At the heart of the European community lies a sooty black lump that has begun to beat with life. Months of uncertainty and worry over the fate of the Eurozone, coupled with sharply falling coal prices, have induced some European utilities to increase their overall share of thermal coal in electricity generation.
At the end of May, the UK Department of Energy and Climate Change announced that coal consumption in Britain had risen to 46 percent of Q1 total energy generation, the highest level in six years. Both Germany and Spain have also reported higher coal consumption in recent months.
Despite trenchant efforts to reduce its reliance on fossil-fuel generated electricity, Germany in particular is expected to increase its coal consumption. Its coal use is expected to rise 13.5 percent this year as it searches for the cheapest path to replace 12.3 gigawatts of idled nuclear power.
Coal prices fall
As Europe battles through its debt crisis, coal prices have tumbled. Amsterdam-Rotterdam-Antwerp and South African Richard’s Bay spot coal prices have been relatively steady at US$88.50/tonne and $89.75/tonne respectively, but have fallen precipitously from the $120/tonne level seen in September 2011.
Between April and May, European power prices fell 12 percent and are down almost 26 percent for the year as a whole, according to Platts data. Reuters has stated that electricity from coal for sale in 2013 is now more than 16 euros per megawatt-hour, more profitable than generating it from gas.
“European power and gas price movements in May were pressured by differing factors,” said Henry Edwardes-Evans, Platts’ editor. “Last year European power was buoyed by Germany’s decision to close nuclear reactors, but oversupply and weak demand have since re-asserted themselves.”
Factoring in political components, the price of emissions permits under the EU’s Emissions Trading Scheme have gone the way of energy prices and electricity consumption across the region. With the cost of emission permits falling, German and UK utilities are drawn to coal’s lower overall costs compared to Europe’s growing solar and wind-generated electricity sources.
Fears pervade Eurozone
As a critical creditor in the Eurozone community, the German economy is suffering the consequences of being a last line of defence for embattled Greek and other European economies.
“We will see a flattening this year. Growth is slowing as orders slow, but we should still see mild growth,” Arndt Kirchhoff, head of the Mittelstand division of the Federation of German Industry, told Reuters this week.
Germany’s flagship industrial energy consumer, the auto sector, has also slowed, with car sales slipping in May by 7 percent after a 3 percent gain in April.
“Europe should quickly reach a common strategy how to solve the debt crisis,” the German auto industry’s chief lobbyist, VDA President Matthias Wissmann, told Reuters.
For some coal companies the impacts have already begun to show. Shares in Poland’s second-largest publicly-traded coal producer, Lubelski Wegiel Bogdanka (FWB:UXX), reportedly fell to a four-month low due in great part to low coal prices.
Bucking the trend
The dynamics of energy production and consumption in the US and Europe as they relate to the coal industry have been quite different in recent months. While both areas are suffering from struggling economies, US coal consumption has been more directly impacted by the boom in natural gas production.
The European reversion to coal has turned the North American story of swapping coal for gas on its head. Coal consumption by UK utilities increased by 20.2 percent over the last quarter while gas consumption fell to 25 percent, its lowest share in 14 years.
The transition is a sharp contrast to coal’s reversal of fortunes in the US, where power plants increased natural gas use by 40 percent this past March compared to a year earlier. Coal’s share fell by 20 percent over the same period, according to the US Department of Energy.
“This trend is likely to persist in the short term as low natural gas prices make natural gas-fired generation more economical,” the department stated.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.