Last week, we discussed the startling study by an MIT group on the Chinese coal industry. We dig a little deeper into the global coal industry (and of course tie it back to the Middle Kingdom), with a presentation by Stanford University’s David Victor at Google’s campus.
In case you don’t have that hour or so to spare, I’ve jotted down several points from Dr. Victor’s presentation that stood out for me:
- While one would intuitively think that high oil prices would have a positive effect on fuel conservation, it is actually bad news for coal consumption. Natural gas-fired electricity is coal-fired electricity’s biggest competitor, but because many natural gas contracts (from Russian supply) have natural gas prices indexed to oil prices, rising oil prices have made natural gas expensive as well, and coal a whole lot more attractive as a source of electricity.
- The price of carbon permits in the European Trading Scheme, even at EUR 25 to 30, is nowhere close to where it needs to be to affect coal use consumption behavior. The reason, oil (and thus natural gas) prices are high.
- Like oil reserves, coal reserves worldwide have been overstated. Expect to see significant coal reserve restatements in the future.
- There is an emerging international steam coal market due to dramatic decrease in cost of shipping. Price of coal from different sources worldwide are starting to converge. [GLF: That means China's energy costs per unit of income compared to richer countries are high, posing an economic security concern.]
- China has just built out a large amount of infrastructure. The large upfront costs have already been paid. India’s state-owned energy companies are more dysfunctional and provide more opportunities for innovation.
- Low cost of capital in China for state-owned companies, which all major coal mines and power companies are, makes unseating coal in China a bigger challenge.
- Dr. Victor is not optimistic about the efficacy of carbon markets. In his view, carbon trading ”turns us into a casino.” He prefers a carbon tax as it is much simpler and sends a clear signal.
What are China’s Coal Supply Bottlenecks?
Additionally, I wanted to delve a little more into the much publicized domestic coal supply woes of China that we might have all read about at some point or another. After some digging, I believe thre is merit to any combination of the following factors in contributing to the coal supply squeeze:
- A surge in demand of electricity, especially since 2001 or 2002, when according to the MIT report, the number of new power plants being built increased precipitously while, according to Wang Qinyi, national energy efficiency levels dramatically decreased, have strained coal supplies. The inflection point coincides with China’s entry into the World Trade Organization, and the start of China’s dramatic growth in the auto industry and other heavy industries, but perhaps most importantly, the break up of the former State Power Corporation in 2002 into five regional companies, which subsequently undertook a huge infrastructure program to not only meet growing power demand but to increase their respective market share.
- Rail capacity being unable to keep up with logistical demand, resulting in insufficient supplies to plants further away from coal sources. As the MIT report (and this report by China energy aficionado Dr. Phillip Andrews) points out, contrary to conventional wisdom, a fair share of coal is transported by non-rail transportation, i.e. by truck. This will have dramatic environmental consequences for heavy vehicle issues, diesel use, highway expansion, etc., as trucking attempt to alleviate the rail bottle neck.
- The ongoing policy of coal mine consolidation by the shutting down of small, inefficient and unsafe (and often illegal) coal mines does not help the overall supply situation. Ironically, rising coal prices seems to be creating more incentive to hasten mine consolidation, setting forth a vicious cycle of sorts.
- Coal price controls that seem to incent the export of coal for higher prices abroad, although as discussed previously, the MIT report finds that more and more coal is transacted domestically on a market basis and not subject to price caps. But recent coal export restrictions and the increased costs of exporting (due to higher oil, and hence shipping, prices), leading to reduced coal exports as of late.
One of the consequences of the coal supply squeeze is the proposal to create a national coal strategic reserve, much like the one that has been created for oil. Fortunately, there seems to be just a little more breathing room in the supply situation lately, however.
For more on official China coal policy, check out the 11th Five-Year Plan for the Coal Industry.
So Green Leapers, based on the above characteristics of the global and Chinese coal industry, what levers points for sustainable change present themselves to us? Let’s hear your thoughts in the comments section below. Leave a comment!