Why is Europe Burning More Coal?

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland) - High gas prices and low coal costs are among a number of reasons behind why the use of coal for generating electricity has been making a significant comeback in Western Europe in recent years.

Europe is leading the world in the rollout of renewable energy, from windfarms to solar plants, but the last couple of years has seen coal replace gas as the key fuel in the electricity mix for many countries, despite its high CO2 emissions. This has led to concerns over the Europe being able to meet its strict climate change goals.

The U.S. Energy Information Administration (EIA), using additional data from Eurostat and the International Energy Agency (IEA), pointed out that natural gas consumption in OECD-Europe, in contrast to the U.S., has been generally declining since 2011, while coal consumption has been increasing. Supply and demand factors for both gas and coal, alongside other economic constraints, are to blame.

According to the EIA, OECD European gross domestic product (GDP), which grew by about 1% to 2% quarter-on-quarter through 2010 and 2011, began contracting again by the second quarter of 2012. Reduced economic activity lowered overall demand for electricity, particularly in the industrial sector. In 2011, annual natural gas consumption was 8% lower than in 2010 in OECD-Europe, while consumption of coal was 6% greater. Similarly, the region consumed 2% less natural gas and 2% more coal in 2012 than in 2011.

In addition, production of natural gas in OECD-Europe is declining, down 5% in 2012 compared to 2011, according to the European Commission (E.C.) Coal production decreased less than 1% during the same period. Production decreases, along with declining natural gas imports from Russia, Norway, and Algeria, and rising imports of cheap coal from the United States and Colombia have affected energy consumption patterns in OECD-Europe between 2011 and 2012. As a result, power producers have opted to use coal-fired plants and reduce production in their gas-fired plants.

Industrial Info estimates that up to 25,000-megawatts (MW) of gas-fired plants will be shut down around Europe by 2014. For additional information, see August 30, 2013, article - Europe to Shut 25 Gigawatts of Gas-based Power Plants by 2014.

In the U.K., for instance, coal remained the dominant fuel used for electricity generation in the first quarter of this year, according to statistics on energy trends and prices produced by the Department of Energy and Climate Change (DECC). Its share decreased by less than 1% to 41.2% while gas saw its share fall to 26.3%, the lowest recorded share for 15 years. Several gas-fired plants, according to DECC, are now closed or mothballed and being run at low levels. For additional information, see September 10, 2013, article - Coal Still Dominates U.K. Electricity Mix.

Key factors, according to the EIA, affecting natural gas and coal market prices in Europe include:

Natural Gas:

- Competition for LNG: China, Japan, and South Korea vie with Europe for LNG imports. The latter two countries have historically paid high prices for LNG import cargos. Following the Fukushima disaster in March 2011, Japan has been importing large volumes of LNG to compensate for idle nuclear capacity, which has driven up prices. In addition, rising demand for natural gas in China has encouraged natural gas suppliers to diversify their export portfolios.

- Pricing structure: Much of the natural gas in Europe is still priced based on oil; this is sometimes referred to as oil indexation. The European Commission estimates that about one-half of European natural gas supply is indexed to oil. Moreover, about 80% of Russian natural gas supplies to OECD Europe are linked to oil.

- Norwegian production: Norway is the largest supplier of natural gas to northwest Europe and exports almost all of the natural gas it produces. Norwegian natural gas production levels affect the prices of natural gas in OECD Europe.

- Supply disruptions: Italy and Spain import natural gas from Algeria. Italy also imports natural gas from Libya. Supply disruptions due to regional conflict affect supply and prices at destination. Recently, pipeline flows from Libya to Italy went to zero because of the Libyan civil war.

- Non-uniform pricing. Russian natural gas companies, important providers of natural gas to Europe, often set diverse prices for different European consumers, further reducing the appeal of relying on imported natural gas.

- Storage capacity availability. Pricing for natural gas is more seasonal in Europe than in the United States, and the limited availability of storage capacity can have a pronounced influence on spot prices, especially in northwest Europe.

Coal:

- Abundant supply: The availability of low-priced natural gas in the United States has made coal a less competitive fuel for domestic power generation. As a result, favourably priced U.S. exports of coal have been an attractive alternative to natural gas for Europeans.

- Electric power sector changes: Following the Fukushima disaster in 2011, Germany retired eight nuclear power reactors, which were replaced with a combination of increased output from renewable sources as well as coal for power generation.

- Environmental initiatives: Since coal produces more carbon per unit of heat than natural gas, coal is more affected by a high carbon price. The price of carbon in Europe is currently very low, partly because of a prolonged economic recession in Europe, so many consumers are opting for coal over natural gas. A significant increase in the price of carbon would promote more natural gas consumption and less coal consumption.

There has been some small reversal noted in the coal-gas balance this year. In first-quarter of 2013, natural gas consumption increased 3% and coal consumption decreased 6% compared with the first three months of 2012. The latest shift in fuel consumption trends can, in part, be attributed to the Large Combustion Plant Directive (LCPD) from the European Commission, which forced a number of older coal plants to retire despite profitability, particularly in the U.K..

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