2017 a year in review: The death of coal

2017 might have been a bit of rotten year all round, but it was good year for renewable energy. The UK recorded a record low in terms of carbon intensity, with an average value of 233 gCO₂/kWh (against a historical level of about 450 gCO₂/kWh). And several key Rubicon’s were crossed this year. In April, for the first time since the industrial revolution, the country went a day without coal. In May solar outperformed coal. And the price of offshore wind fell below that of nuclear power.

Figure 1: UK electricity mix, fossil fuel and “low carbon” (i.e. nuclear, renewables, etc.). 2017 saw the majority of energy coming from low carbon sources rather than fossil fuels for the first time ever [Carbon brief, 2018]

And as regular readers of this blog will note, this is not because of any new pro-renewable policy by the Tories. Instead its occurred despite government attempts to thwart the renewable energy industry. The Tories have spent the last two years acting like Wile Coyote trying to stop the road runner, failing at every turn and ending up with a 100 ton rock falling on them. And Trump and the Republicans attics have had similar comic results. Certainly yes, the pace of the energy transition has been slowed down by their actions but it certainly hasn’t been stopped.

Figure 2: The UK coal industry is in a death spiral…literally [Carbonbrief, 2018]

And worldwide, the latest IEA energy statistics show similar trends worldwide. While overall energy consumption and fossil fuel consumption is still growing, that rate has slowed considerably. Furthermore, only counting OECD countries, there has been a decline, both in overall energy use and in fossil fuel use since 2010. Now while some of this can be explained by sluggish economic growth, but mostly it is down to improvements in energy efficiency standards (of the sorts the brexiters dislike) means there is simply less of a demand for energy in OECD countries. Also it is now clear that the renewable energy industries has turned a corner and has gone mainstream. As I mentioned in a prior post, it has seen record growth levels in recent years and falling costs.

Figure 3: Energy consumption (TPES) for OECD countries between 1971 & 2016 [IEA, 2017]

And, as in the UK, the big loser worldwide has been coal. Coal ain’t king anymore. Overall its slumped, with an 11% drop in production over the last 3 years. And that rate of decline appears to be accelerating if anything. While competition with renewables is part of the problem, as recent figures suggest coal will struggle to remain price competitive, even in the absence of subsidies (remembering that fossil fuels are also heavily dependant on subsidy). But natural gas is also cheaper than coal as well.

Figure 4: World wide coal production [IEA, 2017]

Figure 5: Levelised cost of energy, without subsidies [Lazard, Dec 2016]

The oil and gas industry has had a bit of a mixed last few years. On the one hand, yes they are kicking coal in the shins. There’s been some growth in the industry and oil prices, while low, they are above historical levels (adjusting for inflation). However said growth has been sluggish and very limited (and in truth a lot of it relates to the transition from coal to gas). And, as I discussed in a prior post their CAPEX expenditure has skyrocketed. Currently the oil industry is showing a rate of return on investment that averages out at 10%, against the more historical margin of 20-30%. In short, they are having to run faster and faster just to stand still.

Figure 6: Historic oil prices adjusted for inflation [Macrotrends, 2017]

And there appears to be not much in the way of light at the end of the tunnel for the fossil fuel industry. Overall, in its 2017 world energy outlook, the IEA still expects further economic growth (in line with expected population growth) to mean energy demand will continue to grow worldwide, but at a much slower pace. But within OECD countries it will be relatively flat. While they anticipate fossil fuels will still dominate the energy industry, they also expect any growth in consumption to be much more gradual, probably no higher than 0.8% growth per year. And again, demand for fossil fuels will likely drop within OECD countries.

Figure 7: The IEA’s WEO estimated mix of electricity production by 2040 [IEA, WEO 2017]

By 2040, the IEA expect at least 40% of electricity worldwide to come from renewables, with coal virtually collapsing to negligible levels. And they also expect electricity to increasingly become one of the main components of final energy consumption, particularly given the recent growth in electric cars. And to be honest, I’d argue that if anything the IEA is underestimating renewables. As an organisation, they’ve repeatedly been behind the curve when it comes to predicting renewables growth (I still recall someone from the IEA saying trying to get above 40% renewables in Scotland was quote “stupid”…. Scotland is currently averaging at about 60% from renewables).

Now while its still a case of doing well, but we need to do better, even so all of this is going to have a number of significant of long term implications. Firstly, the link between economic growth, GDP and energy consumption has clearly changed. There’s still some correlation between the two, but its no longer as strong and the energy component doesn’t have to come from fossil fuels anymore. I recall back in the 2000’s how one economists went so far as to suggest that economic growth was IMPOSSIBLE without continued growth in fossil fuels. And thus, the position of treehuggers promoting renewables was to commit the West to economic collapse, poverty and soviet style food queues. LOL!

Of course this green stuff = communism conspiracy theory still holds sway with many conservatives, hence the strongly anti-environment stance adopted by the Republicans and the Tory party. Although as someone who actually knows renewable energy exec’s, I can tell you commie’s they ain’t. Most I know drive around in a Lexus (or if they really want to match the stereotype, a Tesla) and live in a large house…with a large spouse. They saw an opportunity to get in on the ground floor of an industry with a large future growth potential and they took advantage of that. That, I think you’ll, find is how “capitalism” works. Sticking with outdated policies long after the market has moved on, as is the current policy for Trump (with coal) or the Tories (with nuclear), well that’s kind of what communism looks like.

And it also means that by trying to prop up coal (or in the case of the UK, nuclear) governments are just delaying the inevitable. When Trump promised all of those coal miners they’d get their jobs back, he was conning them on a massive scale. Not only is that impossible (indeed the coal industry is now complaining that Trump’s tax bill is going to screw them over), as coal will struggle to compete with renewables (even if he pulls out of the Paris accords), but they are also competing with natural gas. Effectively the only way that the oil and gas industry can grow now is by eating the coal industry’s lunch. And that’s basically been what the natural gas industry has been doing for the last couple of years.

Also the coal miners are, if you’ll pardon the pun, the canaries in the coal mine. They are seeing the impact of these changes to the energy industry first. But eventually, these changes will spread to the oil and gas industry as well. Continuing energy efficiency improvements, a growing market share for renewables and disruptive technologies like electric cars, will all make the high levels of CAPEX within oil and gas simply unsustainable. An oil price rise could help, although that would have the negative impact of making renewables an even more attractive option.

And lower profits and fossil fuels becoming a more risky investment also has financial implications. Pension funds have long been heavy investors in oil and gas as they see it as a “sure thing” which delivers good returns. If that should change (and its already starting to happen) and they jump ship and invest in renewables instead, then that’s a large chuck of the oil and gas industries investment capital gone.

So at some point a process of “rationalisation” (read sacking people) will start to sweep through the oil and gas industry. There is little point in a company spending billions finding oil you are never going to drill, nor drilling for oil when you are going to lose money on every barrel you pump. So the industry will probably start to downsize itself to match future projected demand, much as the coal industry started to do a few decades ago. In short, now would not be a good time to be starting a career in the oil and gas industry. How will you address a petroleum geologist in a few years time? “Could I get fries with that?”.

Figure 8: Deaths per TWh by energy industry [media matters, 2013]

So all that Trump (or the Tories) are doing is delaying the inevitable. If you actually want to help impoverished miners in West Virginia, how about instead of giving them false hope, invest in re-training programmes, so they can get jobs in other emerging industries… such as the renewable energy industry. And instead of blocking renewable energy, encourage it (preferably in places like West Virginia). Renewables has been consistently a much more effective job creator than coal, oil or gas. As well as being a safer industry to work in, with better pay.

For, as I noted earlier, while renewables are growing rapidly and its clear this isn’t some fad that will run its course and then die off again (like bitcoin). Renewables are still not growing nearly fast enough to prevent dangerous climate change.