Coal a historic driver of economic growth
The importance of coal to Australia crystallised in a few seconds in late February.
The importance of coal to Australia crystallised in a few seconds in late February, when rumours spread that the Chinese were mulling rejecting Australian coal at five ports. The Australian dollar, a barometer of our purchasing power and wealth, immediately plunged 1 per cent.
Last year China was the third biggest buyer of Australian metallurgical coal (used to make steel) and the second biggest buyer of thermal coal (used to create electricity), spending a combined $11 billion. That’s a big chunk of the total, which is estimated to bring in around $60bn in export earnings this financial year, more than any other mineral.
To buy our coal, the Chinese — and the Japanese, Koreans and other big buyers around the world — need to buy our currency first, before paying BHP, Yancol and Glencore, who in turn pay their taxes, staff and shareholders.
The dollar regained its value in February over the following days, as the rumours dissipated and supply resumed; but Australians abroad who made purchases in foreign currency that week might at least have a better appreciation of coal’s importance.
Without coal to sell, we’d be a lot poorer. Voters could forget about the sweeping tax cuts the government is likely to deliver in the April budget, which would rest in no small part on the torrent of revenue raining down on Canberra via the nation’s coal exporters. Higher coal prices and volumes have increased scope to cut federal income taxes by an extra $3bn a year, according to AMP chief economist Shane Oliver.
The coal sector employed around 50,000 workers in 2018, with another 120,000 indirect jobs supported by the industry, according to the Minerals Council. “Our comparative advantage in coal — together with iron ore — has helped to sustain the longest period of continuous economic growth in the nation’s history,” it says.
Wool was our biggest export earner for the first 70 years of the 20th century; coal took over in the 1980s, ahead of iron ore’s pre-eminence in the 2000s as the resource boom got under way. In 1970, minerals and energy exports accounted for 17 per cent of total exports by value; now they are over 50 per cent. This financial year coal will surpass iron ore as our single largest export.
“Coal is essential to our standard of living, which is better than most countries on earth,” says Daniel Morgan, a mining analyst at UBS in Sydney, who reckons coal will remain a dominant feature of our exports for decades. For now at least, coal supplies a third of all energy used worldwide and makes up 38 per cent of electricity generation, according to the Paris-based International Energy Agency.
“From an economic point of view if you want to put a zero dollar carbon price in, coal is the cheapest form of energy that we as Australians can access,” Morgan says. “Look at Asia: countries with and without natural coal endowments have made coal an integral part of their energy systems,” he says, pointing to Indonesia, India and China, Japan, Korea and Taiwan.
Yet for all the economic benefits, coal has become a four-letter word for many, because of the carbon emissions released in the production of electricity. The proposed Adani Carmichael mine in central Queensland, which would export thermal coal to India, has fractured the Labor Party and galvanised environmentalists.
Coal plants that provide the equivalent of one third of current electricity consumption will be retired over the next 20 years, according to the Australian Energy Market Operator’s latest Integrated Assessment plan.
“Coal plants can be most economically replaced with a portfolio of utility-scale renewable generation, storage, DER, flexible thermal capacity, and transmission,” the operator said last year.
“The delivered cost of energy from wind and solar in combination with storage from pumped hydro and batteries is anticipated to be lower than generation based on new coal or natural gas when the existing coal generators retire,” it says. This is based on assumptions about improving battery technology, though.
Simon Holmes a Court, senior adviser at the Energy Transition Hub at Melbourne University, says the economics of new coal stations don’t stack up, let alone the politics. “Firmed up wind and solar projects can provide energy in Australia at around $70 a MWh, whereas a new coal plant would be closer to $100,” he says.
“The cost of capital is higher for coal because banks are reluctant to lend: there’s a high likelihood of a carbon price down the track,” he adds. “And it takes three electoral cycles to build a coal plant, so the politics don’t favour it either.”
Claim and counterclaim abound about relative efficiency and the cost of different forms of generation. What is clear is that electricity prices have soared, even after adjusting for inflation, 56 per cent over the 10 years to 2018, according to the ACCC. Correlation isn’t causation, but coal plants have been closed and wind and solar injected into the electricity market by regulation over this period.
The IEA estimates coal will remain the biggest input into electricity generation globally, even in 2040, making more than double the contribution of solar and wind.
Australia would be well placed to support this demand. According to Geoscience Australia, it has over 70 billion tonnes of black coal and 76 billion tonnes of brown. These resources would sustain production, at current rates, of black coal for 125 years and lignite for more than 1200 years. “We have a lot of coal; in any practical time frame an inexhaustible supply,” says Morgan. “And our coal tends to have a higher energy content, and it has lower impurities, ash and various other nasties.”
Even if renewables are inherently cheaper, their mandated priority in the grid inevitably forces coal stations, which can’t be turned on and off easily, to shut down, which leads to greater reliance on gas, which has tripled in price. Since Victoria’s Hazelwood coal plant shut down in 2016, wholesale electricity prices have more than doubled.
China is often cited as a nation that is embracing renewables, at the vanguard of battery technology. But coal remains far and away the bedrock of its energy supply. Indeed, China has invested massively in coal power stations, despite an official position to promote renewables.
Over the six years to 2016 Chinese coal power capacity surged 42 per cent to 940GW, which dwarfs Australia’s 22GW. China has been “investing heavily in a massive expansion of coal-fired thermal energy capacity”, says a recent study by a group of Chinese and US economists from Carnegie Mellon University and the North China Electric Power University.
“If the Chinese government has been aggressively promoting renewable energy to restructure its energy mix, why did it also keep investing in coal power to the point where the government had to cut emergency measures to limit this investment?” they ask.
The Chinese government, being a dictatorship, doesn’t have to take much account of the popularity of renewables. Perhaps it’s a better guide to the real cost of energy than countries like Australia, whose voters are fans of energy powered by the sun and wind.
Whatever people hope or believe, our high standard of living is still sustained in coal and ore mines, far away from Sydney and Melbourne.