Caldecott: Will Old King Coal Continue to be a Merry Old Soul?

By Ben Caldecott
Head of Government Advisory
Bloomberg New Energy Finance

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Old King Coal has benefited from a run of good luck these past few years. First came the fabulous boom years of the first decade of this century. The Copenhagen climate talks loomed like a black cloud over the sector for a while, but dissipated without so much as a thunderclap. The fiscal crisis struck only the developed world, leaving coal’s growth markets in the developing world untouched. Even the shock of the US shale gas boom, which rendered coal uncompetitive in the US, was softened by the resurgence of coal markets in Europe due to the collapsing carbon price.

But there are indications that coal’s luck may be changing, and this time it could be terminal.

In June, Barack Obama gave a major speech at Georgetown setting out his administration’s new climate policy, which included an emissions standard on new and existing coal-fired power stations. The speech was immediately labelled a declaration of ‘war on coal,’ and coal-related shares, such as those in Peabody Energy and Arch Coal, fell as word of Obama’s plans leaked out.

Obama also announced that the US would no longer finance overseas coal plants through the Export-Import Bank, except under exceptional circumstances, and shortly after that there were decisions by both the World Bank and the European Investment Bank to stop almost all lending to coal projects. The EBRD is currently debating similar rules. These are significant blows: over the last five years the World Bank had provided more than $6bn for coal projects and the Ex-Im Bank $1.4bn, and many private lenders will not support projects without the involvement of the concessionary finance providers.

Following these developments the Sage of Omaha, Warren Buffet, predicted the end of coal in a Bloomberg BusinessWeek exclusive. That same week Goldman Sachs published research saying that the window for new coal investment was fast narrowing. Here at Bloomberg New Energy Finance we published new research looking at the risks facing US coal from existing EPA regulations and this was also bearish for coal.

The fast dwindling enthusiasm for coal from institutional investors was also highlighted in early August when Storebrand – a Norwegian and Swedish pension fund with $74bn of assets – decided to divest from all its coal investments. This is the first, and almost certainly not the last investor to dump coal out of its portfolio, especially as Bill McKibben’s fossil fuel divestment campaign gathers momentum. Power generators and utilities have not been immune either, with a number of announcements over the summer to prematurely close coal-fired power stations, from Inkoo in Finland to Masontown in Pennsylvania.

The long-term argument against coal goes along the following lines: the rapid emergence of shale gas, falling renewable energy costs, air pollution regulations, governance issues, action on climate change, changing social norms and worsening water constraints are putting pressure on coal’s competitiveness. These pressures will play out differently in different markets, but are generally growing in strength. Let’s look at these factors in turn.


The development of US shale gas has led to gas prices in the US falling from around $13 per MMBtu in 2008 to under $2 per MMBtu in 2012. These significantly lower gas prices resulted in large scale coal-to-gas switching. Coal’s contribution to US electricity production has fallen extraordinarily quickly, from 50% in 2003-08, to 37% in 2012.

This price pressure is easing somewhat. The price of gas in the US was unsustainably low for shale gas producers and has already risen to around $3.40 per MMBtu. It is likely to rise somewhat higher still in the next few years. Shale gas exports, particularly westwards to Asia to arbitrage much higher gas prices there, will also put upward pressure on US gas prices.

In China and Europe, there are significant shale gas reserves, but various constraints will mean that shale gas development is likely to be less rapid and less economically attractive than it has been in the US. In Europe, high population densities, political opposition, different property rights and tougher planning regimes are likely to constrain shale gas development. In China, water constraints are likely to be the main factor and could prevent some large shale gas basins from being fully utilised. To take one example, the Tarim Basin in Xinjiang Province, one of the four main shale gas basins in China, sits above the world’s second largest shifting sand desert, the Taklamakan.

So while shale gas will continue to be a significant driver of coal displacement, its effect will continue to be felt more in the US than elsewhere.


One of the most striking developments in energy markets over the last few years has been the rapidly falling cost of renewable energy technologies, particularly solar PV and onshore wind.

According to Bloomberg New Energy Finance proprietary indices, solar PV module prices have fallen by 80% since 2008 and 20% since the beginning of 2012, while wind turbine prices have fallen by just under 30% since 2008.

Combined with increasing build costs for conventional fossil fuel generation (not to mention the likelihood of rising fossil fuel prices) renewables are increasingly competitive in a growing number of markets, even as subsidies are dismantled. This trend will speed up as scale deployment drives costs down further.

The resulting increase in low marginal cost renewable energy being delivered to the grid has started to put significant pressure on conventional power generators, particularly those burning coal. We have seen this most obviously in Germany, with both RWE and Eon announcing plant closures and the mothballing of coal-fired generation capacity due to suppressed wholesale power prices. The growth in renewable energy deployment is likely to have the same impact in other markets, putting pressure on coal generators and in turn reducing their demand for coal. This has become an important area of research at Bloomberg New Energy Finance.


Air pollution in China’s largest cities, as measured by the concentration of fine particulates that pose the greatest health risk, was three-times worse in the first half of the year than levels advised by the World Health Organization. According to a recent study published by the US National Academy of Sciences, high levels of air pollution in northern China – much of it originating from coal-fired power plants – will cause 500m people to lose an aggregate 2.5bn years from their lives.

Severe air pollution problems are not just confined to China. Large parts of South and Southeast Asia suffer from similarly bad levels air pollution and in common with China, such problems are often driven by coal combusted for heat and power.

Action by authorities to improve air quality in order to prevent premature deaths and improve quality of life is likely to shift preferences away from coal infrastructure in these countries. This will particularly be the case in China given the combination of rising living standards and acute air pollution problems in major cities like Beijing and Chongqing.


Water constraints are also likely to restrict coal use and future coal demand, especially with competition for finite water resources increasing and physical climate change changing the distribution of water resources.

Coal-fired power generation and coal washing both use very large amounts of fresh water and this poses risks to coal generators and miners. For example, in April 2010, Maharashtra State Power Generation shut down 90% of a 2.3GW coal-fired power station after low rainfall caused water levels to plummet. The other related risk to the economics of coal is water pricing, which is being introduced (albeit very slowly) to ensure water resources are better managed.


Governance issues associated with coal have led to material losses to investors and taxpayers.

The London IPO of Vallar, an investment vehicle for Indonesian coal created by Nat Rothschild, managed to raise more than $1bn in July 2010. This was quickly followed up by the IPO of Coal India in October of that year, which managed to raise $3.4bn. Both have become examples of how alleged poor governance might push investors away from coal.

The Children’s Investment Fund, a UK hedge fund, acquired a stake in Coal India when the Indian government listed 10% of the company’s shares in 2010. The Fund has recently threatened legal action on the basis that Coal India is allegedly selling coal at below its market value and entering into ‘prejudicial fuel supply agreements’ that have negatively affected the profitability of Coal India and its dividend payments and share price.

The Vallar IPO organised in the same year also ran into a wall of controversy. Indonesian coal producer Bumi was founded and listed on the London market in 2010, when coal-mining assets belonging to Indonesia’s Bakrie Group were placed into Vallar. Since then Bumi has suffered from a public battle for control between the Bakrie Family and Nat Rothschild, and it has reported that around $200m has gone missing, resulting in an investigation and a share trading suspension.

Back in the US, the Interior Department’s Bureau of Land Management (BLM), which leases mineral resources on public lands, has been accused in an official Federal Government report of failing to account for the price of exported coal when selling leases, as well as failing to ensure independent oversight of its assessment of coal value. This has in effect led to coal extraction leases being awarded at below market value, with US taxpayers losing out on potentially significant revenue.

Similar irregularities are alleged elsewhere in the world. There is also evidence that many coal mines operate without required environmental permits in some countries, including India, with or without state sanction. According to NGOs at least 239 coal mines belonging to Coal India operate without environmental permits.

Coal also has a terrible safety record, particularly in China and India. In 2012, 1,300 miners died in China and this was the lowest number since records began 60 years ago. The official figure for the number coal mine deaths in 2011 was 1,973. China’s mining death rate is 0.374 per million tons of coal production, more than 10 times higher than the rate for developed countries. In 2010, India saw 205 workers die and 699 seriously wounded.

These issues of governance and safety will put off an increasing numbers of investors and also put pressure on governments to tighten up regulations, particularly for coal mining, which will further increase costs thereby eroding coal’s traditional cost competitiveness further.


According to the International Energy Agency, to have any chance of keeping to a 450ppm atmospheric concentration of CO2, a significant proportion of coal extraction and generation capacity will have to be retired or idled by 2035, well before investment costs have been recouped. HSBC research has found that declining demand due to such a carbon constraint could impact valuations of coal assets by as much as 44%.

Action on climate change, in whatever form it takes, will impact coal more than any other fossil fuel. Coal is the largest source of CO2 emissions and many coal-fired power stations are highly inefficient, with the worst sub-critical plants having thermal efficiencies as low as 30 percent. Carbon pricing, emissions performance standards and other regulatory measures will be introduced to tackle carbon pollution from coal. These are likely to become more stringent as physical climate change becomes more obviously felt.


Bill McKibben, the US environmentalist, has very successfully mobilised a new fossil fuel divestment campaign. His ‘do the math’ tour, where he explains that in order to have an 80% chance of keeping global warming below 2°C we can only emit 565 gigatons of carbon dioxide, but that burning all the currently proven oil, gas and coal reserves would release almost five times this ‘carbon budget’, has been instrumental in mobilising activists around the world.

To try and prevent the ‘carbon budget’ from being breached, McKibben has mobilised a divestment campaign via and this has borrowed heavily from previous divestment campaigns against apartheid and tobacco. Since the campaign started about a year ago, six colleges and universities have committed to divest, along with 17 cities, two counties, 11 religious institutions, three foundations and two other institutions. While this is clearly a small number, the movement has grown fast and we are likely to see many more institutions divesting over the next 12-18 months.


There seems little doubt that the above powerful long-term pressures will ultimately dislodge coal from its dominant role in the global power system. It is likely that a tipping point has already been reached that prevents fresh capital flowing into new unabated coal in the US and much of Europe and results in more of the premature power plant closures we have already seen.

Of the 111 coal-plant proposals in Europe in 2008, only two have actually broken ground due to these strong headwinds. Many more have been closed or mothballed due to low wholesale power prices caused by growing renewable energy deployment. There will also be a wall of fresh coal closures before 2015 as plants use up their remaining operational allowances under the Large Combustion Plant Directive. This gives 205 of the most polluting coal-fired power stations in Europe 20,000 hours of operation before they have to close permanently in 2015. This suggests that Europe’s recent growth in coal demand looks transient and will soon come to an end.

While the confluence of factors is significant, particularly in Europe and the US, the sheer scale of legacy coal assets globally combined with growing power needs in Asia, will prevent coal’s quick exit from the world stage. The Global Renewable Energy Market Outlook (GREMO) we have developed at Bloomberg New Energy Finance shows that under a range of scenarios coal will only account for 10-12% of total power capacity additions between now and 2030. But despite this collapse in new capacity additions, its share of global installed generation capacity will only fall from 36% in 2013 to 21-23% in 2030.

This is almost entirely down to China. The country will add 88GW of new power plants annually from now until 2030 – the equivalent of building the UK’s total generating capacity every year. While China’s power capacity will more than double by 2030 and renewables will account for more than half of new plants, coal will still continue to grow rapidly until 2022. We estimate that China will add on average 38GW per year of new coal capacity – equal to three large coal plants every month. So despite a clear shift to cleaner sources of energy in China, carbon emissions and local environmental problems resulting from coal will probably continue to worsen in the next 10-15 years.

Perhaps the only chance coal has for a bounce back or resurgence in markets with tightening environmental standards is carbon capture and storage, but this seems unlikely to have the impact some hope it could. Carbon capture and storage demonstration projects have been delayed, projects cancelled and the commercial appetite for delivering first-of-a-kind projects, even with significant government subsidy, continues to
wane. By the time carbon capture and storage projects are mastered and delivered on budget, it will
probably be too little, too late.

Great empires disappear at their own pace. Rome was sacked by the Visigoths in 410 AD, but survived in one form or another until the Fall of Constantinople, over a thousand years later. The British Empire managed a quick and relatively well-organised disengagement after the end of the Second World War. The end of the Soviet Union was sudden and almost unpredicted. Will coal decline and fall like the Roman Empire, or disappear like the Soviet Union?

Our sense is that Old King Coal will be around for longer than many might like. A Roman Empire-like decline and fall looks the most likely scenario, though with significant disparity between Asia (particularly China) and the rest. If governments get their act together internationally and agree a timetable for coal’s phase out, this could bring about a quicker phased end to coal, but that depends on international climate negotiations in desperate need of rejuvenation.

Ladies and gentlemen, faites vos jeux!

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