Australian electricity options: coal

20 July 2020

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Ian Cronshaw
Visiting Fellow, Crawford School, Australian National University

Executive summary

Thermal coal (also known as steam coal) is currently the major source of electric power generation globally and in Australia, but its share is falling in many countries. Thermal coal also provides industrial and domestic heat, notably in China.
Metallurgical coal (also known as coking coal) is a major ingredient in steel production, providing both heat and the carbon which is necessary to help convert iron ore to iron and then steel. Unlike thermal coal, metallurgical coal currently has few low-emission substitutes.
Australia is a major exporter of both coal types; our exports account for around 6 to 7% of total global coal use, on an energy basis.

Australian electricity options are short briefings on the principal energy sources and storage options being debated in Australia, including: coal, natural gas, wind, nuclear, photovoltaics (PV) and pumped hydro energy storage (PHES).

The global COVID-19 pandemic and its economic consequences mean that statements and projections about future demand and pricing of energy options may no longer be reliable. Readers should note that some figures quoted in these briefings may pre-date the pandemic.

Globally, the major use of coal is in electricity generation, where its share peaked at over 40% between 2007 and 2013, and it currently accounts for about 38% of generation. The share of coal in electricity generation has been falling steadily in most OECD countries, displaced by natural gas and more recently new renewables. For example, the share of coal in US electricity generation peaked in 2005 at around 50%, and has been overtaken by that of gas in recent years. In China, coal’s share in electricity generation appears to have peaked some years ago, falling from
three-quarters to around two-thirds. India also has seen a modest fall in the share of coal-fired power generation.

Coal also provides industrial and household heat, more commonly outside OECD countries. In China, over half of industrial energy demand comes from coal (dominated by steel making, but also cement). Waste heat from coal-fired power is utilised in industrial and buildings applications (so called combined heat and power).

China dominates coal use, accounting for around half of the world’s coal consumption, up from around a quarter barely two decades ago. OECD countries now only use a quarter of global coal. Up until 2002, China was largely self-sufficient in coal, but in that year emerged as a coal importer, with imports peaking in 2016. However, while this made China the world’s largest coal importer at the time (since overtaken by India) imports typically accounted for less than 10% of China’s coal use. Hence small changes in China’s coal demand and its production (currently being wound back as uneconomic mines close) have major impacts on global coal markets, causing volatility in prices. Similar considerations can be seen in Indian coal use, production and imports. India overtook the US as the second largest coal user in the world around 2015, and in that year was also the largest coal importer, as domestic production struggled to keep up with strong demand growth of 7% per annum.

Coal trade consists of thermal and metallurgical coal, with tonnages of the former growing rapidly since 1990, but at levels of around 1.1 billion tonnes, still represents only around one-sixth of the world’s overall thermal coal use. Metallurgical coal trade at around 300 Mt per annum is almost one-third of total metallurgical coal demand.

The International Energy Agency (IEA) projects, in its new policies scenario, that global coal-fired electricity generation capacity will increase by 63 GW by 2025, with retirements in North America and Europe offset by increases in Africa and the Asia–Pacific. This represents a dramatic slowdown from the rapid rises seen over the last two decades. By 2040, global coal-fired generation increases by around 5% in absolute terms, but falls to around one-quarter of the generation mix. However, in its Sustainable Development Scenario, coal-fired generation capacity falls to around one-fifth of current levels, making up only 5% of electricity generation that is dominated by renewables. The outlook for coal-fired generation is therefore highly dependent on how government policies evolve.

Prospects for Australia

Coal use in Australia is almost completely confined to the electricity sector. Black and brown coal provide around two-thirds of national electricity generation, although this is down from 80% a decade ago as gas and new renewables have become more prominent (see Figure 1 for the trend in coal’s contribution to total electricity generation in Australia). Coal-fired power plants are currently operating in Queensland, New South Wales, Victoria and Western Australia.

Figure1: Proportion of Australia’s total electricity generation from black and brown coal

Source: Parliamentary Library calculations using data from Australian Energy Statistics, Department of Industry, Science, Energy and Resources, Table O1, May 2020. Data for 2018–19 is an estimate.

The high share of coal and gas in the electricity generation mix means that Australia has a high carbon intensity in its power sector, relative to other comparable countries, where low carbon power sources, such as hydro, nuclear and new renewables are more common. Consequently, around 40% of greenhouse gas (GHG) emissions from the energy sector come from electricity generation, and this sector must play a prominent role in any GHG mitigation strategy. In the absence of technologies that can reduce GHG emissions from coal-fired power, this source must inevitably decline if major emissions reductions are to be achieved.

Australia’s large coal reserves have underpinned a major coal production and export industry, with more than 80% of coal output exported. Major markets are in Japan (almost one third), China, (increasing rapidly since 2009), Korea and India. In tonnage terms, exports are split fairly evenly between metallurgical and thermal coal (184 and 210 Mt in 2018–19, respectively), although metallurgical coal is generally more valuable. Some markets for Australian coal exports are mostly metallurgical coal, for example India. Recent coal exports have been worth around $70 billion, with metallurgical coal about $44 billion and the balance from thermal coal.

Figure 2: Distribution of Australian coal resources

Source: Geoscience Australia, Australian Energy Resources Assessment, 2018.

According to the International Energy Agency, Australia dominates world metallurgical coal trade, with two-thirds of the seaborne market, a share likely to increase over coming decades. Almost one-fifth of global metallurgical coal output is Australian. The picture differs for thermal coal: in 2017 Australia provided more than 20% of world thermal coal exports, about half that provided by Indonesia, the largest thermal coal exporter, with Indonesian exports recovering in 2017 after falling sharply in 2016. Indonesia now seems to be the swing supplier of thermal coal, especially in the Asia-Pacific region, as it can relatively easily increase output. Japan buys about 40% of Australia’s thermal coal exports, with China and Korea also major buyers. While Australia provides more than half of Japan’s thermal coal use, we provide only about 1% of China’s thermal coal. According to data published by the Office of the Chief Economist, Australian contract metallurgical coal prices are estimated to have averaged $US201 per tonne in 2018–19, with thermal coal around $US101 per tonne, although prices are very volatile, for reasons noted above.

Pros and cons

Coal deposits are quite widely distributed in the world and there is no global shortage expected in the medium term. Compared to other energy sources, most coal is cheap and, in some places, relatively easy to extract. In many countries, including Australia, coal combustion is the main source of electrical power and, in particular, of constant baseload power. However, there is growing opposition to further investment in coal-fired power plants and some experts see thermal coal use in developed countries as certain to decline in the next few decades, with few new stations being built to replace an aging fleet. The debate around coal as an energy source tends to focus mainly on its carbon dioxide emissions, but concerns extend further than that.

Coal generates significantly more carbon emissions per amount of energy generated compared to other fossil fuels, while renewables and nuclear generate no carbon dioxide in the course of generation (although they do generate emissions in manufacturing and decommissioning activities).

Coal combustion also produces sulfur oxide gases, nitrogen oxide gases, ash, particulate matter, and traces of potentially toxic metals (such as arsenic, selenium and mercury). Particulate matter can be a health concern when inhaled, especially when smaller than 2.5 microns, and there are concerns about the dispersal of coal dust when coal is transported in uncovered rail wagons. Coal combustion can also generate black carbon, which can settle on snow or ice and accelerate local warming.

Modern coal-fired power plants have more effective emissions control and combustion conditions that result in fewer pollutants being emitted to air, compared to older plants. A consequence of uncertainty in energy policy—especially carbon pricing—is that Australia’s fleet of coal-fired power plants is aging and may not be as efficient or as environmentally friendly as more modern facilities. The Finkel Review noted that investors ‘have signalled that they are unlikely to invest in new coal-fired generation’.

Other issues relate to the environmental effects of coal-mining, including effects on surface water and groundwater. However, despite these concerns, the number of coal-fired power plants continues to grow globally, and coal remains a major part of Australia’s electricity supply at present. In addition, metallurgical coal currently remains essential in the manufacture of steel.

Australian electricity options: coal

Executive summary

Prospects for Australia

Pros and cons

Further reading