Power companies predict return of coal
The world is on the brink of a big switch from gas to coal as the preferred fuel for power stations, according to projections from Alstom, Siemens and General Electric, the world's three biggest power equipment makers.
Independent forecasts from France's Alstom and Germany's Siemens, made available to the Financial Times, show that about 40 per cent of the orders for electricity turbines in the next decade will be for coal-powered units, with the share of gas-fired plants falling to between 25 and 30 per cent.
Note that this is not an airy prediction by some market consultant - that's the forecasts of the 3 main companies that will actually build these power plants and need to decide today what kind of turbines they should be ready to provide in the coming years - and it seems that their clients are telling them the same thing: coal is back.
The shift is being triggered by technological changes that reduce the amount of pollution created by coal-fired stations and by rising disenchantment with gas as a fuel. There are concerns over rising prices for the fuel and worries about security of supply, underlined by the recent row between Russia and the Ukraine over gas pricing. Many countries in Asia, which is expected to provide half of all new power station orders in the next 10 years, lack ready access to gas reserves.
Coal's re-emergence as a primary fuel for power generation is a reversal of recent trends. The dash for gas in power equipment was most evident between 1997 and 2001, when gas was the preferred fuel for 60-70 per cent of new power stations and coal for 20-30 per cent.
Alstom and Siemens expect power station orders in the next decade to average 120GW a year. Spending on new power stations is expected to be $50bn annually for the next decade.
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All three companies believe the switch is likely to be particularly marked in the UK, where coal is expected to be the most popular fuel source for the 20GW of power equipment due to be installed over the coming decade.
The reason for this is simple: cost.
The above are my estimates (slightly modified to avoid any confidentiality issues), and this below is the same exercise as provided in the Economist:
What both show is that variable costs form the major part of the cost of gas-fired electricity, and what they don't show is how much these variable costs have shot up: natural gas prices are 3-4 times the predicted levels, and 2-3 times higher than their expected maximums - and that's after dropping recently from their post-Katrina highs in the US (thanks to a so far mild winter - futures show that the market keeps on expecting that prices will remain high in coming years):
The last graph, from an early December article in the FT, shows that the expectations for gas prices in Europe are similarly pessimistic, and point to the main culprit: electricity generation. Gas-fired plants have been the main new source of baseload power in both the US and Europe: they were seen as both a cheaper and environmentally sounder source of power than coal or nuclear, and they underwent a real boom, as the right hand graph above suggests for the UK and that below underlines for the US:
This has created a strong link between gas prices and electricity prices, something that was nice when gas prices were low, but is a nightmare now that natural prices are very high. Electricity prices cannot be increased so easily at the retail level, and producers are thus squeezed in the middle, and have to switch as quickly as they can from natural gas - to coal (or to wind: the table below is for 2001, but it has more or less held true in more recent years)
Underlying this switch is the unexpected speed at which natural gas is being depleted in some major basins:
New gas fields hardly produce for more than 2 years in any meaningful volumes. Thus the switch to plentiful - and domestically available - coal.
The issue with coal is, of course, that it emits more greenhouse gase and more pollutants than natural gas, so all the recent progress that countries like the UK, Germany or Greece have made in reducing carbon emissions (by switching power generation from coal to gas or wind) is being threatened by this new twist.
Emissions trading has been put in place this year in Europe (under the Kyoto mechanisms), and the price of a ton of CO2 increased early last year (and has more or less stabilised since then in the 20-30 range):
It is expected that prices need to reach 50$/ton before anybody starts thinking about switching away from coal. It could happen soon, but so long as it hasn't, companies will be loath to base long term investment decisions on something so uncertain. Thus, between gas, nuclear and coal (the only baseload options available), coal is now seen as the safest, and the likeliest to remain cheap of the 3.
Wind is certainly being developed, but it is not yet seen as a "core" power source and is not taken seriously enough as an alternative.
So we're back to square one: coal. Do you really expect our political leadership to insist that coal power be clean when prices go up?