Future of Energy: The Dilemma of Coal

By Andy Roberts

Coal producers find themselves on the horns of an existential dilemma. Will they move forward just as they have in the past, absorbing yet more blows from a growing coal-averse community? Or will they transform themselves into a new kind of energy company, at least partly comprising of less controversial or even “desirable” fuels?

Underlying these two options is the near certainty that we will never have a coal-free future, for reasons of scale, economics, and technology.

Mined in more than 50 countries, coal generates much of the world’s electricity and is integral to steel production. Developed and developing countries depend on both thermal and metallurgical coal. However, overcapacity, weakening demand, and environmental policies have affected coal prices.

In a competitive market, international and national energy companies need reliable data and analysis to help identify opportunities and make investment decisions to plan, forecast, and succeed in the coal industry.

Here are a few trends to consider:

  • Scale: Coal accounts for 29 percent (153 quadrillion BTUs) of today’s global energy supply—nearly twice the entire energy demand of the United States. Absent fundamental change, a rapidly growing Asia will depend on low-cost energy from coal well into the future.

King Coal reigns unless change is mandated

King coal reigns unless change is mandated

Replacing global coal is like replacing two total U.S. energy supplies

Replacing global coal is like replacing two total US energy supplies

  • Economics: Even at today’s depressed coal prices, energy is expensive and carbon is cheap. Reversing that equation may take decades. Stripping out the costs of coal’s externalities—pollution, reclamation, legacy obligations – results in costs that are usually lower than unsubsidized renewable energy. So, encouraging the use of renewables requires penalizing coal, subsidizing renewables, or both.
  • Technology: Engineering improvements and technical breakthroughs in renewable energy may eventually allow it to compete directly with coal on price. Solutions, such as smart grids and energy storage mechanisms, are being developed but will take considerable time. First-movers are slowed by uncertainties in technology and politics.

Relentless pressure to lower coal consumption will intensify competition among producers for the remaining coal market. Some producers will meet this challenge using a conservative approach and focus on what they do best—mining coal. As markets fade, only low-cost suppliers with access to prime-quality coals, low in undesirables, and with superior market foresight will succeed. As coal markets wither, this strategy becomes one of survival of the fittest of the fit.

There is another strategy—more imaginative, but also more uncertain—diversification. While diversification is a risky strategy, one might ask bankrupt video store chains if they regret their decision to stay focused on the video rental market rather than diversifying to follow the Netflix model. Diversification for coal producers is a “stretch” strategy aimed at participating in a wider, non-coal energy market that is growing, not declining.

This strategy is aimed at providing opportunity for success over the longer term. The benefits of participating in this wider energy market over a long period of time (increased opportunity, greater sales) must be balanced against the financial and operational risks of transitioning into it:

  • Will diversification require acquisition, and what will that do to the balance sheet?
  • Is a merger a possibility, and what would that mean to existing operations and current employee commitments?
  • Will diversification damage the brand and sales, not just of the acquirer but of the acquired?

The emerging coal-averse world will not be the end for coal producers but the beginning of a new world inhabited by two kinds of coal companies: the top-of-the-food-chain lions and the transformative, quick-footed “gazelles.” The “lions” will have their feet firmly planted in the past and will survive, in an ever-smaller market, doing what they’ve always done and using their commercial power and strength over competitors. For the gazelles, success will be tied to their ability to diversify as they position themselves to capture a portion of the rising total global demand for energy.

The market can be home to lions or gazelles, as both paths are possible. But coal producers must act quickly.

Andy Roberts

Andy Roberts is a research director at Wood Mackenzie with a background in mining engineering, planning, and market analysis. Wood Mackenzie is a Verisk Analytics (Nasdaq:VRSK) business.