GGP: The role of coal in Southeast Asia’s power sector and implications for global and regional coal trade
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Originally published by The Oxford Institute For Energy Studies, December 2016
Executive Summary
Southeast Asia currently plays a key role in rebalancing the global steam coal market – and it could well play this role in any future rebalancing. Southeast Asia is home to the largest steam coal exporter, Indonesia, but these exports are decreasing. The region also houses booming coal importing countries, such as Malaysia, Thailand, the Philippines, and Vietnam (which turned into a net importer in 2015).
Driven by rapidly increasing electricity demand, regional coal demand has surged since 2010. The availability of coal in the region, and its lower cost than competing fuels, has made coal the preferred option to fuel rising power demand. The region added 25 GW of coal-based capacity in the past five years, accounting for 42 per cent of total additional generation capacity. Even the gas-producing countries in the region have introduced more coal in their electricity mix as gas shortages pushed them to diversify their mix. In the short to medium term, this trend is going to continue: there are 29 GW of coal-based capacity under construction in the region, most of them to be completed by 2020. In addition, there is a huge number of permitted and announced coal-fired power plants in the pipeline, which means that the shift towards coal may continue well after 2020. However, this shift compromises the national commitments taken by Southeast Asian governments to reduce their greenhouse gas emissions.
In the wake of the Paris Agreement, national governments across the region have started to reassess their power development plans, introducing more renewable energy sources, promoting energy efficiency measures, and reducing the contribution of coal in the electricity mix. This reassessment, however, does not constitute a shift away from coal. Despite the scale back, coal still dominates the targeted additional capacity, followed by natural gas, hydropower, and other renewables. The planned large increase in renewables (including hydro), together with the adoption of clean coal technologies, allow Southeast Asian nations to reconcile a growing coal consumption with national commitments to reduce their carbon intensity compared with a business-as-usual scenario.
Most of the additional coal capacity planned for completion by 2025 is concentrated in two countries, Indonesia and Vietnam. But in both countries, the targets are challenging. In Indonesia, given the delays and revisions that have affected previous and ongoing power capacity building programmes, it is unlikely that the ambitious target will be met. After COP21, the Vietnamese government announced its intention to review the development plans of all coal plants, making the planned coal boom uncertain. The growth in Southeast Asian coal demand is therefore mixed: until 2020, it is expected to be steep as more coal-fired power plants are commissioned, but after that date, the rate of growth is expected to slow down significantly. The wide range of outlooks for future coal demand has a significant impact on coal trade in the region.
Regional coal imports have surged since 2010 – growing by 21 per cent in 2015 to 75 Mt – and are expected to reach 140 Mt by 2020. This growth is led by expansion of the coal fleet in Vietnam, Malaysia, the Philippines, and Thailand (and, to a much smaller extent, Cambodia) and it is secured by anticipated demand from power plants currently under construction or committed, although delays may limit coal imports to 115 Mt by 2020. However, in the 2020s, the rate of growth in coal imports could slow down dramatically and in some countries, it could even be negative. Much of the uncertainty comes from Vietnam and, to a lesser extent, Thailand. Southeast Asian coal imports could peak after 2025 at 150–160 Mt per year in a low scenario, or increase to 230 Mt by 2030 if the targeted coal capacity included in the national power development plans is built. Putting this into perspective, however, even in a high scenario the additional regional import demand is far less than the amount that has been added by either China or India to the international steam coal market over the past few years. Therefore, on the demand side, the balance of the global coal market will continue to be determined by China and India, at least in the short to medium term.
On the supply side, due to its importance in the Pacific Basin steam coal market, the role of Indonesia is important to the rebalancing of the market. After an impressive growth between 2008 and 2013, Indonesian steam coal exports declined in 2014 and plunged in 2015 due to reduced coal import demand by its major customers. Although Indonesia is one of the lowest-cost producers in the world, there is a wide range of production costs in the country. Low international coal prices have forced higher-cost small miners to stop production as they were unable to recover their operational costs. But other factors are at play to explain the fall in Indonesian coal exports. Growing coal demand in Indonesia has led the government to prioritize sales of coal production to the domestic market and to control coal production. New regulation to restrict illegal coal production and exports, the ongoing consolidation of the mining permit process, and the recent moratorium on new coal mining activities, are all likely to reduce Indonesian coal production and exports even further. In the short term, by reducing available coal supply to the export market, Indonesia’s coal policy facilitates the rebalancing of the global market and the increase in coal prices. Combined with the unexpected increase in Chinese coal imports since June 2016, the global coal market has tightened and coal prices have almost doubled since January 2016 to above $100/t at the beginning of November 2016 (Australian steam coal marker), whereas global coal demand continues to shrink.
In the longer term, Indonesia’s coal mining policy, combined with rapidly growing domestic coal demand, questions the availability of Indonesian coal for the export market. On one hand, the size of Indonesian coal resources might allow large Indonesian mining companies to expand their production to serve both the export and domestic markets, provided that coal prices are high enough to incentivize investment in coal mining and transportation. On the other hand, should the government maintain a cap on coal production on a long-term basis (currently production is capped at around 400 Mt per year), Indonesian exports will fall significantly, but gradually.
Reduced Indonesian coal exports could also result from choices made by coal buyers. A significant portion of Indonesian steam coal exports consists of low-grade coal (in other words, coal with a low calorific value) which is sold at a discount on the international market once adjusted for energy content, but it emits more CO2 per kWh than high-calorific value coal. As seen in 2015, coal buyers are becoming more selective. The reduction of coal imports by China in 2015 was partly explained by new regulation on coal quality, which reduced the attractiveness of Indonesian low-calorific value coal. The decline of Indian imports was also more pronounced for Indonesian suppliers than for other suppliers to the Indian market. On a long-term basis, if Indonesian low-grade coal is no longer exported – either because it is consumed locally or because buyers don’t want this quality anymore – the balance of the global market will depend on a very small number of producers, mainly Australian ones, and their ability to ramp up their production.
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By Sylvie Cornot-Gandolphe, OIES Research Associate
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.