IEA (2020), What the past decade can tell us about the future of coal, IEA, Paris https://www.iea.org/commentaries/what-the-past-decade-can-tell-us-about-the-future-of-coal
As we prepare to publish the tenth edition of the IEA’s annual market report on coal on 18 December, it seemed a worthwhile moment to take stock of the key developments that have had an impact on global coal markets over the past decade and consider what they might tell us about coal’s future role in the broader energy system.
Between 2009 and 2019, global coal consumption grew by an average of about 1% per year to reach 7.6 billion tonnes, but its share of the world’s primary energy supply declined from 28% to 26% over the same period. And its share of electricity generation fell from 40% to 36.5%.
From today’s perspective – as efforts increase around the world to accelerate clean energy transitions and reduce emissions from carbon-intensive fuels like coal – the past ten years look like a period in which global coal demand remained stubbornly high. Within the coal industry, however, it is a decade that fell short of initial high expectations. For example, the CEO of a major US coal producer was quoted by the Wall Street Journal in February 2011 as saying, “I actually think that the next decade for coal is going to be one of the best ever.”
There was a lot of momentum behind coal demand growth at that time. The 2000s had seen the largest growth in coal demand in history – greater than the previous four decades combined. China accounted for 85% of the global growth in coal consumption, which it needed to power its rapidly growing industrial economy and build its infrastructure. At that time, expectations that China’s coal demand would keep growing appeared reasonable. And India – another country with a population of over 1 billion people and a reliance on coal – had the potential to take up the slack as Chinese demand growth slowed.
Changes in China, the shale revolution, the rise of renewables and growing climate action
Yet demand for coal in 2019 was lower than in 2013. Coal’s growth prospects were undermined by changes in China’s economic structure and growth, the shale revolution in the United States, the rapid rise of wind and solar PV, and the widespread adoption of policies to fight climate change.
China is now responsible for half of the world’s production and consumption of coal, but it is no longer a major source of demand growth. In fact, Chinese coal consumption stopped growing after 2013, thanks to efforts to diversify its energy mix, reduce reliance on coal and shift towards a less energy-intensive economy. While India’s coal consumption growth in the 2010s has been strong, it is still an order of magnitude below China’s during the 2000s.
The shale revolution in the United States unleashed a formidable competitor to coal – natural gas. Low gas prices have squeezed US coal demand more than any other factor. In 2009, coal’s share in the US power mix was 45%, with gas at 23%. By 2019, coal’s share had fallen to 24%, while gas now accounted for 38% of power generation.
LNG exports have spread the effects of the shale revolution beyond the United States, driving down international gas prices. The combination of lower gas prices and carbon pricing in Europe resulted in a similar decline for coal there. In 2009, coal’s share in the EU power mix was 31% compared with 16% for gas. In 2019, coal was down to 15%, and gas was up to 22%. Interestingly, after the closure of nuclear power plants across Japan following the massive earthquake and tsunami that hit the country’s northeast coast in 2011, the resulting increase in demand for natural gas drove up global LNG prices. European power utilities responded by using less gas and more coal for about two years until gas prices came back down.
The other revolution affecting coal in the power sector was the spectacular growth of wind and solar PV. Ten years ago, wind and solar power were taking off thanks to strong policy support. Technological developments, learning-by-doing and lower costs of capital have together brought down the cost of renewables dramatically since then, taking them from subsidised niche markets to the mainstream. Based on solar PV’s extremely competitive costs, the IEA expects it to become the “new king” of world electricity markets, driving rapid growth of renewable power over the next decade.
Climate policies are the third factor that has contributed to coal’s loss of momentum. After the disappointment at COP15 in Copenhagen in 2009, many observers questioned the ability of world leaders to agree on efforts to tackle CO2 emissions. However, the Paris Agreement reached at COP21 in 2015 was a historical milestone in which virtually all countries supported more ambitious climate targets. Since then, climate policies have gained a lot of impetus, influencing the decisions of investors and companies. Public opposition to fossil fuels has spread, and a growing number of shareholders are pushing companies’ executives to reduce exposure to fossil fuels, particularly coal. An increasing number of G20 countries are pledging to be carbon-neutral by mid-century.
The coal industry’s shift to Asia
The shift in the market environment has resulted in changes in the global coal industry. Ten years ago, the world’s largest coal producers consisted of major multi-commodity miners (Rio Tinto, BHP Billiton, Anglo American and Glencore), US companies (Peabody Energy and Arch Coal) and three state-owned behemoths (Coal India, Shenhua Group and China Coal).
Since then, the big diversified miners, with the exception of Glencore, have left or dramatically reduced their coal exposure. Meanwhile, US companies have been struggling for years in a shrinking market, with only Peabody Energy remaining among the largest producers. In China, coal companies are going through a major process of consolidation, creating China Energy Investment Corporation (the merger of Shenhua Group and Guodian Group) and two new giant corporations launched in 2020 that combine different enterprises in Shandong (Shandong Energy Group) and Shanxi (Jinneng Holding Group). The four largest coal producers in the world today are these three Chinese state-owned companies and Coal India. In the same vein, new coal power plants are now mostly being built by state-owned utilities in Asia.
These corporate trends reflect the geographic shift in demand. In 2009, the United States and the European Union accounted for 22% of global coal consumption. In 2019, their share was 12%, and it will have declined further this year. Therefore, further reduction of coal use in those markets will have a limited impact on a global level. By contrast, China, India and Southeast Asia together went from 58% of global consumption in 2009 to 69% in 2019. The rest of the world’s share remained stable.
The global trend over the past decade shows that coal demand peaked in 2013, with a small rebound in 2017-18. Our analysis of markets, policies and technologies by country and fuel indicates that global coal consumption will not return to its 2018 levels in the coming years, which would make 2013 its historic peak.
However, before definitively declaring 2013 as the peak, we need to consider some caveats – even if they appear highly unlikely at this stage to result in a major resurgence in coal demand.
First of all, there are some economies in Asia that are expected to grow quickly in the coming decades and will likely expand their use of coal. India, Pakistan, Bangladesh and Southeast Asian countries currently consume the same amount of electricity annually for a population of 2.4 billion people as the European Union does for a population of 450 million. The task of scaling up those Asian energy systems to meet rising demand without increasing coal consumption is possible – but it also represents a significant challenge.
Second, China is a USD 15 trillion economy of 1.4 billion people that is powered mostly by coal. Although all IEA scenarios show Chinese coal demand plateauing or declining in the 2020s, the possibility of an increase in coal consumption, even temporary, cannot be completely ruled out. Even a small change in China, which consumes half the world’s coal, can have a big influence on global markets.
Despite the headwinds it has faced over the past decade, which resulted in it failing to live up to the industry’s initial expectations, coal remains the world’s second largest primary energy source today, after oil, and the largest source of electricity. Coal consumption in 2020 is set to be 60% higher than at the start of this century. With its rapid decline in the United States and Europe, coal’s future will depend heavily on the small but significant group of countries – China, India, Indonesia, Pakistan, Bangladesh, the Philippines and Vietnam – that account for 70% of global coal consumption and most of the world’s new coal power projects.
The large amount of relatively young coal-fired energy assets in Asia, such as power plants and steel mills, could continue to operate for decades to come, based on the typical lifetimes of such assets. Tackling the emissions from existing assets like these remains a critical element of efforts to address climate change. An important technology that can contribute to this is carbon capture, utilisation and storage (CCUS). Despite progress in some areas, CCUS has largely failed to meet expectations over the past decade. But the technology has now been demonstrated across a range of key sectors, including coal-fired power generation, steel production and hydrogen. New investment incentives and strengthened climate goals have underpinned renewed momentum in recent years, with more than USD 4.5 billion pledged by governments and industry to CCUS projects and programmes in 2020 alone. Continued progress for CCUS will be important to address emissions across a range of sectors and fuels – but for coal, it is likely to play a pivotal role in shaping its future.