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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


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

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Nuclear Renewables Hydro Crude Oil Gas Coal

Mtoe

World Incremental Energy Supply 2000-‐2009

Coal dominates global energy supply growth

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0.4%

Compound Annual Growth Rate

7.8% 2.4%

1.1% 2.1%

3.9%

Source: IEA


Coal has the greatest share of world energy since 1970

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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

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Coal is the single largest source of global CO2

Coal; 43%

Oil; 37%

Gas; 20%

2009 World CO2 Emissions by Fuel


CO2 from developing world coal is the biggest climate challenge

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1990 2008 2020 2030 2035

Billion

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


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

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Outline



3.  The Epicenter : Chinese Coal Markets


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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

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Source: Foreign Affairs, 1979.


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.


Global trade is connecTng previously disconnected markets

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•  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


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


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


New EIA global shale gas study idenTfies global shale deposits

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•  Newly iden^fied shale gas increases global technically recoverable gas reserves by 40%


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


Outline



3.  The Epicenter : Chinese Coal Markets •  Power sector reform: diversifying away from coal •  Coal sector reform: making coal cheaper


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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.


Expansion of China’s power sector drives coal demand

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1000 1979

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GW

Wind and other renewables

Nuclear

Hydro

Coal

Source: China NBS, CEC.


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 �


Outline





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China’s power market can’t bear the cost of coal

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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


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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% Coa

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Cap

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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





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Chinese coal prices highest in the world

27 Source: Reuters

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$ / metric tonn

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Qinhuangdao Benchmark Coal Prices

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Transport bo"lenecks dramaTcally increase costs

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•  Current railway expansions will add equivalent of 50% of current coal transport capacity by 2015


Beijing’s soluTon: coal-‐power bases

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14. Xinjiang


Key coal-‐power base policy objecTves

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“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


Key coal-‐power base targets

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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


Outline



3.  The Epicenter : Chinese Coal Markets


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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

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Key Criteria: Must be able to provide reliable, secure baseload power


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Advanced NGCC Advanced Pulverized Coal IGCC Advanced Nuclear

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

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•  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.


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


Decoupling (2): Efficiency improvements offer immediate reducTons

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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


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

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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


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

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Thank You

Contact:

[email protected]

415-‐894-‐0197

41


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”


Coal markets are undergoing rapid “financializaTon” similar to oil’s development

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Coal derivaTves markets are now esTmated to be 3x larger than physically traded internaTonal coal markets

Spot Markets

Global Benchmarks

DerivaTves


Wildcard: CBM Will Likely Come Online Before Shale

Shell Signs Pact with China Xinjiang Government on CBM Development – Pla"s, 9 March 2011.

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•  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


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%


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Million Metric Tonn

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Chinese Coal Imports and Exports

Imports

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SubsTtuTon (2): Can China replicate the US shale gas boom?

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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.

ut energy symposium - richard morse - nov 3sites.utexas.edu/energyinstitute/education/ut... ·...

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