The unwelcome renaissance: [Coal] Europe’s dirty secret (The Economist – January 5, 2013)

Europe’s energy policy delivers the worst of all possible worlds

BERLIN – WHILE coal production and use plummet in America, in Europe “we have some kind of golden age of coal,” says Anne-Sophie Corbeau of the International Energy Agency. The amount of electricity generated from coal is rising at annualised rates of as much as 50% in some European countries. Since coal is by the far the most polluting source of electricity, with more greenhouse gas produced per kilowatt hour than any other fossil fuel, this is making a mockery of European environmental aspirations. How did it happen?

The story starts, again, with American shale gas. As American utilities shifted into gas, American coal miners had to look for new markets. They were doing so at a time when slowing Chinese demand was pushing down world coal prices, which fell by a third between August 2011 and August 2012 and is below $100 a tonne. These prices make European utilities willing buyers. European purchases of American coal rose by a third in the first six months of 2012.

Compared with the rock-bottom price of gas in America, coal is not all that cheap. But it is a bargain compared with the price of gas in Europe. Although gas can be carted around in liquid form, that is expensive and the infrastructure required is still patchy; for the most part, gas is shifted through pipelines, and tends to be used close to where it originates.

So whereas coal has world-market prices, gas has regional prices, often linked in one way or another to the oil price. Many European gas contracts were negotiated years ago with the Russian gas giant, Gazprom, and despite a wave of renegotiations European gas prices have stayed high. In the summer of 2012 they were more than three times the American gas price and more expensive than coal. Gazprom has said it will cut prices—probably by around 10%—in 2013, but that may make little difference.

So coal is cheaper than gas in Europe and is likely to remain so, partly because Europe’s domestic shale-gas industry is many years behind America’s (and may never catch up) and partly because it will take time for Europe to build an infrastructure to import liquefied-natural gas in large amounts. The relative price of coal and gas is crucial to the health of European utilities. At the beginning of November 2012, according to Bloomberg New Energy Finance, a research firm, power utilities in Germany were set, on average, to lose €11.70 when they burned gas to make a megawatt of electricity, but to earn €14.22 per MW when they burned coal.

No room for gas in the Energiewende

The difference reflects the prices of the fuels concerned. But there is more to it than that. Germany has an ambitious plan to shift from fossil fuels and nuclear power to renewables like solar and wind (this is called the Energiewende, or energy transformation). Electricity from renewables gets priority on the grid. That has allowed wind and solar to grab market share from fossil energy during the most profitable times of day, when utilities used to make most of their money and burning gas made sense (German electricity prices are at their highest in the middle of the day when solar generation is also strongest). By displacing conventional forms of energy this way renewables have undermined utilities’ finances. Moody’s, a ratings agency, recently said the whole sector’s creditworthiness is under threat.

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