What to Watch in 2014: Policy Developments That Will Shape the Coal Industry

By Aleksandra Tomczak Policy Manager, World Coal Association for Cornerstone

With around 40 national elections, representing 42% of the world’s population and more than half of its GDP, 2014 could be one of the most significant policy years on record.1 New governments, policies, and regulations expected over the year will influence the policy environment for the energy and mining sectors. Bearing the highest potential for change are this year’s general elections in India, which many experts believe could finally unlock the country’s economic potential and further increase coal-based energy demand.

2014 will also be an important year for clean coal technologies, with Boundary Dam, the world’s first pulverized coal-fired power plant operating with commercial-scale CCS technology, scheduled to start operating officially in the early spring.

Largely based on interviews with industry experts, this article looks at the most important developments of 2014 for the coal industry, including the carbon tax repeal in Australia; coal demand prospects in China, India, and Southeast Asia; new emissions performance standards for coal plants in the U.S.; the negotiations for a 2030 energy and climate policy framework in the EU and South Africa; and potential production restrictions in several coal-producing countries.

Carbon Tax Repeal in Australia

Policy expectations for 2014 in Australia center on the promises made by the Liberal National Coalition during last year’s general elections. The new government’s plan, and one of the main points of last year’s election manifesto, is to repeal several flagship Labor policies, including the carbon tax and the mineral resource rent tax. The repeal is expected to take place as soon as the new Senate takes office in July 2014. Although the results of the Senate vote on carbon tax cannot be guaranteed, the Chief Executive of the Minerals Council of Australia (MCA), Brendan Pearson, believes it is most likely that the Tony Abbott government will succeed in gathering the necessary support from the independents.


Australia’s government, led by Tony Abbott,
is reviewing energy policy and aims to replace the carbon tax.

A clear priority for the new government has been to replace the carbon tax by an Emissions Reduction Fund, which will be based on tenders for projects designed to reduce carbon emissions. “This new approach to reducing GHG emissions is a step in the right direction, introducing an incentive based approach, as opposed to a punitive approach introduced by the carbon tax legislation,” says Pearson.

The Abbott government is also currently reviewing Australia’s energy policy. The Department of Industry is expected to publish an Energy White Paper in September. As part of the energy review, the Australian government is likely to propose a mechanism for streamlining environmental approvals at the federal and state level. The MCA is hopeful that this proposal will address the problem of delays in obtaining environmental approvals—a problem which increases the costs for coal in Australia.

Also under review is the renewable energy target that binds Australia to a 20% share for renewables by 2020. The Australian government is considering postponing the target to 2025, with a decision on this issue most likely to occur in the first half of 2014.

In China Coal Continues As the Key Source of Energy

New regulations and policy initiatives in China in 2014 can be expected to reflect the priorities set in China’s 12th Five-Year Plan, including “higher quality growth”, which includes a stronger focus on environmental protection, climate, and energy efficiency. However, despite stricter environmental standards, China’s coal demand is expected to increase by almost 20% over the next five years.2

By the end of 2014, China is expected to finalize all of the seven pilot emission trading schemes it announced in 2011. Once finalized, China’s emissions trading schemes will cover about 7% of the country’s total greenhouse gas emissions, in Shenzhen, Beijing, Shanghai, Tianjin, and Chongqing, as well as in the Guangdong and Hubei provinces. At the moment, allowances are allocated for free and cover 10 different industries, including coal-consuming plants. Under the trading program, companies that produce more than their allocated share of free emission allowances have to buy additional allowances from the market. As of January 2014, carbon prices in China ranged from 51 RMB (US$8.3) in Beijing, to 26 RMB (US$4.2) in Tianjin, to 31 RMB (US$5.0) in Shanghai.

2014 will also see new clean air targets. Early this year Zhou Shengxian, Minister of Environmental Protection, announced that the 2014 reduction target for nitrogen oxides will be set at 5%, a level much more aggressive than in previous years, according to media reports. Minister Zhou Shengxian also announced a separate national emission reduction target of 2% for the other major pollutants, such as sulfur dioxide.3

Despite new regulatory initiatives, China’s annual thermal coal consumption is projected to grow from 2277 Mtce in 2012 to 2669 Mtce in 2018, a 17% increase. The IEA also points to potential coal demand growth coming from coal conversion projects—a “sleeping giant” of Chinese coal demand. In fact, with about 325 Mtce of planned coal-to-gas, coal-to-liquids, and coal-to-chemicals projects, coal conversion could be a source of huge coal demand growth in the future.

The Year That Could Unlock India’s Economic Potential

The policy agenda in India will be dominated by general elections that take place before the end of May. According to regional experts, regardless of the outcome of the elections, public opinion will place tremendous pressure on the new government to deliver economic growth and create jobs. If the Indian National Congress Party, currently in power, is ousted by the Bharatiya Janata Party (BJP), we are most likely to see a more pro-business environment in India. The BJP’s presidential candidate, Narendra Modi, earned himself a name for engineering the economic miracle of the State of Gujarat where he served as the Chief Minister.


In 2014 public pressure and/or changes at the executive level
of government could lead to greater growth in India.

IEA analysis shows that higher economic growth in India will go in tandem with higher energy demand and higher coal imports. India is also set to pass China as the world’s largest importer of coal soon after 2020.  With power generation based on coal and a population of over one billion people, including over 300 million with no access to electricity, higher economic growth in India would have a huge impact on the international coal industry.

Experts say that India needs a comprehensive plan to unlock its economic potential because the current infrastructure is simply insufficient to address India’s developmental needs. This will mean better railway and port capacity and necessary reforms to the energy sector. For the coal mining industry in India, change would have to bring private-sector investment and make environmental planning more effective to speed up investments, while also respecting the rights of local communities.

Energy Affordability and Security Top Priorities in Southeast Asia and Japan

Affordability and security of energy supply top the energy policy  priorities for  Southeast  Asian  governments,  according to a special report on the region published by the IEA last year.4  This means that policy and investment decisions to be taken in Southeast Asia over the coming years will result in  a  spectacular  growth  in  coal-fired  power  plant  generation capacity—from 25 GW today to 160 GW in 2035. These capacity additions will increase regional demand for coal by 300%, according to the IEA report. Most of the new coal-fired power plants are expected to be built in Indonesia, Vietnam, Thailand, Malaysia, and the Philippines; in these countries thermal coal demand will grow by 113 Mtce until 2018, with 7.3% average growth per year.4

Energy security is also a key concern for Japan. This year Japan will review its basic plan for energy which will define the role of various energy fuels and technologies in the country’s long- term energy mix. As of January 2014, all 48 nuclear reactors in Japan were still shut down, among which 16 were being examined for potential reopening. “The current generation capacity available is insufficient to meet the expected maximum demand of electricity during peak season,” says Shintaro Yokowawa, Deputy General Manager at the Federation of Electric Power Companies of Japan. He has argued that coal and clean coal technologies will have to play an important role in the new document, delivering an affordable and secure energy mix in Japan.

Indonesia Considering Higher Royalties and Production Restrictions

The policy and regulatory environment for coal mining operations and coal use in Indonesia will be strongly influenced by this year’s parliamentary elections in April and the presidential elections which will follow in July, with a possible runoff in September. A new president will be appointed in October, the current president having reached his term limit, and a new cabinet will be formed in the latter part of the year. It is expected this will include a new Minister of Mines and Energy.

According to regional experts, the electoral campaigns will be influenced by brewing nationalism and pressures from civil society to make better use of Indonesia’s natural resources for the benefit of Indonesians. These aspects are likely to affect the environment in which coal companies operate.

Restrictions on coal production and coal exports, and increased royalty rates, have already been discussed at the national government level and could emerge as key points in the electoral campaign. In fact, regardless of the outcome of the elections, coal miners in Indonesia already expect some sort of restrictions to be introduced in 2014—most probably production based. On the table is also an increase in the royalties paid to provincial and federal governments by companies that produce from coal mining leases, known as IUPs. Current royalties for IUP producers range from 5% to 10%, depending on coal quality, and rates possibly could increase to as much as 10–13.5%.

Domestic  electrification  efforts  and  the  desire  to  extend the  lifetime  of  Indonesia’s  coal  resources  are  among  the key motives behind the idea to restrict coal production or exports. As more coal-fired power plants are being built to address energy poverty, still affecting 66 million people living in Indonesia, the proportion of coal destined for the export market could drop from the current 80%. Currently the government is working through its Customs Department to better register and control exports, particularly those of the small- scale miners who often ship from local ports. It is expected that this program will result in further monitoring of, and a possible restriction on, coal exports.

Risks of Resource Nationalism in South Africa, Energy Poverty Still a Challenge

With the release of an updated 2030 roadmap for the electricity sector and the possible passing of amendments to the Mineral and Petroleum Resources Development Act, 2014 is certainly an important year for the coal industry in South Africa.

Capetown shown at night
Despite a growing GDP and 25% of South Africans having no access,
a doubling of electricity prices is keeping demand flat.

The Integrated Resource Plan for Electricity for 2010–2030, most likely to be announced in the first half of the year, will define the contribution of various energy technologies and fuels toward incremental energy supply in South Africa. The current draft of the plan prescribes additional coal-fired generation capacity of 2450 MW, in comparison to 11,230 MW from gas and 13,070 MW from solar energy, indicating a desire to diversify an electricity mix in which coal currently supplies 90% of the country’s electricity.

A higher share of more expensive gas-fired and renewables- based power generation could be problematic for the South African economy and consumers, says Ian Hall, General Manager at Anglo American Thermal Coal.  “South Africa is already experiencing unprecedented hikes in electricity prices—a 200% increase since 2008.”  This,  together  with low annual GDP growth rates of around 2% and aggressive demand reduction initiatives, has contributed to electricity consumption remaining flat for the past three years, despite up to 25% of the population not having access to electricity.

The issue of affordable and reliable energy could also be an important theme of the forthcoming general elections as companies and households face restrictions on their energy demand and many have had to drastically reduce their energy use due to rising costs.

The South African government is also expected to adopt a number of important amendments to the Mineral and Petroleum Resources Development Act. The proposed amendments introduce a new category of “strategic minerals”, which could be made subject to export and price controls. It is unclear whether such a declaration could result in coal being subjected to export and price controls. According to Hall, the proposed amendments could discourage future investments in coal mining in South Africa until the full effects of the changes are known, as investors would run the risk of having their assets declared strategic, which may mean potential price or export restrictions on coal produced.

EU Debates 2030 Climate Targets, Proposes New Environmental Standards

Companies operating in the energy sector in the European Union (EU) are likely to see the next 12 months dominated by discussions around the new Energy and Climate Policy Framework for 2030, as well as new environmental standards proposed as part of the Clean Energy Package. For the coal industry, it is not climate targets, but environmental regulations, that are likely to be most challenging.

New environmental standards for coal-fired power plants and smaller coal-fueled boilers could prove challenging for the position of coal in the EU. The three key initiatives to watch are:

  • More ambitious definitions of best available technologies (BAT) for controlling the emissions of various pollutants from large coal plants
  • New environmental standards for medium combustion plants, such as heat-generating boilers
  • Tighter limits on pollutant emissions allowed for each of the EU member states

According to Bernd Bogalla, Head of European Affairs at the German Hard Coal Association, the revision of BAT standards for large combustion plants could result in more ambitious technology requirements on all new coal-fired power plants in the EU. A new standard for mercury emissions, which were not covered by previous EU rules, has also been discussed, but this falls outside the scope of current legislation.

Also problematic could be two other pieces of legislation targeting smaller combustion plants and defining emission limits per member state.  Until now medium combustion plants in Europe have only been subject to national regulations. According to EURACOAL, small heat producers using coal might find it difficult to comply with any new EU rules, while the newly proposed national emissions ceilings might trigger new regulatory action against large point-source emitters, such as power stations, given the political reluctance to tackle emissions from transport.

Also on the European Commission (EC) agenda is a proposal for a 2030 Climate and Energy Policy in January this year. The proposal includes a binding target for greenhouse gas emissions reduction of 40% by 2030, and a non-binding target for a 27% share of renewable in the EU energy mix by 2030. The package also includes a proposal to reform the EU’s Emissions Trading Scheme.

The EC would like to see all elements of the package finalized in 2014. However, with the growing controversy around the costs of the EU’s climate policies and the forthcoming European Parliament elections, reaching any final decisions within that timeframe will be challenging.

More than any other issue, the economic competitiveness of the EU’s industrial sectors could set the tone for the negotiations. Until now, companies in EU member states have been granted some relief from the costs of decarbonization. According to Brian Ricketts, Secretary General of EURACOAL, the Commission proposes to continue this relief for the energy-intensive sectors, but an EC probe into Germany’s energy subsidies could see other sectors in the country facing higher costs with the growing burden of renewable energy subsidies, which runs to billions of euros each year.


2014 EU elections will result in new members of the European Parliament.

EU elections scheduled for May 2014 could have an impact on both energy and climate policies. The elections will result not only in new members of the European Parliament from all EU member states but also new commissioners (ministers) and a new president of the European Commission.

U.S. EPA Leading the Charge on Coal

In the U.S., the policy environment for power generation and mining activities is going to be shaped by U.S. Environmental Protection Agency (EPA) regulatory action.

Among the most debated EPA regulations is the rule which will limit CO2 emissions from new power plants. Proposed in 2012 and expected to be finalized this year, the rule is currently being challenged at the state level and in Congress.

The EPA is now also expected to propose guidelines for states to develop CO2 limits for existing plants. Although the proposal is anticipated before July this year, it is difficult to gauge in which direction the EPA will go with regulations governing existing plants, says Alex Bond, Director of Air Quality at the U.S. National Mining Association.


The U.S. EPA, led by Gina McCarthy,
is expected to shape power generation regulation in 2014.

With upcoming midterm elections scheduled in November, the Democrats are likely to see their power decline in the U.S. Congress. While it is possible that under a Republican majority the House of Representatives and the Senate could decide to go against the EPA’s rule on CO2 emissions from new power plants, according to Alex Bond such moves are unlikely to succeed given the veto power held by the White House.

Climate policies are not the only source of concern for the coal industry in the U.S. 2014 will see the finalization of a number of other pending EPA regulations such as the federal effluent limitation guidelines and a proposal for a rule governing the handling of coal ash. Compliance costs associated with these rules for coal-fired power plants could be significant.

New  water  quality  regulations  could  also  directly  impact mining  operations  in  the  U.S.  “We are seeing escalating legal and regulatory activity under the federal Clean Water Act that is making it more difficult and costly to mine coal in the U.S.,” says Amanda Aspatore of the U.S. National Mining Association.

First Test Case for the World Bank’s New Energy Strategy

2014 will see the first test case for the World Bank’s new energy strategy, which includes a decision to limit financing for coal-fired power plants to “rare circumstances”. In fact, at the end of 2014 the World Bank is expected to take a final decision on whether to finance a coal-fired power plant in Kosovo—it will be the Bank’s first decision relative to a coal project since the adoption of its new energy strategy.

The project would see the replacement of a 45-year-old plant, considered to be one the biggest emitters in Europe, with a more modern and reliable plant, and retrofitting a 25-year-old plant to bring it into compliance with the EU environmental standards. According to earlier World Bank analysis, the proposed new plant “is the least expensive thermal option, even when the relatively higher environmental costs are priced in”.5

Milton Catelin, WCA Chief Executive, says it is critical that development banks support developing countries in accessing state-of-the-art coal technologies. “Coal has been vital to global development—almost half of this century’s incremental energy has come from coal alone and virtually all of the world’s poverty reduction between 1981 and 2008 took place in coal-fueled China.”

International Community Gears Up for 2015 Agreements

No firm decisions should be expected in the framework of international climate change negotiations this year, although the two major international meetings scheduled for 2014 should give a better understanding of possible future policy directions. In September, UN Secretary-General Ban Ki-moon will hold a Climate Summit bringing together heads of states. The Summit could be a useful indicator of the readiness and ambition of the international community for a global climate deal. It will be followed by international climate change negotiations in Peru in December (COP20) where countries will discuss issues such as the type and the level of mitigation commitments that should be made as part of the global climate deal.

2014 will also see the first substantive proposal for the post-2015 Sustainable Development Goals (SDGs). The proposal will be finalized in the first half of 2014 and will then be debated by the UN General Assembly. The SDGs will include a target on energy access, but how this is achieved remains to be seen. A formal negotiating process will commence in September to agree on the goals in mid-2015.

Contributing to the discussion on the post-2015 Sustainable Development Goals, the World Coal Association has called for clear action to improve energy access and address the challenge of energy poverty affecting 1.3 billion people worldwide. “Including energy access targets post 2015 will be critical to mobilizing global action and supporting investment in modern energy technologies in the developing world. A robust energy access target is one essential component, but what derives from that target must also be recognition that different countries will achieve it in different ways. For some, renewable energy might be the best approach, but for many other countries, coal is going to play a huge role in delivering energy access,” said Milton Catelin.

Conclusion: Coal Remains the Backbone of Electricity Generaton

Despite the challenges facing the coal industry in 2014, the global outlook for coal remains positive, driven by global demand for affordable and reliable energy and encouraged by the deployment of more efficient and sustainable coal combustion technologies.

Over the next five years, global coal demand is expected to increase by 15%, as shown in recent IEA analysis.6 Based on these consumption trends, the IEA also forecasts that coal is likely to pass oil within a decade as the world’s top energy source and by 2035 world coal consumption is set to increase by almost 50%. Given the aspirations for social and economic development of countries in Asia and India, it seems unlikely that any new policy or regulatory initiatives will substantially reverse this global trend, especially when these countries have access to domestic coal reserves and their population is still affected by energy poverty.

Even in developed countries the cost of energy generation and climate action are becoming the leading issues in any debates on policies guiding future energy supply. This new policy environment is more likely to favor more practical steps toward sustainable energy supply and sustainable development, such as through the deployment of clean coal technologies and more efficient use of coal.

See Table 1 for a checklist of critical dates to watch in 2014.


Table 1. Dates to watch in 2014

This article is republished by permission from cornerstonemag.net.  All rights reserved.

The content included in Cornerstone is based on the opinion of the authors, and does not necessarily reflect the views of the World Coal Association or its members.

______

REFERENCES

  1. The Economist. (6 January 2014). Daily chart: The 2014 ballot boxes, www.economist.com/blogs/graphicdetail/2014/01/daily-chart-2
  2. International Energy Agency. (2014). Medium-term coal market report, www.iea.org/publications/medium-termreports
  3. Xinhua   Net. (10   January   2014).   Higher   targets   set   for emission  reduction, news.xinhuanet.com/english/china/2014-01/10/c_133033648.htm
  4. International Energy Agency. (2 October 2013). World energy outlook special report 2013: Southeast Asia energy outlook, www.worldenergyoutlook.org/southeastasiaenergyoutlook/
  5. World Bank Group. (2011, December). Development and evaluation of power supply options for Kosovo: A background paper, siteresources.worldbank.org/INTENERGY2/Resources/Kosovo_generation_options_report_12312011.pdf
  6. van der Hoeven, M. (16 December 2013). Launch of the Medium-Term Coal Market Report [speech, IEA Executive Director], www.iea.org/newsroomandevents/speeches/131206MCMR2013LaunchRemarks.pdf

The author can be reached at ATomczak@worldcoal.org.

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