h"p://pesd.stanford.edu • Stanford University
Beyond Climate Policy: Reconciling Climate Change and the “Coal Renaissance”
1
UT Energy Symposium
Richard K. Morse Stanford University
Program on Energy and Sustainable Development
November 3, 2011
h"p://pesd.stanford.edu • Stanford University
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter: Chinese Coal Markets
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
2
h"p://pesd.stanford.edu • Stanford University
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Nuclear Renewables Hydro Crude Oil Gas Coal
Mtoe
World Incremental Energy Supply 2000-‐2009
Coal dominates global energy supply growth
3
0.4%
Compound Annual Growth Rate
7.8% 2.4%
1.1% 2.1%
3.9%
Source: IEA
h"p://pesd.stanford.edu • Stanford University
Coal has the greatest share of world energy since 1970
4
Oil 34%
Natural Gas 24%
Coal 30%
Nuclear Energy 5%
Hydro electricity 6%
Renewables 1%
World Primary Energy Supply 2010
Source: BP StaTsTcal Review 2011
h"p://pesd.stanford.edu • Stanford University h"p://pesd.stanford.edu • Stanford University
h"p://pesd.stanford.edu • Stanford University h"p://pesd.stanford.edu • Stanford University
h"p://pesd.stanford.edu • Stanford University
Coal is the single largest source of global CO2
Coal; 43%
Oil; 37%
Gas; 20%
2009 World CO2 Emissions by Fuel
h"p://pesd.stanford.edu • Stanford University
CO2 from developing world coal is the biggest climate challenge
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1990 2008 2020 2030 2035
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Metric Tons CO
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IEA Projected Emissions by Fuel Source
Non-‐OECD Gas
Non-‐OECD Oil
Non-‐OECD Coal
OECD Gas
OECD Oil
OECD Coal
Source: IEA WEO 2010, current policies scenario.
Non-‐OECD Coal
h"p://pesd.stanford.edu • Stanford University
Kyoto • No agreement to extend Kyoto
• “legally binding global treaty” model likely dead
• FragmentaTon of climate policy is new norm
EU • EU carbon market (ETS) decarbonizing EU power generaTon, reducing coal build
• But nuclear pullback likely to increase coal demand
China • Target to reduce CO2 intensity of GDP 40-‐45% (2005-‐2020)
• Target to improve energy efficiency per unit of GDP by 17% (12th FYP)
• Target to increase “non-‐fossil” energy to 15% by 2020 (mostly hydro and nukes)
USA • NaTonal cap-‐and-‐trade: stalled or dead • RGGI imploding? NJ, NH pulling out • AB32 under legal a"ack (present and future) • EPA regs could drive 10-‐75 GW of coal reTrement
AU/NZ • NZ has nascent market • AU a"empTng to pass cap and trade this year
FragmenTng global climate policy not addressing this challenge
9
h"p://pesd.stanford.edu • Stanford University
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter : Chinese Coal Markets
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
10
h"p://pesd.stanford.edu • Stanford University
Globally traded coal markets were born from the oil crises
In 1979, aier two oil crises, the world sought to diversify its power sectors away from oil. The global arbitrage was clear: swap cheap, abundant coal for expensive, cartel-‐controlled oil.
-‐“The uses of coal are limited only by our imagina3on as to how to transform this abundant resource into prac6cal use.”
-‐“The concept of an interna6onal free-‐trading market in coal analogous to other major commodity markets must be present throughout the planning process. Such a market could ul3mately develop in a fashion similar to today’s interna3onal oil market [. . .]”
-‐Ulf Lantzke, ExecuTve Director of the InternaTonal Energy Agency in 1979
11
Source: Foreign Affairs, 1979.
h"p://pesd.stanford.edu • Stanford University
ImaginaTon became reality
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2010 Million Metric Tonn
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Global Trade in Steam Coal Grew by Over 5x Since 1980
Land Trade (Steam and Coking)
MariTme Coking
MariTme Steam
Source: IEA Coal InformaTon. 1980-‐1985 from 2004 ediTon. 1986-‐2009 from 2011 ediTon.
h"p://pesd.stanford.edu • Stanford University
Global trade is connecTng previously disconnected markets
13
• Prices in the world’s major domesTc coal are increasingly becoming linked to the global trade • Efforts to export US PRB coal are the most recent dramaTc example • China’s import behavior since 2009 is another crucial factor
h"p://pesd.stanford.edu • Stanford University
Coal is going the way of oil – becoming a financial asset
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Growth of Traded Coal Futures: ICE Historical Open Interest
Richards Bay
Ro"erdam
• Markets evolved from long-‐term contracts to spot markets with liquid, global price benchmarks; allows arbitrage to connect markets
• DerivaTves volume now esTmated to be 3x the size of the physical trade • But, that process is just beginning….and significant bilateral/OTC trading persists
h"p://pesd.stanford.edu • Stanford University
Looking ahead: can shale gas challenge coal’s dominance?
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30 S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e D e M ar Ju n-‐ S e
$ / mmbtu
The Global Expansion of Shale Gas Could Redraw the Gas-‐Coal Rela^onship Brent (oil)
Henry Hub (gas)
NBP (gas)
PRB minemouth (coal)
FOB Newcastle (coal)
FOB Qinhuangdao (coal)
• US gas is now cheaper than globally traded coal
h"p://pesd.stanford.edu • Stanford University
New EIA global shale gas study idenTfies global shale deposits
16
• Newly iden^fied shale gas increases global technically recoverable gas reserves by 40%
h"p://pesd.stanford.edu • Stanford University
Drilling down: early signs of the next global energy arbitrage(s)?
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$ / mmbtu
Too Early to Say: Key Spreads to Watch Brent (oil) Henry Hub (gas) NBP (gas) PRB minemouth (coal) FOB Newcastle (coal) FOB Qinhuangdao (coal)
Note: These spreads, of course, do not show required infrastructure investment, transport, or environmental costs incurred to realize the arbitrage.
• Is 20 year BG-‐Cheniere US LNG export deal a sign of the next global energy arbitrage?
US Gas
Asian LNG (oil linked)
US Coal (PRB)
World Coal
h"p://pesd.stanford.edu • Stanford University
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter : Chinese Coal Markets • Power sector reform: diversifying away from coal • Coal sector reform: making coal cheaper
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
18
h"p://pesd.stanford.edu • Stanford University
China coal producTon more than doubled since 2000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Billion
Ton
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Chinese Coal Produc^on
Source: China NBS, BP.
h"p://pesd.stanford.edu • Stanford University
Expansion of China’s power sector drives coal demand
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GW
Wind and other renewables
Nuclear
Hydro
Coal
Source: China NBS, CEC.
h"p://pesd.stanford.edu • Stanford University
Uneven reform of coal and power sectors drives new energy policies �
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1975 1980 1985 1990 1995 2000 2005 2010 2015
Power GeneraTon
Coal ProducTon
Ministry of Coal Industry
abolished – ending central planning of producTon
Central Planning� Coal �
Power �
Two-‐Ter price system
introduced �Electricity coal price controls relaxed �
Coal negoTaTon Conference ends in
2009�
Twh, mt �
Central Planning�
State power corporaTon dissolved �
1978� 1998�
2002�
TVE private mines allowed
1983� 1985� 1992�
SOE price
controls relaxed
Power prices s^ll ^ghtly capped �
Gradual LiberalizaTon �
h"p://pesd.stanford.edu • Stanford University
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter : Chinese Coal Markets • Power sector reform: diversifying away from coal • Coal sector reform: making coal cheaper
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
22
h"p://pesd.stanford.edu • Stanford University
China’s power market can’t bear the cost of coal
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0.60
RMB / KIWH
Coal is oeen worth more than electricity in China
Shanghai Grid Price
Coal Cost
Source: Reuters, Shanghai DRC. Note: Coal price is Qinhuangdao 5800 kcal/kg material. Freight from QHD to Shanghai is $5/ton. Heat rate is average for China: 2775 kcal/kwh.
• Latest NDRC price “cap” on contract coal announced April 2011 • Summer 2011 peak shortages of ~50 GW expected to conTnue
h"p://pesd.stanford.edu • Stanford University
Power sector heavy losses create pressure for Beijing to diversify fuel exposure
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2008 2009 2010 2011 (esTmate)
Billion
RMB
Losses for China’s “Big 5” SOEs
Source: 2008 data is from China Electricity Council. 2010 data and 2011 esTmate from former Datang president Zhai Ruoyu and other sources as reported by China Coal Times.
• “The Big 5” accounted for 54% of installed capacity in 2010
No data available
DiversificaTon is slowly eroding coal’s share of new capacity
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GW
Chinese Power Genera^on Capacity Addi^ons
Other Capacity
New Thermal
Share of Thermal in New Capacity
• Non-‐fossil target 15% by 2020: nuclear and hydro will be the largest coal subsTtutes • Wind growth is making a small dent • But it takes 2 GW of wind to replace 1 GW of coal generaTon; solar is 2.5-‐3x out of the
money against coal without subsidies (feed in tariff) on China’s grid
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter : Chinese Coal Markets • Power sector reform: diversifying away from coal • Coal sector reform: making coal cheaper
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
26
Chinese coal prices highest in the world
27 Source: Reuters
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$ / metric tonn
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Qinhuangdao Benchmark Coal Prices
h"p://pesd.stanford.edu • Stanford University h"p://pesd.stanford.edu • Stanford University
h"p://pesd.stanford.edu • Stanford University
Transport bo"lenecks dramaTcally increase costs
29
• Current railway expansions will add equivalent of 50% of current coal transport capacity by 2015
h"p://pesd.stanford.edu • Stanford University
Beijing’s soluTon: coal-‐power bases
30
14. Xinjiang
h"p://pesd.stanford.edu • Stanford University
Key coal-‐power base policy objecTves
31
“Large energy enterprise groups are nurtured with the integra^ve and comprehensive development of coal, power, railways, ports, chemical, and other related industries so as to toughen the government’s influence and control on energy.” – Zhang Guobao, head of Na3onal Energy Bureau, 2008
• Promote integrated development of coal, power, and chemicals sectors by large state-‐owned firms
• Consolidate coal sector ConsolidaTon
• Reassert government control over energy sector through SOEs • Promote verTcal integraTon of coal and power firms
Control
• Reduce coal costs for power through internal transfer pricing (result: new two Tered pricing in the coal market?)
• Reduce rail bo"leneck and high transport costs through mine-‐mouth power and coal-‐by-‐wire (30-‐60% of delivered coal cost)
Cost ReducTon
h"p://pesd.stanford.edu • Stanford University
Key coal-‐power base targets
32
Bring 90% of all coal producTon under coal-‐power bases by end of the 12th FYP
Establish 10 large SOEs with producTon
capacity over 100 mt each
Establish 10 medium SOEs with producTon capacity over 50
mt each
Coal produc^on reforms and transport expansions aim to make Chinese coal cheaper, which would enable faster demand growth
h"p://pesd.stanford.edu • Stanford University
Outline
1. The Fundamentals: Coal and Climate Change
2. The Markets: Rapid Growth and FinancializaTon of Coal
3. The Epicenter : Chinese Coal Markets
4. Beyond Climate Policy: Addressing Coal in a Post-‐Kyoto World
33
h"p://pesd.stanford.edu • Stanford University
Emissions miTgaTon opTons for coal in the development context
Two MiTgaTon Strategies
1. Subs^tu^on: uTlize less carbon-‐intensive, baseload alternaTves to low-‐efficiency coal
2. Decoupling: uTlize coal technologies that decouple coal consumpTon growth from coal emissions growth
34
Key Criteria: Must be able to provide reliable, secure baseload power
h"p://pesd.stanford.edu • Stanford University
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Cost and Emissions Profiles of Baseload Alterna^ves to Subcri^cal PC
Capital Costs ($/kw)
Emissions (lbs CO2 / MWh)
SubsTtuTon (1): Currently available baseload subsTtutes for subcriTcal coal
35
• Gas makes sense “where you can get it” domesTcally • IGCC makes sense “where you want a CCS call op^on” • Nukes make sense “where you can pay for it and secure it”
Nuclear has no CO2 emissions
Source: US EIA, “Updated Capital Costs EsTmates for Electricity GeneraTon Plants”, 2010. Note: Results are sensiTve to mulTple assumpTons. NETL’s “Cost and Performance Baseline for Fossil Energy Plants” (2010) provides more in-‐depth analysis of coal plant costs and performance.
h"p://pesd.stanford.edu • Stanford University
Decoupling (1): CCS might decouple coal consumpTon from coal emissions
36 Source: Global Carbon Capture and Storage InsTtute, 2010.
• High costs / need for public support
• Regulatory and legal framework for storage lacking
• ArTficially capped power in developing countries prevents cost pass-‐through
• CCS energy penalty harms energy security
CCS is a climate silver bullet, but faces high obstacles
h"p://pesd.stanford.edu • Stanford University
Decoupling (2): Efficiency improvements offer immediate reducTons
37
Coal plant efficiency gains may offer higher near-‐term poten^al for emission reduc^ons than renewables
Source: IEA Clean Coal Centre
21% less CO2
16% less CO2
10% less CO2
40% less CO2
h"p://pesd.stanford.edu • Stanford University
Decoupling (3): Underground coal gasificaTon
• Increases world recoverable coal reserves by 300-‐400%
• Leaves ash underground • Reduces NOx, SOx, mercury
parTculates
• Possible integraTon with CCS and EOR
• Syngas product can be used for diverse inputs (power, transport, chem)
• Early esTmates of cheap costs: 2-‐3$ / mmbtu (without CCS)
• Risk: groundwater contaminaTon
38
Image courtesy of UCG AssociaTon.
h"p://pesd.stanford.edu • Stanford University Map Courtesy of Clean Coal Ltd. Slide courtesy of UCG AssociaTon.
UCG: Old technology, new wave of investment
h"p://pesd.stanford.edu • Stanford University
Conclusions
1. Coal is the world’s fastest growing fossil fuel and largest contributor to new global energy supplies
2. World coal markets are developing along a path similar to oil markets and are connecTng regional markets
3. Chinese coal markets are central to climate change and are now undergoing a radical restructuring
4. Coal should be understood as both the leading cause of climate change – and the leading miTgaTon opportunity
5. Yet climate policy is not adequately equipped to deal with the coal challenge – new approaches are required
6. An porwolio of exisTng and emerging approaches – that are aligned with developing country goals – can be used to address the problem at scale, now
40
h"p://pesd.stanford.edu • Stanford University
Thank You
Contact:
415-‐894-‐0197
41
h"p://pesd.stanford.edu • Stanford University
Wildcards and game changers
• Unconven^onal gas: can the unconvenTonal gas boom be exported and used to displace coal generaTon? – US/China Shale Gas Resource IniTaTve – ~50% of China’s gas resources are unconvenTonal (CBM) (not including
shale)
• Coal to Liquids / Coal to Gas: is coal conversion investment a looming emissions explosion? – China has over 50 BCM of annual CTG capacity by 2015 on the drawing
board (~25% of expected gas supply)
• CCS: Can CCS overcome cost and sequestraTon impediments to become viable? – Will non-‐geological sequestraTon technologies improve prospects for CCS?
42 Source: China CTG esTmates from Michael Parker, based on announcements of planned capacity addiTons in China. NDRC approval pending.
Xinjiang Declared 14th Coal-‐Power Base
43 Source: China Daily, 2008.
• Xinjiang added 250 Bt of proved coal reserves from 2006-‐2010 • Total esTmated resources as of 2011 are 2.19 trillion tons • Peabody recently declared Xinjiang was the “Middle East of coal”
h"p://pesd.stanford.edu • Stanford University
Coal markets are undergoing rapid “financializaTon” similar to oil’s development
44
Coal derivaTves markets are now esTmated to be 3x larger than physically traded internaTonal coal markets
Spot Markets
Global Benchmarks
DerivaTves
h"p://pesd.stanford.edu • Stanford University
Wildcard: CBM Will Likely Come Online Before Shale
Shell Signs Pact with China Xinjiang Government on CBM Development – Pla"s, 9 March 2011.
45
• Shell signed a “Strategic CooperaTon Framework Agreement” to explore and develop CBM with the Xinjiang government
ExploraTon
• WoodMac esTmates CBM will contribute 14% of China’s total gas domesTc supply by 2030 ProjecTons
• CBM downstream prices currently not capped by Beijing Pricing
• But pipeline access for CBM producers has been an impediment Impediments
h"p://pesd.stanford.edu • Stanford University
Global energy supply growth: 2010 update
• Coal now highest share of world energy since 1970: 29.6% • Renewable power gen grew 15.5%, but all renewables are only 1.8% of
global energy supply
46 Source: BP StaTsTcal Review, 2011.
Oil: 3.7%
Nat Gas: 7.4%
Coal: 7.6%
h"p://pesd.stanford.edu • Stanford University
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h"p://pesd.stanford.edu • Stanford University
SubsTtuTon (2): Can China replicate the US shale gas boom?
48
China’s Major Shale Gas Basins and Pipeline System
Source: US EIA, World Shale Gas Resources, April 2011.
Tarim: recoverable reserves es^mated at 583 tcf (16.5 tcm)
No produc^on YET. Produc^on es^mated 10 years out.