(John Kemp
is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON,
June 23 (Reuters) - Two-thirds of the world's already discovered reserves of
oil, coal and natural gas must remain unburned if the rise in average global
temperatures is to be limited to 2 degrees Celsius by 2050, according to the
International Energy Agency.
But coal
miners and oil and gas companies
round the world allocated $674 billion to finding even more reserves and new
ways of extracting them in 2012/13. Much of this investment risks being wasted,
according to the Carbon Tracker Initiative, which is campaigning to get
investors to think again. ("Unburnable carbon 2013: wasted assets and
stranded capital")
"It
is possible that much of this additional spending would prove fruitless. At
worst, these assets might be 'stranded' forever," Martin Wolf, the
celebrated chief economics commentator of the Financial Times, wrote in a
sympathetic review recently. ("A climate fix would ruin investors"
June 17)
Carbon
Tracker Initiative is part of a broader divestment movement pressing
universities, pension funds and other socially responsible investors to boycott
shares and loans in fossil fuel companies to force them to leave the oil, gas and coal "down there".
("Stranded assets and the fossil fuel divestment campaign: what does
divestment mean for the valuation of fossil fuel assets?" Oct 2013)
The
divestment campaign has drawn a swift response. Major oil and gas companies such as Exxon and Shell (LSE: RDSB.L - news) reject the claim that
their exploration and development spending is being wasted. "We do not
believe that any of our proven reserves will become stranded," Shell wrote
in a letter to investors on May 16.
"While
the stranded asset notion may appear to be a strong and thought-through case,
it does have some fundamental flaws, and there is a risk that some interest
groups use it to trivialise the important societal issue of rising levels of
carbon dioxide in the atmosphere," the company complained in a detailed
response.
GAMBLING ON INACTION
There is
an obvious inconsistency between companies continuing to invest in developing
more fossil fuels while governments maintain they are still committed to the 2
degree target.
According
to Wolf: "Something will have to give: either the world will abandon its
pledge to keep emissions below the level thought to produce a temperature rise
of 2C, or the fossil fuel companies are holding stranded assets and investing
in unusable ones. Investors are implicitly betting on the former
possibility."
He
concluded: "Major energy producers do not believe governments will do what
they promise. They envisage a very different and quite unrevolutionary energy
future in which the reserves they now possess and those they plan to develop
will all be burnt."
Wolf is
right about the contradiction between investment policies and climate targets.
It is more likely the world will miss the 2 degree target than that fossil fuel
reserves will be stranded.
PUTTING COAL BEYOND USE
Rather
than oil or gas, the primary target of the divestment campaign is coal, which
emits far more carbon dioxide when burned for electricity production.
"Coal
companies appear far more vulnerable than oil and gas," according to
researchers at Oxford University's Stranded Assets Programme. "Coal not
only contributes to climate change but also releases harmful pollutants with
short-term and visible, health and environmental consequences."
In the
first phase of the divestment process, concerned investors are likely to begin
by liquidating their holdings in coal companies, the Oxford researchers
explain, before moving on later to oil and gas producers.
Several
prominent U.S. universities and European pension funds have already sold their
shares in coal companies.
If the
total amount of carbon that can be burned in the next few decades is
constrained by an overall "carbon budget", and coal is the most
polluting fossil fuel, it might seem to make sense to put coal reserves off
limits first.
Some of
the big oil and gas companies have quietly supported this idea, hoping to
replace dirty coal with clean-burning gas and bump up demand for their own
products in the process.
The
unspoken alliance of climate campaigners and gas companies appears to have
convinced the Obama administration.
Cutting
coal consumption and replacing it with gas is the central objective of new U.S.
regulations on power plants at home. ("Regulatory impact analysis for the
proposed carbon pollution guidelines for existing power plants" June 2014)
And the
U.S. Treasury has stated it will not provide financial support for any new
coal-fired plants in poor countries. ("Guidance for U.S. positions on
multilateral development banks engaging with developing countries on coal-fired
power generation" Oct 2013)
COAL REMAINS INDISPENSABLE
The
stigmatisation campaign against coal, in the words of the Oxford researchers,
is already well underway and has notched up some notable early successes.
Recent
successes in developing shale gas and oil have led some campaigners to imply
the world could do without coal.
But the
effort to put coal off limits is doomed to fail. Coal resources will remain an
essential part of the energy mix far into the future.
Coal
accounts for roughly a third of known fossil fuel resources (excluding highly
unconventional resources such as methane hydrates which are unlikely to be
developed in any foreseeable timeframe).
Gas and
oil appear much more abundant than before thanks to the shale revolution. But
they would start to look scarce again if coal was put off limits and the entire
power generation sector switched to gas.
On a
global scale, switching entirely from coal to gas would put a tremendous strain
on gas supplies and push prices sharply higher. It would be a windfall for gas
companies but not for everyone else.
Coal also
has important benefits for energy security. Coal reserves are much more widely
distributed around the world than the other fossil fuels. Major developing
economies with fast-growing energy demand, including China and India, have
abundant coal resources but relatively little oil and gas.
Shale oil
and gas could change that calculation, since they are more widely distributed
than conventional oil and gas, but their widespread development still lies in
the future.
In the
meantime, coal is cheaper than oil and gas, available from a broader range of
suppliers, and the major emerging economies have more of it at home. Coal is
therefore vital to energy security in developing economies.
For these
reasons, coal has been the fastest-growing source of energy in the 21st
century, driven by growth in emerging markets. Coal is the second-largest
source of primary energy after oil and the largest source of electricity.
"Coal
has been, is and will be the backbone of modern electricity and the bedrock on
which the modern world is built," according to the World Coal Association.
("The public image of coal: inconvenient facts and political
correctness" May 2014)
The trade
association has an obvious interest in promoting the future of coal, but that
does not make its claims any less true.
There is
no conceivable energy future over the next 30 to 40 years in which coal does
not play an enormous role.
The
divestment campaign, however well intentioned, will therefore fail. While it
might shut down some of the ageing U.S. coal mines in Appalachia and Kentucky,
it will not dent the developing world's prodigious demand for coal-fired power.
CLEANER AND MORE EFFICIENT
If coal
is set to remain a big part of the energy mix, however, the way it is burned
will have to change. Coal power plants in China and other developing economies
are creating killer smogs, which are poisoning the population as well as
spewing billions of tonnes of greenhouse-causing carbon dioxide into the
atmosphere.
In
future, coal must be made to burn more cleanly (to cut air pollution) and more
efficiently (to reduce the amount of greenhouse gas emitted for every
kilowatt-hour of electricity generated).
In both
cases, the challenge is to bring the whole fleet of coal-fired power stations
up to the standards of the best.
Even in
the United States, more than half of coal-fired power plants are over 40 years
old. China and India, too, have lots of very old facilities. Most of these old
plants are too small to reach maximum efficiency and employ outdated
technology. ("Focus on clean coal" Nov 2006)
The
average power plant in the United States or China achieves a thermal efficiency
of just 33 percent. For every three units of energy contained in the fuel
burned in the plant only one unit of usable electrical energy is delivered to
the grid. In India, the percentage is even lower.
But
modern plants built on a scale of 500 or even 1,000 megawatts, with
ultra-supercritical boilers, can achieve thermal efficiencies of 40 percent or
more, burning less coal to produce the same amount of power.
Even
higher efficiencies are possible if instead of burning the coal directly it is
gasified and the gas is then used in a combined cycle system (first driving a
gas turbine and then a steam turbine). Integrated gasification and combined
cycle plants are tricky to build and operate but could achieve thermal
efficiencies of 45 percent.
China,
India and even the United States are now building power plants that are larger,
far more efficient and with better pollution-control technology. Modern
coal-fired power plants can make a contribution towards slowing climate change,
in combination with more use of natural gas, renewables such as wind and solar,
nuclear power, and energy efficiency measures on the demand side.
The
question is how to shut down the fleet of old power plants that fall far below
these standards. "To reduce emissions, replacement of the oldest plant
should be a high priority, but it is rarely economic, and electricity demand
growth dictates that these plants often remain open," the International
Energy Agency explained in 2006
In the
United States, the Obama administration is now attempting to force these old
power plants to shut or undertake expensive upgrades by introducing strict
rules on pollution and carbon emissions.
China,
India and other developing countries will eventually have to overhaul their own
older coal-fired plants if they are to enjoy clean air and contribute to global
efforts to limit climate change.
The
realities of the energy system mean there has to be a future for coal.
Even in
the United States, with its shale gas boom, coal is still expected to account
for 30 percent of power generation by 2025, down from 37 percent currently. In
Asia, coal's share is currently much higher and cannot conceivably be replaced
by gas.
To limit
the impact, however, coal will have to be burned in power plants very different
from most of those in existence today.
Rather
than trying to shut down the coal industry, campaigners would be more effective
if they focused on trying to modernise the electricity sector to use newer,
larger, cleaner and more efficient power plants.
