Energy transition and the future of coal


July 31, 2017

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Coal is dying. We hear this sentiment a lot from those in the wind industry, as they argue that the world should move from black to green. But what does it mean?

First, it doesn’t mean coal is already dead. Coal is still mined in 50 countries and, at current rates of consumption, coal resources could last for over 140 years. It is also used to produce 30% of global energy and 40% of electricity. That’s not dead. People in the wind sector would love to achieve those last two percentages.

What it really means is that some companies, including in the coal industry, are saying publicly that coal does not have a long-term future. For instance, this month Hunter Harrison, CEO of US freight railroad group CSX, said the firm would not buy more locomotives for coal trains as, in the long-term, “fossil fuels are dead”.

How long is long-term? Well, this is where Harrison gets hazy: “It’s not going to be in two or three years, but it’s going away, in my view,” he said. Even so, given that it is not in his interests to talk down the coal industry, this is still a significant intervention.

This follows BP’s ‘Statistical Review of World Energy’, published last month. The oil and gas giant has said that coal consumption “fell sharply” for a second consecutive year in 2016. BP identified that there was a 1.7% fall in coal consumption in 2016 – we can argue about its definition of the word “sharply” – but again it shows the trend. It also identified that coal fell to its lowest share of the world energy mix since 2004.

In the words of BP group chief economist Spencer Dale, “weakness in recent years does seem to signal a fairly decisive break from the past”. He says there are likely to be ups and downs for coal in the coming years, rather than a slow march to the grave, but the fact that BP now sees weakness in the sector is notable.

These are only two statements, but they do show that two significant companies in the fossil fuels industry have reservations about investing in coal. If that is the case, how much confidence can institutions and other investors have in the future of coal?

Because here’s the thing. If coal is dying then it doesn’t really matter for investors if the sector gets its last rites in ten years, 20 years or later. For long-term investors, the fact that coal is on a downward trend means they face significant risks by holding projects that could end up as stranded assets, or shares in coal-focused companies.

That is a good reason for those investors to doubt the wisdom of holding coal assets as the industry faces stiff competition from renewables and natural gas. They could incur huge losses as governments seek to tackle climate change. We understand the debate about whether some funds are losing out on potential returns by selling their fossil fuels assets too early, but the risks of holding on are significant.

We are all well aware that 196 countries signed the United Nations climate change deal in Paris in late 2015, to try to keep global warming to lower than two degrees centigrade by 2050. But a report from one leading fund manager this month said that nations would need to act far quicker than those Paris commitments.

This month, the UK’s largest listed asset manager Schroders, which manages assets worth $520m globally, warned that temperatures globally could rise by four degrees centigrade above pre-Industrial Revolution levels. This puts 15%-20% of company cashflows at risk, on average, due to climate change. It follows similar warnings from BlackRock and Legal & General that governments and businesses must act quickly.

And that would then speed up a global transition to wind and solar, and make both of those sectors look even more attractive. If coal is dying then warnings like these from businesses in the sector are only likely to hasten its demise.

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