Report Tracks the Erosion of Coal’s Energy Dominance

By Nolen Nychay
Editorial intern, Fall 2013

A report by Goldman Sachs finds that around the world “the window for thermal coal investment is closing.”

A report from Goldman Sachs’ commodities research team predicts a decline in global coal production as a result of decreasing demand. While coal-fired electricity still accounts for 36 percent of international electricity generation, according to the report, emerging global trends are predictive of a lower dependence on coal-produced energy in the near future.

Due to the recent boom in coal exports from China, the coal market is in a state of oversupply that is predicted to last until at least 2015. The resulting lower prices have put pressure on high-cost producers, forcing production cuts and the closure of marginal mines.

Goldman Sachs, a global investment banking and securities firm, developed this latest report as a reference for energy investors — especially those with investments in coal. The reaction to this analysis remains to be seen, but as the report definitively states, “The window for profitable investment in coal mining is closing.”

The three main trends the report claims as being catalysts of the coal regression are the increasing competitiveness of natural gas and renewable energy, innovations in energy efficiency and the shifting regulatory landscape.

In the last 20 years, the annual growth in coal demand around the world was most influenced by China and India — which alone accounted for 85 percent of the increase. Excluding their markets, global consumption of coal has increased by less than 1 percent annually since 1990.

Global coal production is projected to have a 4 percent growth rate in the 2013-2015 period. This is significantly less than the 13 percent growth rate coal production saw in the 2002-2012 period. This decline in production will likely be aided by China’s proposed ban on importing low-grade coal. The report estimates that the seaborne coal market will peak by 2020.

The European Union is in the process of closing down inefficient nuclear power plants in favor of cleaner energy sources in response to heightened taxes on greenhouse gas emissions. Operational energy utilities still utilizing coal-fired production within the EU are incentivized to support cleaner technologies by fines for exceeding permissible emission levels. However, we still lack a global treaty on carbon emissions as current regulations stem only from the national and regional levels.

The World Bank announced a new policy in July to limit financing of coal-fired power plants. A few days later, the Export-Import Bank of the United States declined to help finance a Vietnamese coal-fired plant on environmental grounds. These financing retractions, in conjunction with the developing trends detailed in the Goldman Sachs report underscore a need to shift investments to renewable energy and improving efficiency.