Multiple countries

Electricity

In the US and Europe there is no doubt that the role of coal in power generation has been diminishing. In 2016 coal generation fell to less than one-third of total generation in the US, and to just over one fifth in the EU (see chart). Coal has long been a major source of electricity supply in both the US and Europe, but falling reliance on the fuel has pushed it behind natural gas in the US in 2016 (for this first time on annual basis). Similarly in the EU coal is now in third place in terms of its share of power generation, behind renewables and nuclear.

Why has this been occurring? In the US, where power generation from coal has fallen by 38% in volume since 2007, the availability of cheaper natural gas brought about by the boom in shale gas production has caused significant switching from coal to natural gas in the power sector. In addition, regulations imposed by the Environmental Protection Agency (EPA) aimed at improving air quality have contributed to the retirement of coal capacity (over 50 gigawatts (GW) of coal capacity has been retired since 2002 with retirements in recent years partially due to regulations). While natural gas became the leading source of power generation in 2016, renewables in the US (especially solar and wind power) has also been on the rise, further eating into coal's market share. In 2016 solar and wind power accounted for 7% of US power generation, compared with just over 2% in 2010. Renewables generation has surged due to federal tax credits, state level mandates, and plummetting costs. As generation from gas and to a lesser extent renewables has increased electricity consumption in the US has remained flat since 2005, due to the American economy becoming more efficient in its energy use. As a result, the size of the power generation pie has remained the same as gas and renewables are taking bigger slices of it, squeezing out coal in the process.

The election of Donald Trump has raised expectations of a revival in American coal usage, but it is unlikely that coal's fortunes will completely turn around. Repealing federal regulations that the new administration claims has restricted coal production does not change the fact that demand for coal in the power sector will continue to struggle in the face of other competitive pressures. The future of the EPA's Clean Power Plan (CPP) now looks uncertain but even its abandonment will, at best, arrest the decline in coal-fired generation in the long term. The announced closure in early March of the Navajo coal plant, the largest in the US West, by 2019, demonstrates that coal-fired generation will still struggle going forward. Indeed the EIA expects further retirement of 14 GW in coal capacity by 2028, probably a cautious estimate. In abandoning the CPP, the decline in coal's share of generation in the US will slow significantly, but coal is unlikely to regain the market share lost over the last decade. In 2005 coal accounted 50% of US power generation, but by last year this had fallen to less than one-third.

In Europe, too, coal generation has been falling in terms of volume and market share. In 2014 we wrote that a modest boom in Europe's coal consumption had begun to falter, and in fact coal consumption has consistently declined since 2013. This has been largely driven by successive annual falls in EU coal generation, especially in the UK over 2015-16. According to analysis by non-profit research group Sandbag, EU coal generation fell to just over 21% of total generation in 2016, a little more than one-half the share in 1990. Over the 2013-16 period generation from hard coal fell by 29%, while generation from lignite fell by 10%, leading to a fall of 22% overall (an in-depth analysis of this most recent trend in coal generation in Europe is found in a recently released EIU Special Report). The fall in oil-indexed natural gas prices, continued growth in renewables, the impact of EU air quality directives, and the introduction of a carbon price floor in the UK have all contributed to coal generation retreating in Europe.

As in the US, it is also unlikely that the recent trend of falling coal power will be reversed. The UK has pledged to phase out unabated coal power by 2023, and other countries such as France and Finland have pledged to do so as well. Even in Germany, often criticised for not tackling its heavy reliance on coal, has seen its coal generation fall (albeit slightly) between 2014 and 2016. Announced reforms to the EU's Emissions Trading Scheme, along with a proposal to impose CO2 limits on fossil fuel power plants that are eligible to receive capacity market payments to remain operating, will limit the ability for coal generation to regain lost market share. While the EU does not have a policy that directly addresses coal generation, the implementation of the EU's 2020 and 2030 climate and energy targets have set the framework for lowering the emissions intensity of Europe's power system. This will ultimately impact the use of coal in the power sector over the longer term.

As in the US, electricity consumption is also stagnant, so growth in renewables usage, boosted by EU climate and energy targets, are making the market environment tougher for coal utilities as well. Further plant retirements can be expected in the Netherlands, Germany, and Spain, as utilities increasingly focus on de-carbonising the electricity sector. In reflecting this, Denmark's Dong Energy plans to phase out its coal plants by 2023, while Italian utility Enel plans to become carbon neutral before 2050. In several Western European economies coal fired power can be expected to fall modestly over the next two decades. In the UK alone coal's share of generation fell to just 9% in 2016 (a historic low), due to the closure of three plants last year mainly caused by the introduction of a carbon price floor.

In emerging economies, especially in South East Asia, coal generation is growing, although it appears to have stalled in China, and in India targets for renewables deployment have become more ambitious. As far as high-income economies in North America and Europe are concerned, coal will struggle to turnaround the very significant losses seen in the last five years. To a large extent, the structural change characterised by de-carbonisation appears to have become entrenched in most developed economies. One significant risk to this forecast is a sustained and significant rise in natural gas prices, which would slow down coal to gas switching among utilities in the US and Europe. Therefore policy drivers that lock in the trend seen in most recent years, such as carbon pricing, would help to guarantee that its reversal would not occur. Meanwhile the Trump administration's energy policies may significantly slow down the pace of coal's decline in the US, but it will have little impact elsewhere, including in Europe.