The declining role of coal

In 1955 Winston Churchill rumbled “I have not become the Queen’s First Minister to preside over the liquidation of the British Empire”. History tells us that in the following decades the winds of change blew long and strong, transforming the old Empire into the new Commonwealth of Nations.

In 2010 one of the first statements made by Greg Combet, newly appointed Minister for Climate Change was to assure the coal industry and its workforce that they had nothing to worry about where profits and jobs were concerned. History will show that the imperative of placing a price on carbon began the decline of the fossil fuel industries in Australia.

Most Australians accept that production and use of fossil fuels in general and coal in particular are responsible for greenhouse gas emissions, the prime cause of global warming. They know that sooner or later a price must be placed on those emissions, popularly referred to as “carbon”, to reduce emissions and help curb global warming. What comes as a surprise to many is the call by both the mining and power generating industries for carbon to be priced.

Why should the industries most responsible for greenhouse gas emissions be calling for a price to be put on those emissions? It seems so counterintuitive - but when you come to think about it, it makes sense.

The coal mining industry knows that it can’t undertake its activities without emitting greenhouse gases, mostly methane. It knows that a price on carbon will add to its production costs but, it also knows that in the absence of a cheaper alternative to coal, it can pass-on all of those extra costs to its customers. Since there is no cheaper alternative to coal, introduction of a carbon tax is not going to affect their profits.

However, Federal Government has made it clear that from now on new coal-fired power stations must emit lower levels of carbon. They must also be able to capture and securely bury their emissions when carbon capture and sequestration (CCS) technology is commercially available.

Power station owners have had plenty of warning of this, so it comes as no surprise. Like the coal miming industry, they too can pass-on this additional cost to their customers - industry, the public sector and households, in short everyone who uses electricity. Because those customers are so numerous, an increase in the cost of electricity for any one customer is most unlikely to prove so great that they feel forced to stop using it.

Australia is a prosperous country, its economy is growing and so is the demand for electricity. Demand is so great that existing power stations are barely able to supply it and the need for additional power stations generating additional electricity is now quite pressing. The problem for those willing to build and operate new coal-fired power stations is that government requires them to have lower emissions and ultimately none by using CCS technology.

This adds to the capital cost of building a power station. It also means that new power stations have to compete with existing ones that are exempt from these requirements. Those wanting to build new power stations cry foul, pointing out that this gives existing, old power stations (the worst polluters) with their much lower capital cost, a competitive advantage. Moreover, this makes it very difficult to attract, let alone service, the loans needed to build new coal-fired power stations.

In short, proponents of new power stations are calling for a price to be placed on carbon because they see this as a mechanism that will level up the playing field by placing an additional cost on old power station operators - a cost which their new, more efficient power stations will be burdened with to a far less extent.

This would make the cost of electricity generated by old and new power stations more competitive. Indeed, the higher the price of carbon, the greater the advantage for new cleaner power stations, making it easier for them to attract and service capital needed to build them and earn income needed for maintenance and upgrade.

Conversely, a price on carbon increases the difficulty of attracting capital to build the 12 coal burning power stations, some of them highly polluting, approved before new government requirements were announced. Proponents of power stations that are subject to the new requirements could not be happier with the prospect of a price on carbon - except for one thing. It makes new, less polluting power stations more capital intensive and more expensive to operate because the cost of coal also increases when a price is put on carbon.

Moreover, putting a price on carbon also levels up the playing field between electricity generated by coal-fired power stations and electricity produced from renewable sources that have no carbon emissions and are unaffected by the price of carbon. These include wind, hydro, geothermal and solar. When the price of carbon reaches ~$30/tonne, electricity produced from renewable sources with the present exception of solar, becomes slightly cheaper than that generated by burning coal. And therein lies the rub!

At a carbon price of ~$30/tonne, why would anyone invest in a coal-fired power station when it is more profitable to invest in electricity produced by wind, hydro or geothermal? Capital always looks for highest return at lowest risk, so placing a price on carbon will make it more attractive to invest in renewable energy than in coal-fired power stations. And the higher the price of carbon above $30/tonne, the more profitable it is to invest in energy produced from renewable sources.

The use of CCS technology that would eliminate most if not all carbon emissions produced by coal-fired power stations is not cheap to use. Given the present state of that technology, estimates are that its use would only be justified and profitable when the price of carbon reaches ~$50-$60/tonne. CCS technology is expected to be commercially available by 2020, possibly sooner.

This implies that in less than a decade, no new coal-fired power stations will be built and that those currently approved to be built are at best a marginal investment. Though some may be built, they are almost certainly the last of their kind. From 2015 onwards it should be expected that capital will be exclusively attracted to electricity generated from renewable sources, particularly geothermal. Why?

Because Geodynamics Ltd, the leader in the field, has demonstrated that superheated steam produced by hot fractured granites 4km beneath the surface can be accessed and used to generate base load electricity. Early in 2012 it will commence operating a 1MW power station entirely fuelled by superheated steam. This will supply all of its own energy needs and those of the nearby township of Innamincka.

Thereafter Geodynamics and more than 30 other companies now engaged in geothermal mining will build and operate a series of power stations, each feeding 50MW or more into the National Grid. These are expected to supply all of the additional electricity required by the growing Australian economy and make a substantial contribution to achieving the bi-partisan target of sourcing 20 per cent of Australia’s energy needs from renewable sources by 2020.

From 2020 onwards, electricity produced from renewable sources, including solar, are expected to meet all new demand for electricity and start replacing coal-fired power stations thereby reducing the cost of electricity nation-wide.

What are the implications for the coal industry? After showing growth over the next three to five years, domestic use of coal as a source of electricity can be expected to decline in the next decade. After 2020 that decline is expected to become more pronounced, due to replacement of coal by geothermal steam and developments in solar and battery technologies.

Australian coal exports in the next decade are predicted to remain at their present levels, at best, but are more likely to decline due to increased competition from other exporters, particularly Mongolia. Beyond 2020 they will decline significantly due to advances in solar and other technology and the cost of CCS to our biggest customers, Japan, India and South Korea, currently among the world’s worst polluters

Australia can not afford to delay putting a price on carbon and has indicated an intention of doing so by 2012. To act otherwise may well expose Australian exports to a carbon tariff imposed by countries that have already introduced a price on carbon.

Those countries will not be prepared to have their industries disadvantaged by countries that have refused to price carbon. Countries that buy our coal, particularly Japan and Korea, will no doubt also seek to avoid tariffs on their exports by putting a price on carbon, a price which is unlikely to increase our coal exports.

The overall effect on our mining industry is for growth in the very short term, followed by a period of stagnation and after 2020, possibly earlier, a decline. So think again Minister Combet and do what you need to do. Put a price on carbon sooner rather than later and put in place appropriate and timely measures to retrain coal mining employees and find them other work. At most, you have five years to get those processes well established.

Professor James Hansen (PDF 534KB) and other scientists point to dangerous irreversible climate change being reached by permitting greenhouse gases in the atmosphere to increase much beyond 400ppm. By August 2010 they had reached 388ppm. Minister Combet is responsible for ensuring that Australia does not help push the world over a tipping point that endangers our species. He can not meet this responsibility by presiding over on-going expansion of the coal industry.