Energy Market Madness Drives Record Coal Consumption
Global coal-fired power generators are producing more power than ever in response to post-pandemic surge in electricity demand and soaring gas prices following Russia’s invasion of Ukraine .
The world’s coal-fired generators produced a record 10,244 terawatt-hours (TWh) in 2021, surpassing the previous record of 10,098 TWh set in 2018 (“World Energy Statistical Balance Sheet”, BP, July 2022).
Coal-fired generation is on track to set an even higher record in 2022 as generators in Europe and Asia minimize the use of expensive gas following the Russian invasion and US and EU sanctions imposed in response .
By contrast, mine output was still slightly below the record set between 2012 and 2014, as older, less efficient coal-fired generators were replaced by newer, more efficient generators requiring less fuel per kilowatt.
Global coal mine production was 8,173 million tonnes in 2021, compared to 8,180 to 8,256 million per year between 2012 and 2014.
But mining output is also likely to set a new record this year, as growing demand for coal-fired generation outpaces improvements in efficiency.
The coal resurgence has baffled US and European policymakers who expected it to decline as part of their net-zero emissions plan.
Between 2011 and 2021, production from coal grew more slowly (1.2% per year)…
… than hydraulics (2.0%), gas (2.8%), wind (15.5%) and solar (31.7%).
As a result, the share of coal in total global production has fallen to 36.0% in 2021 from a recent peak of 40.8% in 2013.
But the enormous growth in electricity demand (2.5% per year) has ensured a growing demand for all sources of production.
Coal generation and generation are expected to continue to rise through at least 2027 as growing demand for electricity outpaces improvements in combustion efficiency and the deployment of gas and renewables as alternatives.
The rapid recovery from the pandemic has accelerated these trends, boosted electricity demand and reliance on coal generation, and driven coal consumption to a record high.
Russia’s invasion of Ukraine and the resulting reduction in gas exports has further boosted demand as producers attempt to minimize consumption of expensive gas and countries attempt to indigenize their energy supplies.
In Europe, governments are encouraging coal-fired generators to stay in operation longer rather than shutting down in case gas flows from Russia cease in the winter of 2022/23.
In response to shortages and security concerns, China and India are encouraging domestic miners to increase production to record levels to ensure adequate fuel stocks and reduce reliance on expensive imported coal and gas .
China’s coal output hit a record 2,192 million tonnes between January and June, up from 1,949 million in the same period a year earlier and 1,758 million before the pandemic hit in 2019.
Indian production reached a record 393 million tonnes between January and May against 349 million a year ago.
Despite the rapid growth of domestic coal production in China and India, there is still a global shortage of fuel, which has pushed coal prices to their highest level in real terms in more than 50 years.
US and European sanctions have intensified upward pressure on prices by rerouting Russian coal to Asia and coal from Australia and Indonesia to Europe, leading to longer and more expensive journeys.
Coal is the bulkiest and most expensive commodity to transport relative to its value, so longer journeys have a direct and significant impact on the landed price paid by power generators. Related: Germany agrees to $15 billion bailout for Uniper
Rising gas prices in Europe are bringing higher coal prices in their wake as coal-fired generators scramble to get fuel so they can run their units for as many hours as possible.
Month-ahead futures prices for gas delivered in Northwestern Europe climbed to €157 per megawatt-hour from €41 at the same time in 2021, while coal prices rose to €53 from €16 .
If the Northern Hemisphere winter 2022/23 is colder than normal, coal, gas and electricity shortages are likely to become severe and force some form of energy rationing or allocation . The global coal shortage is part of a broader energy shortage evident in crude, diesel, gas and power markets.
In each case, the shortage stemmed from the strong cyclical rebound of the pandemic and was intensified by Russia’s invasion of Ukraine and the sanctions imposed as a result.
Record prices send a strong signal to producers to increase production and to consumers to save as much fuel as possible.
As with crude and diesel, however, the rebalancing of the coal market will likely require a significant slowdown in major economies to ease the immediate pressure on inventories and give production time to catch up with consumption.
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