Europe's Hooked on U.S. Coal, But That Can't Last
At the end of last week, the last deep coal mine in the U.K. and one of the three remaining ones in Germany closed forever. It seems symbolic, of course, in light of the new Paris climate agreement and Europe's role as the global leader in sustainable, no-carbon energy, but the mines aren't closing because of the green energy transition. The coal era is far from over in Europe, and the U.S. shale revolution is largely to blame for that.
The European Union still produces about a quarter of its electricity from coal. Germany, the continent's largest economy and its biggest producer of wind and solar energy, generates 45 percent of its electricity from different kinds of coal. In the U.K., the share of coal in the energy mix is still above 20 percent, though renewable energy has overtaken it.
In 2000, the EU generated 32 percent of its electricity from coal. Since then, production of this most polluting of fuels has dropped 11.6 percent in Europe. In the U.S., a more significant shift occurred, with the share of electricity generated by coal declining to 38 percent in 2014 from 52 percent in 2000. North American coal production, however, only dropped 4.6 percent:
In the U.S., the share of gas in electricity generation has almost doubled between 2000 and 2014, and the domestic coal market became glutted. Yet U.S. companies kept mining for export: Other markets, particularly China, were hungry for coal. At the turn of the century, Europe wasn't a big buyer of U.S. coal because transport costs were too high. Yet coal prices in the U.S. kept dropping, roughly halving since 2011 to the current level of $43 per short ton. Lately, imports to Europe became economically feasible despite the European Union's efforts to phase out coal generation. U.S. exports of steam coal to Germany have more than quadrupled since 2000.
As late as last year, observers were even talking about a European "coal renaissance." They were reacting to the increased use of coal by some big utilities, such as France's EDF and GDF Suez (now Engie) and Italy's Enel. In fact, coal consumption went down in Europe except for a few brief bumps, but it declined less than it could have if it hadn't been for cheap U.S. coal, and it fell less than in North America:
This was the free market working. Despite huge subsidies for renewable energy in many European countries, and despite the existence of the world's first and largest carbon emissions market -- which was supposed to make it uneconomical to use coal -- utilities found it cheaper to use the dirtiest of fuels than to speed up the move to wind and solar. Companies even started building new coal plants. Between 2010 and 2014, 17,580 megawatts of coal-burning capacity were taken offline in the EU, but 14,469 were added.
Unlike in the U.S., gas has been expensive in Europe. Despite recent price decreases and growing competition, it's still not worth it for utilities to switch to the cleaner fuel. And as the U.S. moves to replace its coal generation -- that's the essence of President Barack Obama's clean energy plan, announced earlier this year -- coal is likely to get even cheaper.
This is something only government intervention can correct. One way to do it is by fixing the carbon market, known as the Emissions Trading System (ETS). The cost of emissions credits is currently too low because of weak emissions targets in individual countries and a large amount of international offsets in the system.
Georg Zachmann of the Brussels-based think tank Bruegel recently produced this chart showing how much the price of emission credits would have to rise to make switching from coal to gas worthwhile:
EU governments could just make a political decision to tighten the market, but that would undermine its credibility. Zachmann suggests an alternative: The European Investment Bank could auction guarantees on the future price of emission allowances.
One way or another, the EU countries will eventually drive up the price of emissions allowances. Carbon Tracker, a group of finance specialists working on climate risk pricing, predicts that the price of European emissions allowances will approach the switching point by 2030 and that recently opened coal-burning power plants in Europe will likely never break even.
This augurs ill for U.S. coal producers. Demand growth in Asia has peaked, with China looking for ways to reduce the use of coal. If Europe gets its act together, Obama's energy plan works, and nothing happens to the shale gas industry, these companies are as doomed as the now-defunct Kellingley colliery in the U.K. or the Marl mine in Germany.
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