking coal consumption.

According to forecasts, the demand for coal will increase again after 2010. This is based on the assumption that part of the phased-out nuclear energy will be replaced by imported coal. Esso, for example, has estimated that by the year 2020 coal consumption in Germany will amount to about 70 million tonnes.

Continuous scaling down of subsidies

The German coal market

The development of the domestic coal industry has been mapped out by the National Coal Agreement of 1997 to 2005, which stipulates a production capacity of 26 million tonnes. The EU Regulation on aid to the coal industry for 2000 and 2001 provides for a further adjustment for the period to 2007 amounting to four million tonnes.

The debate on a national follow-up regulation for the period after 2006 has seen leading politicians on the Government’s side and from the main opposition party fundamentally agree that there should be no talk of abandoning the German coal industry, as this would mean the end of the country’s largest indigenous energy reserve. There is also no disputing the fact that having an active domestic coal industry gives German companies, who are market leaders in mining technology, the best platform from which to exploit their technical expertise and know-how at an international level right along the entire coal chain, as the RAG Group has succeeded in doing through its various subsidiaries. The legal framework for a national follow-up regulation after 2006 has now been established by a new EU Regulation on State aid to the coal industry that was adopted on 7. June 2002. This follow-up Regulation allows national aid to be granted to the coal sector in the same way as for many other branches of industry.

Allocation of aid to German industry

The fact that the coal industry tends to be mentioned first when there is talk of phasing out of subsidies may have something to do with a lack of information about the amount of State aid granted in Germany. Demands for a swift end to the subsidy system for fiscal reasons can be countered by pointing to the consequences of closures on other budget sectors. In the short term the effect of this would be to prevent the release of funds for other purposes.

The EU allows aid when this is intended to redress the competitive imbalance between Community coal and imported coal. Given the fact that subsidies to the coal industry have been declining for a number of years, combined with the general objective of cutting back the volume of operational aid granted, there is now little potential for any conflict with imported coal. In fact the threat to overall coal consumption in Germany now comes from quite a different source – one that has more to do with mistaken decisions based on ecological arguments.

Germany continues to need a broad-based and balanced energy mix. For the foreseeable future this is inconceivable without coal and lignite, even though no fixed quantity targets can be given either for coal or for any other of the fuels concerned.

Source:
by Dipl.-Volkswirt Wolfgang Reichel. Published in Brennstoffspiegel 3/2002.
The following is an extract from the paper "The coal industry caught between competition policy and the environment", which the author presented at the Neu-Ulm energy conference on 30. January 2003.