South African coal exports are approaching long-term decline, according to a new report from the Institute for Energy Economics and Financial Analysis (IEEFA) that was published today.
Author of the report Simon Nicholas, energy finance analyst with IEEFA, says the sector needs to come to terms with the prospect of fading demand from its major export destinations.
“Policy-makers in South Africa need to prepare for the ongoing technology-driven transition away from coal or face the inevitable social and economic consequences,” says Nicholas.
“It won’t happen overnight, but key trends in global markets show new energy technology is replacing coal-fired power faster than most predicted.”
Eskom woes
The report comes as SA makes moves towards renewable energy generation in the country as power utility Eskom is saddled with R450 billion debt.
In his State of the Nation Address earlier in the year, president Cyril Ramaphosa announced debt-ridden power utility Eskom would be unbundled into three divisions – generation, transmission and distribution – which would fall under an Eskom parent company.
Eskom currently meets over 90% of SA’s power needs. Although SA’s energy sector is still largely coal-driven, government is making efforts to support renewable energy in the country’s energy mix.
In August, SA’s then energy minister Jeff Radebe released the long-awaited Integrated Resource Plan, a 20-year energy roadmap to meet the country’s future power needs.
The government envisages that in 2030, SA’s energy mix will consist of 34 000MW of coal, representing 46% of installed capacity; 11 930MW of gas, or 16% of installed capacity; 11 442MW of wind, or 15% of installed capacity; 7 958MW of photovoltaic (PV, or solar); and 4 696MW of hydropower, or 6% of installed capacity.
National Treasury recently proposed that after the unbundling of troubled power utility Eskom, an independent transmission company be created to buy electricity transparently from independent power producers.
It has also suggested Eskom sell coal-fired power stations, possibly through a series of auctions, to service its debt.
“By 2030, new wind and solar will be cheaper than running existing coal- or gas-fired plants virtually everywhere in the world. This is already the case in India, South Africa’s major coal export destination,” says Nicholas.
He explains that in 2018, 48% of all South African exports out of Richards Bay Coal Terminal went to India, a nation with a clearly stated policy of reducing reliance on coal imports. In the first half of 2019, that rose to 60%.
According to Nicholas, the last fiscal year saw the expansion of thermal power capacity in India slow to the lowest level in a decade due to major renewable energy expansion.
He explains that India’s coal ministry is now preparing a new plan to cut coal imports by one-third, or around 85 million tonnes, by 2024.
Progressive retirement
Other major export destinations for South African coal include Pakistan, whose import growth will be limited by concerns over the economic impact of coal imports, and South Korea, which is now considering the progressive retirement of up to 20 coal-fired power plants as it plans to rely on renewables and LNG in the long term, he notes.
“Major mining companies are starting to realise that the long-term outlook for thermal coal is bleak,” says co-author Tim Buckley, director of energy finance studies at IEEFA.
“Global mining giants such as Rio Tinto, South32, BHP and Anglo American have all either withdrawn from the seaborne thermal coal market already or are now considering it.
“And more than 100 significant global financial institutions, including South African banks, now have formal coal exclusion policies in place. Access to coal debt and equity financing is becoming increasingly problematic,” Buckley says.
IEEFA adds that South African coal exporters are likely to seek alternative markets going forward as opportunities for growth in renewable-driven destinations dry up. However, the long-term outlook for coal exports to other destinations is also likely to disappoint, the organisation says.
“The global seaborne coal trade is set to go into permanent decline,” says Nicholas. “As a result, South Africa will see increased competition in markets around the world from other major thermal coal exporters such as Indonesia, Australia and Russia.
“Richards Bay Coal Terminal, already operating with almost 20% spare capacity, may have to get used to the idea that an increasing proportion of its annual capacity will become stranded. The limited growth potential for coal exports in the long-term will no doubt disappoint the industry; however, it’s a timely reminder that the world is transitioning away from coal and South Africa needs to keep up and turn its sights to renewable energies.
“It’s time to plan for an alternative future. That planning should have already begun,” Nicholas concludes.
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