The boom in fossil fuel prices is not what it might seem

Since breaking above $100 a metric ton in May, coal prices at Australia’s Newcastle port – a benchmark for Asia, which consumes nearly three-quarters of the world’s soot – rose to a record $173.10 a tonne on Thursday. has reached. The major regional contract for liquefied natural gas, the Japan-Korea marker, is in the same region, reaching $18.02 per million British thermal units on the same day. That’s not a record, but it’s the third-highest spike ever for LNG, usually during the low season for a commodity, which rises amid winter heating demands.

If you think of futures prices only as a vote on the way forward for the commodity in question, it should be a concern for a world that needs to decarbonise. However, this approach is simple. Commodity prices do not rise and fall depending on the level of demand, but as a result of a mismatch between demand and supply. a world in which fossil fuel consumption On a prolonged downtrend, we can still see good prices for fossil fuels in any period when supply falls faster than demand.

There are many sources of current price spikes. One is to divert Russia’s gas from Europe to Asia, while the other is China’s coal-to-gas switch. Then there is the relatively hot, dry summer which reduces hydro production and increases the pressure on the air conditioner. Most important, however, is bouncing back from the battle of the 2020 economic disease, which has ramped up electricity consumption – and with it, the dirtiest forms of generation.

Flat or declining electricity demand has been one of the biggest drivers for the increase in the energy share of renewable energy over the past decade. Adding wind and solar, capable of supplying 5% of a country’s grid electricity, can lead to a sharp reduction in emissions if production remains stagnant or falls. If, however, grid usage climbs 5%, all that new renewable capacity will make no difference to emissions. If it climbs 14% year-on-year – as China did in July – it is likely fossil fuels that make up the shortfall.

That situation could also turn the economic losses of coal and gas in its favor. For years now, the growth of renewable energy with zero fuel cost is putting thermal generators out of use, taking a serious blow to their economics. Fossil power plants need to be running 60% to 80% of the time to make a profit, but the last time China’s fleet reached that level was in 2011. For much of 2019 and 2020, that figure was well below 50%.

However, very little use means there is enough capacity to turn gas when demand starts to rise. Delivering additional megawatt-hours from thermal generators operating at half capacity only requires finding some fuel in global markets for coal and LNG. If you want to increase wind and solar generation beyond current levels, you will need to build a new power plant.

That sounds like bad news for decarbonization — and in the short term, it is. Still, the current price hike reminds generators why thermal power’s days are numbered. At current Newcastle coal prices, even the most efficient power plant will pay more than $60 per megawatt for its fuel. In the biggest markets of China and India, new wind or solar power generation costs half or even less. Even renewable power plants with batteries to provide electricity on demand are competitive with fossil fuels at current prices.

This is the final reason why the world will move away from the historic role of carbon as the solid foundation of power systems in the coming decade. Renewable production is priced at installation, and does not vary in cost over a multi-decade project life. This gives great certainty to grid operators whose revenues are usually fixed by the government, especially when compared to commodities like coal, whose prices can triple in 12 months as they did in the past year. .

As lenders withdraw finance from fossil fuel projects and major producers shift to lower-carbon alternatives, those problems will only be exacerbated, with supply-demand mismatches leading to increasingly volatile fuel prices. Will wreak havoc with the cash flow of the generator. Stability and certainty have always been valuable qualities in business. The very uncontrollable euphoria of the energy fuel markets now contains the seeds of their own downfall.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, Wall Street Journal, Financial Times and The Guardian.