Demand for Coal in China Predicted to Drive Electricity Prices Worldwide

International Energy Agency
December 13, 2011

Medium-Term Coal Market Report 2011

The International Energy Agency issued a report, MEDIUM-TERM COAL MARKET REPORT 2011, which predicts that global demand for coal will continue expanding over the next several years. The report says the main reason for the projected increase in coal demand over the next five years is surging power generation in emerging economies. More than half the demand in the next five years is expected to come from China. “For all of the talk about removing carbon from the energy system, the IEA projects average coal demand to grow by 600,000 tons every day over the next five years,” IEA Executive Director Maria van der Hoeven said in a statement accompanying the issuance of the report. Among the troubling findings in the report is that events and decisions in China could have an outsized effect on coal prices – and thus electricity prices – around the world over the next five years. China’s domestic coal market is more than three times the global coal trade: Only 15% of global coal demand is met through international trade, yet more than half of global coal demand during the outlook period is projected to come from China. Thus, according to Ms. Van der Hoeven, “what happens in China over the medium term may impact the prices for electricity that consumers everywhere will have to pay.”

Other key findings of the report include:

  • Growth in coal demand over the next five years will mostly occur in non-OECD countries, with China and India accounting for the majority.
  • Growing demand means poorer deposits will have to be exploited, which will likely lead to upward pressure on mining costs and therefore on coal prices.
    Despite the rise of new exporting countries, traditional exporters will meet the bulk of demand growth.
  • While coal has traditionally been considered a cheap and secure energy resource, this perception may be tested in the years ahead. Six countries account for more than 80 percent of global coal exports, and as demand surges markets could experience more of the infrastructure bottlenecks that in recent years caused coal prices to more than triple.

What are the implications for West Virginians? The good news is that there is plenty of demand for whatever coal is extracted from the ground in West Virginia. Whether or not dozens of coal-fired electric generating plants around the country are retired in the coming years – as is currently being predicted, and blamed largely (and unfairly) on EPA – there will be plenty of buyers for West Virginia coal, primarily from China and India. The bad news is that the utilities serving West Virginia are heavily dependent on coal-fired generation. So as domestic coal prices soar in response to international demand for coal, our electricity prices will continue to increase substantially over the next few years. Utilities in this state have done virtually nothing over the past decade to diversify their generating portfolio, and have relied almost exclusively on coal to satisfy electricity demands, to the exclusion of renewable energy and investments in energy efficiency and conservation programs. More recently, utilities have announced plans to switch to natural gas, thanks to the abundant supply and low prices of natural gas due to shale gas plays across the region and the country. But it takes years to diversify away from the current heavy reliance on coal-fired generation, and in the meantime West Virginia utility ratepayers will be paying the price. The IEA study confirms the urgent need for utilities in this state to engage in rigorous long-term system planning to identify and implement a resource acquisition strategy that will be in the long-term best interests of utility ratepayers. Utilities throughout the country have been engaged in “integrated resource planning” – a process that guides the selection of power plants as well as investments in demand-side efficiency measures – for decades, and it is about time that West Virginia utilities start following the lead. Our ratepayers cannot afford sole reliance on coal any longer.