What is on the Cards for the Coal Industry in 2015?

By Aleksandra Tomczak, Policy Manager,A  World Coal Association for Cornerstone

Last year the coal industry saw a number of important changes to policies and regulations, both nationally and internationally, that directly affect coal demand and the business of mining coal. Among the most important were the repeal of the carbon tax in Australia, the EPA’s CO2 emission limits on new and existing power plants in the U.S., the EU’s initial agreement on the 2030 energy and climate package, and the election of a new prime minister in India.

Following a year that saw over 40% of the world’s population voting in national elections and major new policy developments in the key coal demand and production regions, what is on the cards for the coal industry in 2015? Undoubtedly, the major event that could structure policy and regulatory developments of interest to the coal industry in 2015 is COP21 in Paris. COP21 is expected to bring about the world’s first comprehensive climate deal. In fact, some of the most important jurisdictions—including the EU, China, the U.S., Australia, South Africa, Australia, and Japan—will see national climate policies debated as part of the preparations for the international climate negotiations. This makes 2015 a year of strategic importance to the coal industry as it continues to make its case for the sustainable use of coal and cleaner coal technologies as part of the global mitigation strategy.

COP21 PUTS CLIMATE AND ENERGY POLICIES AT THE TOP OF THE AGENDA

The international community set itself a deadline at COP21 in Paris this year to agree on a comprehensive climate deal which will, for the first time in the world’s history, cover both developed and developing countries under a single agreement. In session from 30 November until 11 December, COP21 is the concluding point of the four-year-long negotiations under the Durban Platform, established during COP17 in South Africa.

The deal can be expected to follow a bottom-up approach whereby countries make pledges that reflect their national circumstances. This differs significantly from the top-down approach adopted in the Kyoto Protocol, which had a global mitigation target and country targets allocated based on a developed/developing country division.

COP21 will structure climate and energy policy developments worldwide as governments debate and consult domestic stakeholders to define national mitigation pledges under the United Nations Framework Convention on Climate Change (UNFCCC). Although it is far from certain that COP21 will result in ambitious mitigation targets for all countries, it is certain that the national-level preparatory work will be carefully scrutinized throughout the year by stakeholders.

The United Nations climate change talks started the year off by advancing the draft text leading to COP21 in December.

UNITED NATIONS TO ADOPT SUSTAINABLE DEVELOPMENT GOALS

In September 2014, the UN General Assembly released a set of draft Sustainable Development Goals set to be agreed upon at a special UN summit in September 2015. These goals form part of the post-2015 development framework and will replace the UN’s Millennium Development Goals. According to Benjamin Sporton, Acting Chief Executive of the World Coal Association, “It is important that the goals refer to energy access and recognize the role of cleaner fossil fuel technologies.”

FOSSIL FUEL DIVESTMENT CAMPAIGNS GAIN RENEWED VIGOR

In December 2014 the independent-expert group set up to advise the Norwegian government on investment in fossil fuel assets supported continued investment in coal and petroleum companies—counter to the global campaign to divest from fossil fuels, particularly coal. Despite that, the global divestment campaign is expected to continue, with renewed vigor, leading to the COP21 climate negotiations in Paris.

There is a proposal that the climate agreement in Paris should include a call to achieve zero net CO2 emissions by 2050. Although the proposal is unlikely to be adopted, activists are describing it as a proposal to end all fossil fuels by 2050 and using it in their campaign for divestment based on the carbon bubble hypothesis. “It is likely that the divestment campaign will strengthen through 2015 as higher profile participants, including Pope Francis, sign on to the campaign. These campaigns will require a strengthened response from the industry at a global level,” says Benjamin Sporton.

CHINA TO PUT FLESH ON THE 13TH FIVE-YEAR PLAN

China recently announced its intention to peak CO2 emissions around 2030, and to strive to peak earlier. China’s policymakers will be finalizing the details of the 13th Five-Year Plan (2016–2020) this year, adopting the final text in March 2016. The 13th Five-Year Plan will provide insight into China’s energy and climate policy objectives as to the role of coal in its energy mix and the role of cleaner coal technologies in mitigating greenhouse gas emissions.

China’s 13th Five-Year Plan will be developed in 2015 and due for passage in March 2016 by the National People’s Congress.

China’s five-year plans typically include a set of environmental and energy targets and guidelines. According to the Yale Center for Environmental Law & Policy,1 a consultative draft of the 13th Five-Year Plan should be developed between February and October 2015 and discussed during the Fifth Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) taking place in mid-October. Media speculation about the new plan includes a possible introduction of a cap on carbon emissions, the expansion of existing pilot emissions trading schemes, or the introduction of carbon taxes. The new plan is also likely to include a new target for the expansion of renewable energy technologies.

Several recently announced policy shifts or actions are already underway that will affect the coal industry in 2015. For instance, China recently announced that coal consumption will be capped by 2020.2 Existing coal utilization will be increasingly cleaner under the Action Plan for Upgrading of Coal Power Energy Conservation and Emission Reductions, released in September 2014.3 Finally, China changed how its coal resource tax is applied. Coal produced in China will now be taxed on price, instead of quantity—a move that had been called for by a coal industry struggling against lower commodity prices.4

New regulations will also come into force in 2015. As of 1 January, a new regulation restricting coal qualities went into effect. This regulation, called “Interim Measures on the Management of Commercial Coal Quality”, specifies the following quality standards for coal produced, sold, and used in the Chinese market:

  • Lignite quality requirements: ash (<20%), sulfur (<1%)
    • Other types of coal quality requirements: ash (<30%),
      sulfur (<2%)
  • “San Coal” (coal used for small boilers, domestic heating, and in some hotel/restaurants) used in the Yangtze River Delta near Shanghai and the Pearl River Delta near Hong Kong: ash (<16%), sulfur (<1%).

According to the International Energy Agency (IEA), this regulation will impact both domestic and international markets.

U.S. EPA TO FOCUS ON FINALIZING CARBON REGULATIONS FOR POWER PLANTS

A priority for the U.S. Environment Protection Agency (EPA) for 2015 is the completion of carbon emissions regulations, including the rules regulating CO2 emissions from existing and new power plants, explains Bruce Watzman, Senior Vice President, Regulatory Affairs at the U.S. National Mining Association. The two rules are expected to help meet the target pledged by President Obama prior to COP20 in Peru: reduce U.S. GHG emissions by 26–28% by 2025, compared with 2005 levels.

In 2015, the U.S. EPA plans to finalize carbon emission standards for new and existing power plants.

The rule limiting CO2 emissions from existing power plants is anticipated to be finalized in the summer of 2015. Under that rule, the EPA would require individual states to meet CO2 emission targets on a state-wide basis, starting in 2020. States will have four “building blocks” to meet those goals: heat rate improvements, energy efficiency, plant retirements, and renewable energy. The EPA projects that the proposed rule will result in power-sector emission reductions of 26–30% from 2005 levels by 2030. According to Watzman, the exact impact of that rule on existing coal-fired power generation remains uncertain, although analysts agree that it is most likely to further reduce coal-based power generation.

Carbon emissions from new power plants are covered under the “Carbon Pollution Standard for New Power Plants”, first proposed by the EPA in 2013. The rule introduces an emission performance/control technology standard for fossil fuel plants at a level that makes it impossible to build new coal-fired units, but still allows unabated gas-fired power plants. The EPA is currently reviewing public comments on the proposed standards and plans to issue final rules for both existing and new power plants in summer 2015.

Coal ash is another issue to watch in 2015. The U.S. Office of Surface Mining (OSM) is expected to issue a proposal on the handling of coal ash at mine sites in April. The EPA also finalized a rule in December 2014 on the handling of coal ash at the utility level. The EPA’s final rule concluded that coal ash was not hazardous. However, “there is a possibility that OSM’s rule might be far harsher than the EPA rule. OSM could prohibit the use of coal ash for reclamation purposes. If this happens, mine operators will have to obtain other materials and this will drive up the costs,” Watzman explains.

2015 COULD FIX THE EU COAL POLICY LANDSCAPE UNTIL 2030

In the EU, the 2030 climate and energy package is still at the top of the policy agenda for the coal industry in 2015. At the end of last year, EU member states agreed with the European Commission proposal to reduce the EU’s greenhouse gas emissions by at least 40% by 2030 (compared to 1990), to increase energy efficiency, and to set a new EU-wide target for renewables in final energy consumption of at least 27% by 2030. EU leaders also decided to establish several funds, including a successor to NER300, which will be used to finance carbon capture and storage (CCS) and renewable projects. As the package will now go through the European Parliament, Brian Ricketts, the Secretary General of EURACOAL, expects that parliamentarians will propose many amendments. However, he expects that the most ambitious climate and energy policy amendments will struggle to win support under the political make-up of the European Parliament following last year’s elections.

The EU will also continue its work on the proposal to reform the EU Emissions Trading Scheme. The proposal from the Commission last year would establish a Market Stability Reserve (MSR) whereby allowances can be moved in and out of a reserve, but not canceled permanently. In this form, the MSR is unlikely to affect the competitive position of coal in the EU, according to Brian Ricketts. This would change, however, if emission allowances were to be withdrawn permanently—an option that remains possible until a final decision is taken, probably in 2015.

The new European Commission (EC), officially appointed and approved in November 2014, has already established an image of being pro-business and pro-industry. One of the objectives of the new Commission President, Jean-Claude Juncker, is to reduce the number of work items in order to improve the quality of decision making. As part of this exercise, the new Commission withdrew several existing legislative proposals, including the National Emissions Ceiling Directive intended to introduce more stringent limits on emissions of certain pollutants at the national level. The directive is now expected to be modified as part of the legislative follow-up to the 2030 Energy and Climate Package.

Jean-Claude Juncker, President of the European Commission

The new EC will continue the work started by the previous team on limiting emissions from medium-size combustion plants, such as heating plants. This proposal would affect coal consumption in a number of Central and Eastern European countries that rely on coal-fired medium-size plants for district heat production.

The EU will also continue its work on the European Energy Security Strategy, creating an opportunity for the coal industry to promote the security benefits of using coal. However, according to Brian Ricketts, the document released on this subject by the EC in May 2014 proposes “more of the same medicine”, which means more renewables, more energy efficiency, and more gas pipelines, with virtually no mention of the security benefits offered by coal.

SOUTH AFRICA GEARS UP FOR A CARBON TAX

South Africa will finalize its carbon tax legislation in 2015, expecting to introduce a tax early in 2016. The 2015 debate will focus on the issue of carbon budgets and the alignment of this mechanism with the carbon tax, which is linked to the Intended Nationally Determined Contributions that will be submitted to the UNFCCC prior to COP21. According to Nikki Fisher, Coal Stewardship Manager at Anglo American, the South African Department of Environmental Affairs will be consulting stakeholders in the first quarter of 2015. As in other jurisdictions that have already introduced a price on carbon, this new policy can be expected to shape the circumstances for investments in coal-based power.

Changes are also expected in the rules governing the power generation sector. Historically, coal-fired plants in South Africa have been run exclusively by the public utility Eskom. However, 2015 may see the first investments in independently constructed coal-fired power plants. Debate in South Africa about investment in nuclear energy and more investment in renewables will also continue.

In 2014 Eskom’s flagship coal projects, Medupi and Kusile (each to supply 4800 MW of coal-fired generation), once again suffered delays in construction. Currently, Medupi is projected to be in commercial operation in the second half of 2015. Kusile’s commissioning program will follow at least one year after. As a result of these delays and maintenance issues with Eskom’s existing coal fleet, South Africa experienced electricity blackouts in December 2014 for the first time since 2008, perhaps intensifying calls for more independent power producers.

The Mineral and Petroleum Resources Development Act (see author’s previous Cornerstone article for a description)5 was ratified by South Africa’s Parliament in 2014 and now awaits presidential signature. Although a number of the more onerous provisions of the original bill were amended, uncertainties persist regarding the modalities of implementation and its impact on coal investment—especially in relation to the minister having powers to designate coal as a “strategic mineral” and a “designated mineral”. The latter would result in a portion of existing production being slated for domestic sales.

JAPAN TO CLARIFY COAL AS PART OF ITS ENERGY FUTURE

In 2014, the government of Japan launched its first review of energy strategy since the Fukushima nuclear accident resulting from the earthquake of 2011. In this new strategy, which sets basic policies for the next 20 years, the cabinet positioned coal and nuclear power as key “baseload power sources”. In fact, according to Shintaro Yokokawa, Deputy General Manager at Japan’s Federation of Electric Power Companies, most of Japan’s planned 10 GW of new capacity through 2030 will be coal-fired.

Mr. Yokokawa also explains that two nuclear power plants are scheduled to re-open in 2015. Those two plants (four reactors) have already passed the security screening by the Nuclear Regulatory Authority and are now under the final approval process by the local government; 17 reactors at 12 other power plants are also waiting to be screened.

As a result of reviewing its energy strategy, Japan may reopen nuclear reactors and add new coal capacity.

STEP-BY-STEP REFORM OF INDIA’s COAL SECTOR

Narenda Modi, India’s prime minister and the leader of the Bharatiya Janata Party (BJP), is expected by many to unlock the economic potential of India, by reducing red tape, making India more business-friendly, and investing in new transport and energy infrastructure.

At the end of last year, Modi’s government issued an executive order that includes a provision to allow the government to end the state monopoly on mining and selling of coal. While analysts consider the move crucial to boosting coal output, unions fear it could lead to job losses. This year began with one of the largest strikes by coal miners India has ever seen, resulting in half of the production and shipments of Coal India Ltd being shut down. Although many are tempted to draw parallels with the miners’ strikes in the UK, local experts argue that the Modi government is much more likely to take a step-by-step approach to reform of India’s coal sector to ensure that energy security is not compromised.

MORE COAL-FRIENDLY POLICIES EXPECTED IN AUSTRALIA

In 2014 Australia saw two major policy developments: the repeal of the tax on carbon and on mining. According to Brendan Pearson, the Chief Executive of the Minerals Council of Australia, the industry and the Australian economy are saving much money as a result of these changes. From 2012 to 2014 the overall cost of the carbon tax to coal miners in Australia was AU$1.6 billion. “This is a big weight off the coal industry, as [coal] prices are 50% lower than what they were in 2011/12.”

Another issue carrying over from 2014 was the finalization of trade agreements with the largest coal-importing countries: China, Japan, and Korea. As a result of the new agreement with China, the Australian coal industry will be exempt from the 3% tariff recently imposed on coking coal imports and the 6% tariff on thermal coal imports.

Newcasatle, Australia, is the world’s leading coal export port.

In 2015 the coal industry will closely watch two existing legislative projects: a reform of the environmental approvals for mining projects and the Australian government’s new climate policy—consisting mainly of an Emissions Reduction Fund.

“At the moment, going from exploration to the commissioning of a mine in Australia can take up to seven years. In the 1990s the same process would only take 18 months,” explains Brendan Pearson. The Australian government is in the process of developing a one-stop shop for assessment and approval processes that covers both federal and state levels to address the problematic delays in environmental approvals. “If we can reduce this process by a year in the mining sector, the economy will gain AU$160 billion over 2014–2025.” The MCA Chief Executive believes the legislation blocked last year should be adopted in the first quarter of 2015.

The MCA is also keeping a watchful eye on the so-called Safeguard Mechanism under the Emissions Reduction Fund. The proposed mechanism is expected to introduce a soft cap on emissions in sectors not participating in the auctions. “This could be problematic for methane emissions from coal mines because they are linked to a specific geology, not poor design of the coal mines,” says Pierson.

Another important development to watch in 2015 is the draft decision by the World Heritage Centre, expected in March or April, on whether to list the Great Barrier Reef as endangered. “We could see much more unnecessary restrictive regulation on port developments if the decision is positive,” argues Pearson, who highlights the objective of the coal industry is to ensure a strong coexistence between an essential export industry and the world heritage values of the reef.

INDONESIA EXPECTS A YEAR FOCUSED ON ECONOMIC GROWTH

The Indonesian Parliamentary and Presidential elections in 2014 resulted in a new president, Joko Widodo (Jokowi), as well as a new cabinet. According to a local expert, the appointment of a new Mines and Energy Minister, Sudirman Said, was broadly welcomed by the coal industry as he brings solid credentials from both the public and private sectors. In fact, one of his previous positions was at a senior corporate level in an Indonesia coal group.

The new Indonesian government, led by Joko Widodo, has already relaxed caps on coal production. [www.flickr.com/photos/ukik/ (Ahmad Syauki)]

The nationalistic ideals that shaped the 2014 elections are now largely muted and no changes in the laws and regulations regarding foreign investment in the coal sector are now expected. The new administration has so far focused on economic and infrastructure development. On the energy front, one of the key aspects is a plan for considerable growth in coal-fired power production. It is believed that domestic demand for coal will continue to grow, particularly in two to three years when more new plants come online.

The new government has also already relaxed the caps on coal production levels. The increase of mining royalties, proposed but not implemented in 2014, remains under consideration. However, the government recognizes that such increases at present may lead to increased mine closures with resultant unemployment, and less value flowing to mining communities.

Although some caution exists because the new administration has yet to detail their coal-sector requirements, most Indonesian coal industry experts believe that 2015 will see limited, if any, increase in regulation. There could be streamlining in some areas, a small production increase, or continuing emphasis on coal supply to the domestic market with a resultant flattening, or decline, in export levels.

2015: A YEAR OF STRATEGIC IMPORTANCE

With COP21 on the horizon and the long-expected comprehensive climate deal, many jurisdictions of importance to the coal industry will be weighing the future of various energy fuels in their long-term energy mixes (see Table 1 for a summary). This makes 2015 a key year for the international coal industry and a year that should see renewed efforts to make a strong case for coal as a sustainable energy fuel and for cleaner coal technologies as an irreplaceable element of any effective global climate mitigation strategy.

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.

________

ACKNOWLEDGMENTS

This article was compiled based on interviews with industry experts as referenced throughout the article. Their valuable input and contribution role is gratefully acknowledged.

NOTES

  A.  This article was prepared in January 2015 when Aleks Tomczak was Policy Manager at the World Coal Association. Aleks has since left the WCA.

REFERENCES

  1. Environmental Performance Index. (2015). Five-year plan process in the People’s Republic of China, epi.yale.edu/visuals/china-five-year-plan/ (accessed January 2015).
  2. Shanghai Daily. (2014, 19 November). China sets cap on energy use, www.shanghaidaily.com/article/article_xinhua.aspx?id=253473
  3. LexisNexis. (2014, 22 September). Action Plan for Upgrading of Coal Power Energy Conservation and Emission Reduction released, hk.lexiscn.com/latest_message.php?id=164721
  4. Cornerstone. (2014). Global news, 2(4), 67, www.nxtbook.com/nxtbooks/wiley/cornerstone_2014winter/#/68
  5. Tomczak, A. (2014). What to watch in 2014: Policy develop-ments that will shape the coal industry, Cornerstone, 2(1), 19–25, cornerstonemag.net/what-to-watch-in-2014-policy-developments-that-will-shape-the-coal-industry/

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