The mid-term outlook for thermal coal in Southeast Asia is positive. The region is likely to see a continuation of growing energy demand on the back of strong demographic trends which underpin a strong regional economic growth profile. However, investors and corporates should proceed with eyes wide open to the risks of the global energy transition.
There are an increasing number of technologies and economic and financial headwinds that suggest the growth profile for coal is far less certain. The global deflationary renewable energy trends make this an ever more significant competitive pressure. Similarly, energy security will increasingly come to the fore if strong economic growth brings with it an increasing reliance on imported fossil fuels. And while in Asia the first movers to begin divesting from coal financing are being witnessed, global financial markets have for some time been increasingly grappling with the financial flow implications of the need to align with the Paris Agreement and contain global carbon emissions to limit warming to 2°C.
This paper draws on recent global trends and developments in Southeast Asia to illustrate how the global energy transition is disrupting energy markets. Given this, it is opportune to consider if the Southeast Asian power sector will similarly pivot away from historic trends.
In examining global coal-fired power generation trends, there was a strongly upwards trajectory of 4 – 5% annual growth established from 2000 – 2013. However, the market was entirely unprepared for global thermal coal generation to peak in 2013. After a decline from 2014 – 2016, some growth resumed from 2017 – 2018. However, overall global coal power generation in 2019 was lower than that evidenced in 2013.
Given the huge investment in new coal-fired power capacity across China, India and Asia, this has been problematic; significant capacity additions have driven capacity utilisation rates down to a decade low of just 51% in 2019.
The unexpected global peak of thermal coal demand back in 2013 reflects a number of factors.
First and foremost, the Chinese economic growth rate has materially slowed and the composition of economic growth has changed to less energy intensive service sectors. Both of these trends are set to continue, and given China is 50% of world thermal coal production and consumption, this sets the global tone.
Moreover, the US electricity sector has been transformed by three factors. Firstly, electricity demand has flatlined for a decade, entirely de-coupled from strong economic growth. Secondly, the sustained nature of decade low gas prices has entirely undercut the viability of existing coal-power. Thirdly, renewable energy has become the low cost source of new capacity, assisted by the 30% investment subsidy. NextEra Energy, now the leading US utility, noted that coal-fired power generation dropped from 50% market share in 2008 to just 25% in 2019 and has somewhat controversially forecast coal use in US power generation to cease by 2030, replaced entirely with additional renewable energy.
India is the third largest electricity market globally. It too has seen an unexpected electricity sector disruption. Installation rates of thermal power net new capacity have fallen from some 20 GW annually over 2010 – 2016 to just 3 – 4 GW annually over the following four fiscal years, a 75% deceleration in growth. A surge in renewables investment followed a halving of the required tariffs for both solar and wind to just US$30/MWh, some 20 – 30% below existing, domestic coal-fired power tariffs (and half the cost of new imported thermal power). Prime Minister Narendra Modi has ambitiously targeted 450 GW of renewable installs by 2030 – a fivefold expansion on the current installed base of 86 GW. Further, electricity demand growth has been consistently below the optimistic assumptions of the International Energy Agency (IEA) and the Indian Central Electricity Authority. This has left average coal plant utilisation rates at a decade low of just 55%, and stranded asset losses across the thermal power sector have reached US$60 billion.
Global electricity demand overall grew by 1% y/y in 2019 – the lowest rate of increase in the past decade, consistent with a slowing rate of global average GDP growth.
All up, the global electricity developments of 2019 are very telling. Figure 2 highlights global electricity demand growth in 2019, up just 357 TWh in total. Coal generation fell -259 TWh or -3% y/y, led by a collapse in the EU (-24% y/y) and the US (-16% y/y).