Renewables certainly play a part in the energy mix with their use in Australia increasing and, by one count, 25 per cent of China’s energy production now coming from renewables. Another report from the Office of Chief Economist, the Australian Energy Update 2015, attributes a dip in brown coal production to renewables.
Brown coal is not exported from Australia and is typically associated directly with power stations, such as the pits near the La Trobe Valley power stations in Victoria (one of which, Hazelwood, is scheduled to close in 2017).
For high quality “black” thermal coal producers, renewables such as wind and solar power have yet to make a real impact on their overseas markets. The bulk of the 25 per cent penetration figure cited for China, for example, in fact refers to hydro-electricity from projects that have been in place for many years.
A 2014 report by the International Renewable Energy Agency estimated that about 2.5 per cent of power on the Chinese grid at the time was from wind farms although that figure has clearly been growing strongly.
A count of existing, proposed and under-construction projects in China in the September issue of The Resources and Energy Quarterly shows although hydro and nuclear power are gaining ground against coal, capacity for 'other renewables' (including wind and solar) proposed and under construction remains tiny (although the capacity figures for those green projects are still impressive when quoted in absolute terms).
This point is also made in ANZ’s Commodity Insights which points to substantial increases in the use of hydropower, including a 3.5 per cent year on year increase for the year to June.
A major problem for the growth of other renewables in China is the country’s electricity grid is still primitive compared with Western grids and is run completely differently. A report by the US policy analysis group The Wilson Centre, points out the Chinese grids confusingly remain both provincial government-owned and largely unregulated except for price. The price-setting mechanisms, however, are opaque and electricity use on grids is determined by a quota system and not by cost of generation, as happens on Western grids.
Meanwhile, technological advancement is also present in the thermal coal industry. There is increased confidence in the longer term market as the “better quality” thermal coal processed through new power-gen high efficiency low emission technology (HELE) - which already exists - can deliver up to 35 per cent less emissions than older technology.
Offsetting this of course is growing price competitiveness of renewable generation of all kinds, coupled with improving storage technology such as batteries.
Given the long life of generating assets – typically 40 to 60 years – valuations of assets, or particularly commitment to new assets, is particularly fraught.
India has made commitments, at least by announcement, to renewables with a Department of Industry report ‘Coal in India 2015’ stating the government intends to build more than 100 gigawatts of renewable capacity by 2025 but already has 113 gigawatts of coal-fired capacity under construction or approved.
The challenge for India, as indeed it is for base load generation everywhere, is to balance the effective output with demand. The most productive wind farms for example produce at up to 45 per cent of installed capacity (depending on technology and wind) compared with 80-90 per cent for coal plants (coal generators obviously only really on coal supply, not sun or wind). In any case, the Indian grid remains so primitive and prone to blackouts, major users keep diesel generators.
Australia’s most significant customer, Japan, currently has relatively few green energy projects producing energy. However this too is by no means a static situation. Japan was heavily reliant on nuclear power generation prior to the 2011 Tohoku earthquake and tsunami and consequence nuclear disaster at Fukushima.
While Japan inches towards restoring some nuclear generation it is also investing more heavily in renewable projects, including wave generation and hydrothermal. The spike in coal demand in Japan then has been more reactive to a particular event than a long term trend.
BHP Billiton economist Huw McKay, in a note “How much spark is there in the solar and wind revolution?”, says “in 2015 wind accounted for only about 3½ per cent of power supply and solar accounted for around 1 per cent. And despite the fact that the ‘continuous revolution’ will see the combined share of wind and solar in power generation triple in the coming quarter century, the world will still require roughly four-fifths of its growing total energy needs (of which power is a subset) to come from non-renewable sources.”
As the Commodity Insight bulletin points out, coal faces considerable problems from a range of factors including hydropower in China and the Indian government’s declared policy to reduce imports. Gas has also taken large slices of the power market in the UK and UK (which do not use ASEAN coal). But for miners in Australia and Indonesia, renewables are not a threat. Yet.
Longer term, government policy, incentives, cost reductions due to improving scale and technology and improving storage solutions such as batteries may change the picture. For the moment though, coal producers only have more traditional competition and volatility to worry about.
The big question is how will the shift to renewables occur? Will it be rapid, stranding assets? Or gradual as the price and reliability of renewable generation improves incrementally. For providers of long term investment capital, when long term can mean half a century, timing is critical. So too for policy makers grappling with immediate economic needs and the necessity of combating climate change.
Mark Lawson is a journalist and author