ESG Focus: Thermal Coal’s Tipping Point; How Fast, How Soon?

ESG Focus | May 01 2019

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The crucial tipping point for thermal coal use in the USA could come as early as 2025, new data suggest.

-US Energy Information Agency report sets out timeline
-Transition time closes in for the West
-ESG targets could hasten the process

By Sarah Mills

Investors (should) know that coal is in decline but are seeking timelines around a coal transition. A recent article in The Guardian suggests the tipping point in the United States could be as early as 2025: data that helps firm up timelines for a coal transition in the West.

The article notes that about 75% of US coal production already costs more than wind and solar energy, and by 2025, the entire US coal system will be out-competed on cost by wind and solar, even after factoring in new construction.

This figure comes from a report for Energy Innovation and is based on the public financial filings and data from the Energy Information Agency (EIA), a principal agency of the US Federal Statistical System.

The report follows a series of reports late last year showing that solar and wind power are now cheaper, including storage, than coal.

The situation for coal in the United States has been exacerbated by the shift to natural gas and the cost of installing pollution controls, all of which places pressure on existing plant utilisation.

The report also follows the publication of data from the EIA recently showing renewable generation in the United States had doubled since 2008 and now supplies 17.6% of the nation’s electricity.

The fact that US is a global renewables laggard among major economies (even China sits at 38.3%), suggests that 2025-30 could be a key transition period for thermal coal use in the West, especially given the strong progress in Europe.

Germany is closing coal-fired plants and building renewables, France is committed to nuclear energy and the Nordic states are committed to renewables.

Russia is well behind, having set a renewable energy goal of 4.5% by 2020.  Hydrocarbon companies hold immense clout in Russia – the country boasting enormous coal resources, but this could change rapidly as the economics of renewable generation continue to improve.

Coal only comprises about 14.4% of Russia’s total energy use, but the nation is the fourth largest generator and consumer of electricity in the world.

Russia does, however, have enormous land resources and capacity to move to renewables when the time is deemed correct. 

The EIA notes that the growth in US renewables and research and development in the renewables industry has been spurred by state policies, such as the American Reinvestment and Recovery Act of 2009 and the Production Tax Credit and Investment Tax Credits for wind and solar.

However, the EIA also recently published figures in its Annual Energy Outlook 2019 predicting US thermal coal consumption would drop this year then level off after 2020, and comprise 17% by 2050.

The agency expects the share of US total utility-scale electricity generation from natural gas-fired power plants to rise from 35% in 2018 to 39% by 2050.

It expects renewables to rise to just 31% by 2050.

Yet it is hard to justify such estimates if coal is under such intense pressure from both gas and renewables.

Given the present rate of technological advances, renewables are also expected to become even cheaper, so for coal consumption to remain at near present levels for 30 years, even after accounting for population increases, seems anti-intuitive.

The United States would compromise its global competitiveness by paying more than necessary for energy.

Similarly, renewables at just 31% also seems counter intuitive, especially given even gas will be subjected to carbon-related taxes, regulations, and ESG targets.

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