2936 Decc Coal Price Projections

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DECC coal price projections

October 2011



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DECC Coal Price Projections

Introduction

1. This paper sets out some of the key considerations used by DECC in creating a set ofprice assumptions for the coal market over the next 20 years. For appraisal purposesDECC requires a low, central and high price scenario. Therefore, for each of the factorsconsidered in this paper, a concluding assumption to use for each scenario is set out – these assumptions are partly based on judgement.

2. The paper was submitted to internal and external peer review and takes into accountcomments and suggestions made by academics, industry experts and government

economists. Together with the analysis of the coal market fundamentals a rationale foranalysing the link between coal and gas prices was considered, as this seems relevant forthe UK. This is due to the fact the current energy and EUA markets appear to hedge fossilgeneration (from both gas and coal) quite well. However, coal markets are international innature and although we note that coal and gas prices have moved closely togetherhistorically in Europe, we are careful not to imply any causal relationship. It is hard to relyon statistical relationships over long periods of time and, following peer review, we havelooked at supplementing statistical estimates with production costs.

3. The projections are based on the analysis of fundamentals, mainly supply and demand,analysis of long run marginal costs, statistical analysis and interpolation. We have also

sensed checked the figures against those carried out by external organisations. Given thedifficulty of forecasting the future, the range of outcomes is wide. The projections shouldnot be taken as a forecast.

4. Whilst there are a large number of factors to consider, this paper focuses on several keyfactors which influence the coal prices in the UK. We consider the role of Asian demand,gas prices, the correlation of gas and coal prices, market hedging strategies, future climatechange policies and the role of new technologies.

Figure 1: Key Inter-linkages in Determining the Nature of Coal Prices



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5. The Coal market is international and UK coal prices follow international price movements.China and India are key players in the future evolution of coal prices and in theconsideration of future scenarios. The balance between supply and demand within theglobal coal market is important. These factors are subject to considerable uncertainty and it

is possible that the price risk is greater on the upside.

6. Long-run coal production costs are also important, as there is some evidence that theinternational steam coal market tends to be competitive1, and this view was also expressedby some peer reviewers. However, there is considerable uncertainty surroundingproduction costs for coal imported to the UK. These vary significantly between exportingcountries.

7. There are key factors in the gas market that will also influence the coal price. These are inrelation to liberalisation and gas contracting. These can indirectly affect coal prices due tosubstitution in the electricity generation market.

Background

8. The Figure below shows the historic pattern of coal prices in the UK in relation to gasprices. The UK market is liberalised and prices are determined by the cost of supplying themarginal unit of coal. The UK obtains the majority of its coal from imports from Russia,Colombia and South Africa. As can be seen below, UK prices fluctuate over time and thereare times when coal prices are higher than gas prices and vice versa. However, as a resultof deregulation more competitive and interrelated markets are developing in electricity andnatural gas. Because coal and gas are substitute fuels used in the production of electricity

the price of coal would be affected by the price of gas and vice-versa.

1Haftendorn et al (2010)



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Figure 2: comparison of gas and coal prices

9. The EU ETS might be expected to reduce risk for coal and gas fired generation. If the priceof gas increases relative to coal, generators will increase output from coal-fired plants, butbecause that releases roughly twice as much CO2 /MWhe as gas the demand for EUAs willrise and so will their price, making the cost of coal-fired generation rise in sympathy withthe cost of gas-fired generation (see Annex 2). For existing generating companies theserisks are largely self-hedged at least in the medium run. We would expect the EU ETS tocontinue to exist and liberalisation in energy markets to continue to deepen, so thisrelationship between gas and coal prices could be expected to be important in the future.

10. When reading this paper it is also worth noting that this focuses of potential long-term

trends, not short-term price movements. In the short-run prices are set by short-runmarginal costs and reflects short-term fluctuations in demand (which is also seasonal),supply outages, capacity constraints at different parts of the market, etc. The focus of thiswork is not on short-term price movements. We aim to provide a range of scenarios thatcapture the range of possible outcomes for European coal prices in the long-run.

Market Fundamentals

11. Data: Historically, coal markets have tended to be international in nature. There is data on

the historic price of coal and the price futures. Recent forward gas and coal prices aremore highly correlated than in the past for UK fuel prices into major generating stations.

12. A period of change: Coal reserves are high and potential reserve additions could providesupply for many years post 2030. However, in the short and medium run supply is



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restrained by port and rail capacity in major producing countries (Australia, Colombia, andRussia) and there is a continued reduction in exports from China. Investments in coal andexport infrastructure will affect supply but there could be bottlenecks. According to the IEA(WEO 2010) recent investments include Australia. The Russian export infrastructure is due

to expand. African supply levels are predicted to rise. However, China is now a netimporter and this will have a big impact on coal supply in more distant periods in the future(its net position is highly uncertain for the future). Transport cost and capacity are importantfactors in the determination of coal prices. Coal is mainly transported by train on land andby ship internationally. An increase in land transport costs such as the possibleprivatisation of parts of the rail infrastructure in Russia will have an impact on theinternational price. Shipping distances, and hence costs, could also increase prices.

13. In the long run: In addition to the factors mentioned, supernormal profits could attract newinvestment and mergers and acquisitions with the possibility of higher concentration.However, the availability of coal reserves would tend to make this a competitive market.

Flue gas desulphurisation (FGD)2 and other pollution controls have reinforced the trendtowards the commoditisation of coal. In the future, policies that constrain exports willrestrict supply and increase prices in the long run. It is possible that countries may reduceexports and keep supplies for domestic consumption. Similarly, public opposition to theexpansion of coal infrastructure would reduce investment and create capacity constraints.

14. The demand for coal: According to some estimates, global demand for electricity will drivegrowth in the demand for coal in the international market. The IEA (WEO 2010) estimatesthat, under the New Policies scenario (central scenario), the biggest growth in coal demandwill be in non-OECD countries mainly from China and India, raising their share from 66%

today to 82% by 2035. They also estimate that by 2035 demand from the OECD willaccount for less than one-fifth of global coal demand compared with one-third today, itscoal demand declining on average 1.7% per year. Non-OECD countries account for all ofthe growth in global coal demand. Demand in power generation accounts for almost 60%of the increase in global coal demand while another 30% of the demand comes from theindustry sector. The growth in non-OECD coal demand is projected to come from powergeneration with China, India and Indonesia responsible for 61%, 21% and 6% of thegrowth, respectively (see Figure 4.A in Annex 4).

2FGD is a technology used to remove sulphur dioxide.



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Figure 3: Global Coal Demand in 2008 and 2035

Source: IEA, World Energy Outlook 2010

15. In addition, the single largest proportion of world-wide power generation comes from coal

generation. High economic growth in Asia will expand demand and international trade.Severe economic slowdown, global backlash against globalisation and trade cooperationwould reduce demand. Investment in coal-fired equipment will affect demand. Emergingnations building coal fired power stations are China, India, Chile, South Africa, Moroccoand Argentina.

16. Coal Resources and reserves: Although it could be argued that coal reserves arewidespread and are sufficient to meet demand for many decades, it is important toacknowledge the considerable uncertainties and limitations in the available data. TheWorld Energy Council (WEC) estimates a downward trend in proved coal reserves. This

could indicate that depletion is outpacing technological developments but it could alsoreflect a multitude of other factors such as land-use regulations restricting access to knownreserves. Only six countries (USA, China, India, Russia, South Africa and Australia)account for 85% of global reserves, so future global coal supply hinges upon the supplysituation for these countries. While each of these countries appears to have large reserves,



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some authors3 have highlighted how depletion and other factors could restrict supply ofcoal from these regions in the period up to 2050.

17. Chinese coal supplies are highly uncertain. In addition, China is already in the process of

becoming a net coal importer owing to a combination of growing domestic demand,removal of export subsidies, the existence of export taxes, infrastructure constrains and thehigh cost of rail transport from the north which makes imported coal highly competitive inthe centres in the south. Although observers agree on this trend, they vary widely in theanticipated volumes. An important factor is the sensitivity of global coal markets and coalprices to even relatively small changes in Chinese coal production and consumptiontrends. There is a risk that Chinese coal imports could be much higher than indicated bythe WEO2010 that could translate into higher global and regional coal prices. Similarly,supply and demand projections for India and Indonesia remain equally uncertain.

18. The limit to continued growth in the use of coal does not come only from its scarcity but

depends also on how coal’s carbon intensity can be reconciled with growing globalmomentum to stabilise green-house gas emissions at a sustainable level. The IEAestimates that coal production in most OECD regions is expected to decline over theperiod up to 2035 with the exception of Australia where growth in export demand increasesby 0.6% per year. To meet growing electricity and industrial demand, China’s coalproduction is expected to grow by 1.1% per year in WEO 2010.

19. The impact of demand on the supply of coal: Uncertainties in the demand of coal maycreate lumpy investments and represent bottlenecks in supply due to capacity constraints.These factors are difficult to predict and will consequently be ignored in the consideration

of coal prices in the period up to 2030 but could be important factors for particular years.Global coal consumption between 2000 and 2007 was driven primarily by the boomingeconomies of India and China. Since China now accounts for 46% of global coalproduction and 47% of global coal consumption, the prospects for global prices are highlysensitive to the future of the Chinese economy in general and the Chinese coal market inparticular. It is possible that the IEA and EIA scenarios underestimate the potential forfuture growth in Chinese coal demand. Around the year 2000 the energy use in theChinese economy underwent a structural break. Since the year 2000, electricityconsumption grew faster than GDP with an average income elasticity which is also higherthan historically. The Chinese economy continues to expand at around 10% yearly andwith the great majority of electricity coming from newly-built coal fired power stations, coal

demand increased by 130% from 2000 to 2009.

20. Future Chinese demand will depend on the speed of growth of the economy, the rate ofimprovement in energy intensity and the fuel mix. Some authors (Shealy and Dorian 2010)believe that scenarios for Chinese coal could significantly exceed the IEA and EIAprojections.

21. Other factors affecting the demand for coal in the long run: Climate change policies inregions other than Europe and technological developments will affect the demand for coalin the long-run. Technological factors are likely to play an important role but are verydifficult to predict as they depend on a very complex set of factors. For example, the

3Hook et al (2009) and Lin et al (2010)



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viability of Carbon Capture and Storage (CCS) technologies in the UK and globally couldbe an important factor, especially in the period after 2020. DECC’s estimates does notinclude carbon intensity as a factor influencing coal demand. Uncertainty remainsregarding the long term prospect of low carbon generation technological developments. An

increase in low-intensive generation technologies will affect coal prices negatively.Alternative uses of coal will also have an impact. For example, coal-to-liquid4 may showpromise due to rising oil and gas prices. Currently only South Africa is undertaking theseprojects on a large scale. Policies that regulate (limit) air pollution will have a negativeeffect on the demand for coal. Similarly, government policies encouraging other generatingtechnologies will limit the demand for coal.

22. Contractual arrangements such as the trend towards shorter-term and more flexible tradingaway from long-term contracts will affect the price of coal.

23. Factors affecting the gas market will affect the coal market in the UK (see Annex 2). Coaland gas are substitute fuels used in the production of electricity so the price of coal will beaffected by the price of gas and vice-versa.

Behaviour of Market Participants and Hedging of Risks

24. Rising oil and gas prices will make coal more competitive but, in the UK, this will alsointeract with the price of the EUAs. There is evidence that gas and coal prices are linked inrecent years. For example, an increase in the price of gas will make coal more competitive

but because generators would have to buy EUAs the cost of generation from coal wouldincrease eroding its initial advantage. There is evidence that since 2007 coal and gasforward prices are more highly correlated thank in the past. Our analysis shows that thecorrelation between the actual cost of coal and the actual cost of gas generation in theperiod 2007-2010 is 72% when the appropriate EUA cost is added to each fuel (see annexfor details).

Long Term Forecasts by External Organisation

25. Several other forecasts from external organisations were reviewed. These include the

International Energy Agency (IEA), Wood Mackenzie, the US Energy InformationAdministration (EIA), the European Commission (EC) and Cambridge Econometrics (CE).

26. The IEA’s analysis gives different results depending on the scenario5. In the “450 scenario”coal becomes the only fossil fuel that has a reduction in demand, reaching a level almost50% lower than under the reference scenario as there is a shift to cleaner fossil fuels.There is also a shift in Chinese power sector to less carbon-intensive activities and building

4 Converting coal to a liquid fuel (CTL) – a process referred to as coal liquefaction – allows coal to be utilised as analternative to oil.

5The WEO 20010 uses three key scenarios: A low carbon (450 ppm of C02) scenario, a “current policies” scenario

representing the implementation of current national climate change policies and a “new policies” scenario thatrepresents the implementation of broad policy commitments and plans announced by countries.



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of more efficient power stations. Also the production in exporting regions is lower, mainlydue to lower demand in export markets and lower prices.

27. Some short-run cost curves for internationally traded steam coal derived from WEO are

presented in Annex 1.

28. There is a big difference in costs versus the average FOB6 prices. Variations in FOB pricesare related to stretched supply chains and infrastructure constraints affecting profit marginsconsiderably. FOB prices in Asian markets have been rising in 2010 in response to a risein demand from the Pacific markets.

29. The position of China as a net importer is uncertain and will have a big impact on the costof coal. It is difficult to overstate the importance of China’s role in global coal markets.China has struggled to keep up with rapidly rising demand. It is now working to overcometransportation bottlenecks and to speed up the development of its vast coal resourcesconcentrated in the northern part of the country. China could become a net exporter andthis is likely to have major implications for trade patterns and prices of internationallytraded coal.

Liberalisation

30. Liberalisation in gas markets will impact on the price of coal in the UK and Europe moregenerally.

31. In addition, fuel prices may also respond to electricity prices. This makes the analysis evenmore complicated. The impact of electricity prices on fuel prices has been omitted in theanalysis of price scenarios presented here for simplicity. This omission would be ofconcern when analysing the evolution of fuel prices in the very near term but would be ofless relevance in the medium to long run.

Carbon Market and Coal Prices

32. Future developments in the pricing of CO2 and the future development of other carbon

markets will have an important impact on the use of coal and subsequently on its price.The carbon price will affect the demand for coal. As coal produces twice as much CO2 asgas, the price will impact on the price of coal. In Europe, we expect the EU ETS cap tobecome tighter throughout the period and up to 2050 and this will increase the cost ofelectricity generation using coal. On the other hand, technological developments such asCarbon Capture and Storage (CCS) would also affect the coal market. Importantuncertainties remain about the development of this technology but its impact will likely notbe negligible.

6Free on Board Prices, this is the price paid to take ownership of the commodity once onboard a shipping vessel in

the exporting port.



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Analysis by External Organisations

33. Annex 1 presents the analysis of the long-run cost curves for internationally traded steam

coal from the IEAs WEO. These do not on their own represent long-run marginal costs soshould not be taken as an indication of a supply curve for coal.

34. Annex 2 sets out the arguments for some recent dynamic interrelations between coal andgas prices. The conclusions from this are:

• Given that coal is used as a fuel mainly in electricity generation and the demand forenergy is likely to increase, there is a statistical relationship between the price of gas andthe price of coal. Recent forward gas and coal prices are more highly correlated than thepast fuel prices into major generating stations. Although this correlation is not extremelyrobust, it shows a degree of co-movement in gas and coal prices that cannot be ignored;

• The rationale for correlated prices in the UK and the European market will diminish overtime if the substitutability of gas for coal in electricity generation falls.

35. Annex 3 presents the historical evolution of coal prices including the dramatic increaseobserved in 2008 and its subsequent decline, for reference.

36. A summary of the analysis by all external organisations reviewed is presented in Annex 4including a qualitative description of the main drivers under each future scenario.

Surveying Forecasts by External Organisations

37. This approach involved surveying forecasts by external organisation and analysing themain underlying assumptions used in each one (see Annex 4 for details). All of theforecasts surveyed include figures up to 2030. The evolution of historical prices and acomparison of the forecasts by external organisations are presented in Figure 4.



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Figure 4: Coal Price Projections from External Organisations

Source: IEA WEO 2010, Wood Mackenzie, Cambridge Econometrics, European Commission(2009), EIA AEO 2010, Platts International Coal Report.

Methodology

38. In general, we use a combination of analysis of fundamentals together with estimates ofLRMC constructed from SRMC and investment costs. We also use some statisticalregression analysis based on the statistical link between coal and gas prices in the UK7 and analysis of forward prices judgement to derive the coal price figures for the period to2030.

39. We use regression analysis to study the relationship between coal and gas prices8. Basedon historical monthly figures for the period 1996-2010, we observe that fuel costs moveclosely together. There is a significant statistical correlation between coal and gas prices.

8Regression analysis was also carried out for the cost of generation, including the carbon costs. We found that for

the period 2007-2010 the correlation (R2) for coal on gas prices is 79% and the cost of coal generation (includingcarbon) Pc in £/MWhe is predicted to be Pc=0.73+12.13 Pg where Pg is the cost of gas generation in £/MWhe.



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The mathematical expression used is Pc= 0.29+79.71 Pg, where Pc is the price of coaland Pg is the price of gas, both in p/GJ9.

40. We recognise that a correlation coefficient (R2) of 49% is not very high and this is why we

only use this relationship in conjunction with other techniques such as developingapproximations to the long run marginal costs by using extraction and freight costs.

41. For the period 2013- 2020 we use a smooth linear interpolation. This is explained furtherin the next section. We also sense-check the figures for each scenario using a variety ofdifferent analytical methods and against the forecast of external organisations.

42. We provide an explanation of the methodologies used in each of the different scenarios inwhat follows.

Low Scenario

43. This scenario could come about as a result of timely investment, low economic growth, andliberalisation in Europe. It also represents low demand, high investment and highproductivity worldwide.

44. In all scenarios, for the period 2011 to 2013, we based our projections on forward prices.The rationale behind this approach is that the market for futures accurately reflects theinformation about the developments over the next few years and that the years up to 2013constitute a liquid horizon of forward trading. The near-term prices are exacerbated by a

combination of factors, including export capacity restrictions, extreme weather, higher gasprices and German nuclear policy decisions.

45. The table below shows average forward coal prices (“API 2”, or “CIF ARA”) in the weekcommencing 11 April 2011.

9We also carried out analysis of co integration between the coal and gas prices series on this regression. The time

series of coal and gas prices are co integrated according to the Engle-Granger test. The residuals don’t have a unitroot. Detailed analysis is included in the Annex 3.



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Figure 5: Coal Forward Prices

US$/tonne

2011 129.8

2012 130.5

2013 131.7

2014 133.5

2015 135.2

Source: Spectron, Weighted average of contracts for May, June, Q2, Q3 and Q4 delivery.

46. Based on this, we consider that in the central scenario, it would be reasonable to assume aconstant price of U$S130/tonne from 2011 to 2013. In the low scenario, forward priceswere adjusted downwards relative to $130/tonne by 5% and 10% in 2012 and 2013respectively. This is a reflection that uncertainty increases further out along the forwardcurve, but also allows for smooth trends in the trajectory of fossil fuel price projections.

47. We lack solid empirical evidence of the degree to which coal forward prices are a goodpredictor of spot prices. The table below compares historical prices with the average price

of the relevant forward contract in the last five days of December in the preceding year andin each of the two years before that. Based on the table below, recent forward prices (atone year ahead of delivery) have been within a +21% to -23% range of the correspondingspot price. Two years ahead of delivery, the range of uncertainty has been wider. However,our dataset is limited, and coincides with a major peak in global coal prices. Nevertheless,we still consider that an adjustment of near-term prices is needed (in the low and highscenarios) to reflect the availability of new information captured by the spot price that wasnot available at the time of the formation of future prices.



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Figure 6: Comparison of Historical Forward Prices and Realised Prices

Year Prices Forwardcontract (atyear – 1)

% diff Forwardcontract (atyear – 2)

% diff Forwardcontract (atyear – 3)

% diff

200788.83 68.48 -22.9%

- N/A - N/A

2008146.95 116.70 -20.6% 69.59 -52.6%

- N/A

200970.46 85.33 21.1% 103.41 46.8%

- N/A

201092.07 85.78 -6.8% 92.79 0.8% 92.66 0.6%

2011 (Q1)123.18 120.14 -2.5% 98.74 -19.8% 98.75 -19.8%

Source: Platts, Spectron

48. From 2013 and 2020, we interpolate between the value of the 2013 forward coal price(minus 10%), and a price of $80/tonne in 2020. We believe the latter price to be consistentwith LRMC in a low demand/ high investment scenario. We do not expect coal prices to fall

very quickly, unless there is a sudden fall in power generation due to poor economicactivity. In a scenario with low growth in demand, we do not expect prices to be aboveLRMC after 2020.

49. Annex 1 presents estimates of short-run supply costs for internationally-traded steam coaland estimates of seaborne freight costs. In order to come to a view on LRMC, theseestimates were supplemented by estimates of capital costs and freight costs. There isuncertainty over how production and investment costs are likely to evolve going forward, soany assessment of LRMC in a low demand scenario relies on certain assumptions.

50. The main countries supplying the European market are Russia, Colombia, South Africa

and the USA. According to peer reviewers from the Sussex Energy Group10, “…historically,the USA has been the ‘swing supplier’ to the Atlantic market, with higher cost Appalachiancoal mines being the marginal supplier to the Western European market. Coal from thePowder River Basin in the US (i.e. Montana and Wyoming) is currently uncompetitive in theAtlantic market owing to the high cost of rail travel”. In recent years, South African coal hasbeen increasingly drawn out of the European market and into the Asian market, due to thegenerally higher prices observed there11.

10Steve Sorrell and Gordon Mackerron, Sussex Energy Group, March 2011, “Comments on the DECC paper:

‘Fossil fuel price assumptions - supporting paper on the coal market’”

11Woodmac (2010)



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51. In a low demand/high investment scenario, we believe it is possible that US exports mightno longer be supplied to Europe and the UK. Based on the estimates of short-runproduction costs and freight costs presented in Annex 1, Russia could be the marginalsupplier, with short run costs (freight and production) of $71/tonne (in 2011 constant

prices), compared to $57/tonne and $62/tonne in South Africa and Colombia, respectively.

52. To derive LRMC, we have to make some assumptions on the required margin over short-run costs, which will depend on the investment cost, cost of capital, required paybackperiod and capacity utilisation. Investment costs vary by type of mine and requiredinvestment in additional inland transportation capacity. Based on Haftendorn et al (2010),citing IEA estimates, we assume investment costs of $50 per tonne of annual capacityaddition for the value-added chain from production to the export terminal. We assumefurther a cost of capital of 10%12, a required payback period of 10 years and capacityutilisation of 90%. This gives a required margin of approximately $9/tonne of coalproduced.

53. Based on this, we assume the LRMC in the low scenario will be $80/tonne ($71/tonneplus $9/tonne). In the absence of strong evidence to suggest otherwise, we hold thisconstant between 2020 and 2030. A combination of excess investment and improvedproductivity could offset the general trend of increasing extraction costs to keep the long-run marginal cost constant over the period. This results in a price that is below the majorityof other forecasters but higher than the IEA 450 scenario by 2030.

54. In addition, the assumption of a 90% capacity utilisation might seem at odds with theassumption that Russia would also be the marginal import source in this scenario, but we

use this simplifying assumption in order to arrive at a minimum margin estimate (a lowerutilisation assumption would result in a higher required margin).

Figure 7: Low Price Scenario (US$/tonne, 2011 prices)

US$/tonne

2011 130

2013 117

2015 106

2020 80

2025 80

2030 80

12Haftendorn et al (2010), uses estimates from New York University’s Stern Business School.



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55. As one sense-check, the price charged at Russian coal export points (the Free-on-Board,or “FOB” price) might give an alternative estimate of LRMC, as it might be argued that thisprice includes some element of margin. According to data presented by the IEA WEO 2010(see Annex 1), the average FOB price for Russian coal exports was approximately

$67/tonne over 2009 and the first half of 2010. Adjusting to 2011 prices and addingseaborne freight costs results in an estimate of LRMC (inclusive of seaborne freight) ofapproximately $83/tonne.

56. As an alternative sense-check, it is worth checking whether the resulting price trajectorymight be enough to pay for any increase in investment required under a potential lowdemand scenario. Taking the IEA WEO 2010 “450 scenario”, demand is projected toincrease to 2020 by 509Mtce (million tonnes of coal equivalent) on 2008 levels, beforedeclining to 2030. Assuming short-run costs (plus freight) of $71/tonne, the “low scenario”prices calculated above and a discount rate of 10%, capacity built to meet the additionaldemand to 2020 could earn profits of approximately (NPV) $44billion. Even at investment

costs per tonne of capacity addition of $85 per tonne of annual capacity addition, towardsthe higher end of the range estimated by Haftendorn et al (2010), investment could still beprofitable.

Central Scenario

57. In the Central Scenario, for the period 2011 to 2013, our projections are informed byforward prices, as described in the section above, and are set equal to $130/tonne. Asdescribed above, we believe that the near-term prices are supported by a range of factors.

58. The coal price for the central scenario from 2013 and up to 2020 uses an interpolationbetween the assumed value of the forward price for 2013 ($130/tonne) and the coal pricein 2020 that is informed by the statistical regression relationship described earlier (seeAnnex 3 for regression results). The assumed value of the price for 2020 is also informedon LRMC estimates.

59. The regression predicts a constant coal price of $106/tonne from 2020 to 2030. There area large number of unknowns about the price after 2020. On the one hand, climate changeaction could reduce demand for coal and this will depress coal prices. On the other hand,new and more efficient coal plants could be built with the implication that the price of gas

would have to fall relative to coal to compete. We recognise that this approach has somelimitations in the sense that information available is based on current technologies whereasinnovation is uncertain.

60. Given that the USA is generally the marginal supplier to the European market, the USAexport price, plus freight costs, could be seen as a “ceiling” for European coal prices.Taking the US EIA AEO 2010 “reference case” projections, and adding freight costs (seeAnnex 1) results in a “ceiling” European import price of $115/tonne in 2030 (declining froma peak of $136/tonne in 2020).

61. It is also important to see how US marginal costs could evolve over time. Haftendorn et al(2010) use a global equilibrium model that predicts trade flows and allows for model-determined changes in production costs. Based on the “reference case” demand from IEAWEO 2008 (though subsequently the model revises demand downwards, due perhaps toprice elasticity effects), the model predicts that the main suppliers to the European market



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will be Russia and the USA, with most of the Colombian and South African output going toAsian markets. Between Russia and the USA, USA Appalachian coal is predicted to be themost expensive in 2030; the price before inland transportation and seaborne freight costsare added is $68/tonne. Adding inland transportation costs ($26/tonne, see Baruya 2007)

and seaborne freight costs ($21/tonne, see Annex 1), and ignoring any required margin forinvestment costs, results in a European import price of approximately $115/tonne in 2030.Haftendorn et al’s (2010) model itself predicts a European import price of $110/tonne in2030.

62. Given the range of estimates above, we believe it is reasonable to round upwards from theregression-implied estimate of $106/tonne. Therefore, in the central scenario we assumethat for 2020 up to 2030, the coal price is$110/tonne.

Figure 8: Central Price Scenario (US$/tonne, 2011 Prices)

US$/tonne

2011 130

2013 130

2015 124

2020 110

2025 110

2030 110

63. These estimates generally fall within the range of prices estimated by external forecasters.

64. As a sense-check, we looked at whether the prices could be sufficient to incentiviseinvestment required to meet some plausible demand scenarios. Rough calculations showthat, under some plausible marginal cost assumptions, the price trajectory above issufficient to incentivise most new investment required to 2020 to meet the IEA “newpolicies” scenario, though it might not be enough for higher demand scenarios, such as theIEA “current policies” scenario.

High Scenario

65. This scenario could come about as a result of delayed investment, high economic growth,

market power or strategic protection of prices by producers. It could also represent a worldof high demand, low investment and low productivity worldwide.



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66. In the High Scenario for the period 2011 to 2013 prices are informed by forward prices. Inthe high scenario, forward prices were adjusted upwards relative to $130/tonne by 5% and10% in 2012 and 2013 respectively. This is a reflection that uncertainty increases furtherout along the forward curve, but also allows for smooth trends in the trajectory of fossil fuel

price projections (see “low scenario” above for more explanation of the use of forwardprices).

67. The coal price for the high scenario case for the period 2013-2020 uses an interpolation ofthe adjusted forward price in 2013 ($143/tonne) and the price calculated for 2020 using themethodology described below.

68. We use the EIA AEO 2010 “high coal cost” scenario as a basis for a high price scenariofrom 2020 to 2030. In a supply constrained world with high demand for coal, much of thedemand is likely to come from Asia, rather than Europe. In such a scenario, Asiancountries may draw imports from Colombia and South Africa, in addition to traditional

suppliers to the Asian Market (Australia and Indonesia). European imports are likely tocome from Russia and the USA at a higher import price, with the USA likely to be the moreexpensive source. In such a scenario, it is possible that Europe will have to draw on someof the less productive mines in the USA. Hence, the EIA AEO 2010 “high coal cost”scenario, which is based on lower productivity growth rates, higher mining wages, highertransportation costs and higher mine equipment costs, could represent a reasonable “highcase” for European import prices.

69. The EIA “high coal cost” scenario is not a smooth projection. We arrive at a smoothprojection for European import prices by taking point estimates in 2020, 2025 and 2030;

adding freight costs (see Annex 1) and interpolating between these points.

Figure 9: High Price Scenario (US$/tonne, 2011 prices)

US$/tonne

2011 130

2013 143

2015 146

2020 152

2025 155

2030 155

70. These projections are higher than predicted by any other organisation. However, given the

evidence available, we believe that they represent a reasonable “high case” for coal prices.

71. Figure 11 and the table below present the DECC Fossil Fuel Price Projections for coal.



20

Figure 10: DECC Coal Price Projections (US$/tonne, 2011 prices)

Low Central High

2010 93 93 93

2011 130 130 130

2012 124 130 137

2013 117 127 143

2014 112 124 144

2015 106 121 146

2016 101 119 147

2017 96 116 148

2018 91 113 149

2019 85 110 151

2020 80 110 152

2021 80 110 153

2022 80 110 153

2023 80 110 154

2024 80 110 154

2025 80 110 155

2026 80 110 155

2027 80 110 155

2028 80 110 155

2029 80 110 155

2030 80 110 155

Source: DECC



21

Summary and Conclusion

72. This paper has reviewed the different drivers of coal prices: market fundamentals, the links

between coal and gas prices, the influence of liberalisation in electricity and fuel markets,and the importance of the behaviour of market agents in hedging against price risks. Ahybrid approach has been used to present coal prices projections based on the futureevolution of gas prices and the analysis of constructed LRMCs. These projections havebeen compared with those forecasts of coal prices by external organisations (see figure 9).

73. There remain great uncertainties in relation to new technologies, climate change policiesand uncertainties in the demand of coal, the trade position of China in the internationalmarket, etc. No explicit assumption about the nature or extent of future policies to combatclimate change has been made nor the interactions with other factors.

74. All projections are based on the results from the analysis of market fundamentals, forwardprices, the current tightness in coal markets, statistical analysis between existing coal andgas prices, analysis of long run marginal costs and the analysis of the international market.Although the statistical analysis reflects the current close substitutability of gas and coal asfuels used in electricity has its limitation and it therefore only used as a guide. So, furtheranalysis of market forces and judgement was used to produce these projections

Figure 11: Comparison of DECC projections with external forecasters

Source: DECC analysis, Bloomberg Data



22

Summary of Coal Price Assumptions

2011-2013 2013-2020 Post 2020 Sense CheckedLow Judgement

based on acombination ofthe prevailingforward pricesand adownwardadjustment of5% and 10% for

2012 and 2013respectively

Assumingsmoothed / linearinterpolation

Estimate ofLRMC forRussian coal

Againstestimates ofinvestmentneeded andforecasts byotherorganisations

Central Judgementbased on acombination ofthe prevailingforward pricesand


Statisticalrelationship,estimates of USexport price

Againstestimates ofinvestmentneeded andforecasts byotherorganisations

High Judgementbased on acombination ofthe prevailingforward pricesand a upwardadjustment of5% and 10% for2012 and 2013respectively


US export price(EIA AEO 2010“high coal cost”scenario)

Againstforecasts byotherorganisations

Exchange Rates used:

$/£ = 1.546;

€/£ = 1.165

Coal-gas relationship

DECC analysis using a simple regression approach indicates that for the period 1996-2010 theprice of coal Pc in p/GJ is predicted to be Pc= 0.29+79.71 Pg, where Pg is the price of gas in

p/GJ.



23

References

Baruya, Paul (2007), Supply Costs for Internationally Traded Coal, IEA Clean Coal Centre , July

2007.

Energy Information Administration (2010), Annual Energy Outlook 2010 : with projections to2035.

European Commission (2009), EU Energy Trends to 2030 : Update 2009, DG Energy.

Haftendorn, Clemens, Franziska Holz and Christian von Hirchhausen (2010), “COALMOD-WORLD: A model to assess international coal markets until 2030”, PESD Working Paper 96 ,September 2010.

Hook, M. Aleklett K. (2009), Historical trends in American coal production and a possible futureoutlook, International Journal of Coal Geology , UK Energy Research Centre: London.

International Energy Agency (2010), World Energy Outlook 2010.

Lin, B-q; Liu, J.-h, Estimating coal production peak trends of coal imports from China, Energy Policy , 2010, 38,512-19.

Mohammadi, Hassan (2009), Long-run relations and short-run dynamics among coal, naturalgas and oil prices, Applied Economics , First published on: 29 May 2009, (free) downloadable

online.

Mjelde, James W. and David A. Bessler (2009), Market integration among electricity marketsand their major fuel source markets, Energy Economics, Volume 31, Issue 3, May, Pages 482-491.

Newbery, David, David Reiner, Tooraj Jamasb, Richard Steinberg, Flavio Toxvaerd and PierreNoel (June 2009), Carbon Capture & Storage (CCS): Analysis of Incentives and Rules in aEuropean Repeated Game Situation, DECC report,

http://decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/ccs/ccs/ccs.aspx

Shealy, M.; Dorian, J.P (2010), Growing Chinese Coal Use: Dramatic Resource andEnvironmental Implications, Energy Policy , 38, 3134-54.

Wood MacKenzie (2010), Pan-European Overview: Fuel Price Forecasts and Power Generation Economics.






24

Annex 1: The Short Run Cost Curve for Internationally Traded Steam Coal

The WEO presents the costs of producing coal for the international market. Their analysis for

2008 and 2009 is presented below. It is interesting to compare the figures to see how muchthese costs can vary from one year to the next.

Figure A1.1: The Coal Supply Cash-cost Curve for Internationally traded Steam Coal

Source: IEA. World Energy Outlook 2009 (Fig 1.13)

However, in 2009 there appears to be little change in the average cash cost of internationallytraded coal (Figure 1.B below). Based on this coal supply cash cost curve, the weighted averagecost is around $42 per tonne across all countries. Please note the difference in costs versus the

average FOB prices in 2009. The fall in FOB prices since the peak of 200, related to supplychains becoming stretched and infrastructure constraints, squeezed margins considerably. FOBprices in Asian markets are rising in 2010 in response to a rise in demand from Pacific markets.Coal futures suggests that prices will rise over the next four to five years as the global economypicks up. The highest prices could be found in Chinese ports.



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Figure A1.2: Coal Supply Cash-cost Curve for International Traded Steam Coal for 2009and average FOB prices for 2009 and first half 2010

Source: IEA, World Energy Outlook 2010, Fig 5.5

Seaborne freight costs are cyclical, and are currently much lower than the highs reached in2008. The table below shows average seaborne freight costs, adjusted for inflation, for steamcoal into Rotterdam, a key North-West Europe coal hub, from 2004 to 2011. Without a moredetailed analysis of the seaborne freight market, we use this average over the cycle as anapproximation for long-run marginal cost for seaborne freight.



26

Figure A1.3: Average Seaborne Freight Costs for Steam Coal (dry bulk) into North-WestEurope (Rotterdam), 2004 to April 2011

Port of Origin US$/tonne, 2011 Prices

Puerto Bolivar, Colombia – Capesize 21

Puerto Bolivar, Colombia – Panamax 43

Richards Bay, South Africa – Capesize 21

Richards Bay, South Africa- Panamax 24

New South Wales, Australia – Capesize 38

Hampton Roads, Virginia, USA – Capesize 21

Hampton Roads Virginia, USA – Panamax 21

Murmansk, Russia to ARA - Panamax 15

Source: Bloomberg



27

Annex 2: The rational for a Link Affecting Gas and Coal Prices

Gas and coal prices are linked in the short as well as in the long run. Because coal and gas are

substitute fuels used in the production of electricity the price of coal would be affected by theprice of gas and vice-versa. Indirectly, factors affecting the prices of gas will change the relativeprice of gas with respect to that of coal and will therefore affect its demand, in turn affecting theprice of coal in absolute terms. Whilst coal is mainly used in electricity generation, gas is usedfor generation as well as to provide heating to households.

As a result of deregulation more competitive and interrelated markets are developing in theelectricity and natural gas markets. Also, fuel prices may respond to electricity prices.

An additional important factor affecting the demand of these fossil fuels is the price of the EUAs.Coal and gas-fired generators face considerable risks trading in liberalised markets. The price offuels, electricity and CO2 are volatile. Any generating company faces risks that depend on itstechnology as its variables cost depend on the type of fuel chosen and the cost of the EUAswhile the price of spot electricity will depend on the marginal generator possibly burning adifferent fuel (and with different efficiency and other costs). If fuel and electricity prices do notmove together, gross profits will be volatile and risky. The EU ETS might be expected to reducerisk for coal and gas fired generation. If the price of gas increases relative to coal, generators willincrease output from coal-fired plants, but because that releases roughly twice as much CO2/ MWhe as gas the demand for EUAs will rise and so will their price, making the cost of coal-firedgeneration rise in sympathy with the cost of gas-fired generation (see Figure 2.A). For existinggenerating companies these risks are largely self-hedged at least in the medium run. In periods

of high demand for electricity, generators would switch to coal, but because generating with coalproduces more CO2 generators incur the cost additional cost of the EUAs. Newbery et al (2009)show that ETS makes both coal and gas competitive and this should have reduced the risksassociated with selling electricity from both types of power plant between 2000 and 2008.



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Figure A2.1: UK Electricity Generation Choices

Source: Newbery et al (2009) from UK Quarterly Energy Prices

Each point in figure 2.A represents the cost of generation using gas in a 50% CCGT plant

plotted against the cost of generating using coal in a 36% efficient station for various quarters.The triangles (red) represent the position before the EU ETS, the squares (black) are the costsof the fuels alone and the diamonds (blue) are the costs including the EUAs required for eachfuel (twice as many for coal than gas).

The straight lines show the combination of gas and coal prices (with their associated EUA price)between which coal and gas plant would have been able to compete with each other on variablecosts alone (depending on the efficiencies of each, where high efficiency of 55% can competeagainst low efficiency 34% coal at higher gas prices (as indicated in the dashed line). Note thatthe EUA price shifted the otherwise cheaper coal plant into this range of competition againstgas. This is shown by the diamonds (blue) moving down and to the right compared with the

squares. The EU ETS makes both coal and gas competitive, and this should have reduced therisks associated with selling electricity in both types of power plant.



29

Figure A2.2: UK 2010 Forward prices of electricity and fuel costs excluding EUAs

Source: Bloomberg data processed

Figure A2.3: UK 2010 forward prices and generation costs (including EUAs)

Source: Bloomberg data processed, EEX for carbon prices



30

Figure A2.4: Evolution of EUA Price

Source: EEX



31

Annex 3: Coal Prices and Econometric Analysis

There are indications that we might be at the end of a price boom with prices likely to be lower in

the near-term as the effects of the recession are played out.

In recent years, the price of seaborne coal into Europe has reached record levels, as much astwice the marginal cost of supply due to tightness on the supply-side. In late 2008, the coalmarket reached a turning point, with prices falling back towards the marginal cost of supply. Theglobal economic recession was a major contributing factor in the change.

Figure A3.1 Comparison of Coal and Gas prices

Source: DECC analysis, Bloomberg data



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Regression results

Low Central High

2010 78.3 78.3 78.3

2011 98.7 98.7 98.3

2012 82.6 104.1 134.1

2013 65.4 109.4 132.0

2014 66.4 113.7 126.6

2015 66.4 112.7 125.6

2016 66.4 112.7 127.7

2017 67.5 109.4 128.8

2018 67.5 106.2 130.9

2019 68.6 106.2 133.1

2020 69.7 106.2 135.2

2021 70.7 106.2 137.4

2022 71.8 106.2 138.4

2023 72.9 106.2 138.4

2024 74.0 106.2 138.4

2025 75.0 106.2 138.4

2026 76.1 106.2 138.4

2027 77.2 106.2 138.4

2028 78.3 106.2 138.4

2029 78.3 106.2 138.4

2030 79.3 106.2 138.4



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Econometric Analysis

Analysis was undertaken to explore the possibility of cointegration between the series of coaland gas prices. The unit root test of Engle-Granger shows that coal and gas prices are

cointegrated. Gas and coal prices do cointegrate, passing the test even at the 1% level ofsignificance. This is shown by the Dickey-Fuller test on uhat having a test statistic of -3.266,lower than even the 1% critical value of -2.999.

The Dickey-Fuller tests on gas and coal prices suggest that both series are I(1) at 5% level ofconfidence.

Econometric test results are below, gas representing gas prices in real terms (2009=100) andcoal are prices in real terms (2009=100). The Dickey-Fuller test for unit root on gas pricesshows:

. dfuller gas

Dickey-Fuller test for unit root Number of obs = 179

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -2.776 -3.484 -2.885 -2.575

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0618

. dfuller coal


---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical


------------------------------------------------------------------------------

Z(t) -0.677 -3.484 -2.885 -2.575

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.8527

. reg coal gas

Source | SS df MS Number of obs = 180

-------------+------------------------------ F( 1, 178) = 173.18

Model | 401290.365 1 401290.365 Prob > F = 0.0000

Residual | 412453.68 178 2317.1555 R-squared = 0.4931

-------------+------------------------------ Adj R-squared = 0.4903

Total | 813744.045 179 4546.05612 Root MSE = 48.137

------------------------------------------------------------------------------

coal | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+----------------------------------------------------------------

gas | .2920055 .0221891 13.16 0.000 .248218 .335793

_cons | 79.70859 7.404099 10.77 0.000 65.09748 94.3197

------------------------------------------------------------------------------

. predict uhat, resid



34

. dfuller uhat


---------- Interpolated Dickey-Fuller ---------Test 1% Critical 5% Critical 10% Critical


------------------------------------------------------------------------------

Z(t) -3.156 -3.484 -2.885 -2.575

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0227Annex 4: External Forecasts Surveyed

and Summary of the Main Underlying Assumptions



35

Annex 4: External Forecasts Surveyed and Summary of Main UnderlyingAssumptions

Scenario Demand Supply

World GDPGrowth /EnergyDemand

Coal intensityof energy /GDP

Other

IEA WEO 2010Current Policies

Scenario(referencescenario)

Worldpopulation

growthassumedannual averagerate of increaseof about 1% andGDP growth by3.2% per yearon averagebetween 2008-35.

No additionalgovernment

action onenergy – fossilfuels dominantsource ofprimary energy – coal biggestincrease.

China most ofincrease, mostof rest of OECDdemand

decreases.

Rising oil andgas prices

increasedemand forcoal.

Possibility ofcarbon pricehas negativeimpact ondemand.

GovernmentPolicies are

main source ofuncertainty to2035.

High reserves,potential

reserveadditions.

African supplyincreases.

Investment intransport andport facilitiesaids (slightlyscaled backpost 2008, then

recovery).

IEA WEO 2010New PoliciesScenario

(same asabove)

Additionalmeasures areintroduced thatmaintain thepace of globaldecline incarbon intensity

established in2008-20, inorder to reachtargetsproposed byCopenhagenAccord.



36




Other

IEA WEO 2010 – 450 scenario

(same asabove)

Shift to cleanerfuels, increasedefficiency inChina

CCS viabilityfactor after 2020

Lowerproduction, dueto lowerdemand.

EIA AEO 2010 – referencecase

Baselineeconomicgrowth (2.4% / year from 2008to 2035)

World oil priceand technologyassumptions

EIA AEO 2010

– high coalcosts

Lower

productivitygrowth rates,higher miningwages, highertransportationcosts, highermine equipmentcosts

European

Commission

baseline price

assumptions forthe EU27 arethe result ofworld energymodelling (usingthePROMETHEUSstochastic worldenergy model)that derivesprice

trajectories foroil, gas and coalunder aconventional



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Other

wisdom view ofthedevelopment ofthe worldenergy system

WoodMackenzie

Near term: slowgrowth indemand.

Longer-term:Asian demand

Longer term:competition inEurope fromgas generationtends to lowerdemand; USgas priceincreases tendto increase

demand

Mid-term:Weakeningdollar leads tocost increases

Long-term:Russian andColombiancapacityexpansions;

mining costescalations

CambridgeEconometrics

Assumed 1%annual increasein prices, from2010.

In general, UKprices areassumed to

move in linewithinternationalprices, whichalso drive UKfuel importprices.



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International Energy Agency (IEA)

Price assumptions reflect the IEA judgments of the prices that will be needed to stimulate

sufficient investment in supply to meet projected demand. OECD coal prices in the InternationalEnergy Agency: World Energy Outlook (2010) are determined by five broad factors:

Demand

• Oil and gas prices

• The carbon price

Supply

• Coal exports

• Trade position of China (net importer or exporter)

• Investments

Current Policies Scenario (Reference scenario)

Demand

• Fossil fuels remain the dominant source of primary energy and coal will see the biggestincrease.

• The main driver will be inexorable growth in energy needs for power generation.Electricity demand is projected to grow at 2.5% per annum; over 80% of this growth willbe in non-OECD countries (China and India in particular).

• Rising oil and gas prices will make coal increasingly more competitive.

• The possibility or the extension of a carbon price will negatively impact on coal demand.

Supply

• Coal reserves are high and potential reserve additions could supply demand growth formany years post 2030.

• Coal exports will continue to rise; recent investments in Australian coal infrastructureshould ensure an end to bottlenecks witnessed in 2007 & 2008.

• African supply levels are predicted to rise. Although China will become a net importerrather than exporter.

• Recent (post 2008) scaling back of investment will slow the growth in production capacitybut only to a relatively small degree and investment will pick up again when demand andprices recover.



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New Policies Scenario (central scenario)

World electricity demand is expected to continue to grow. Demand is projected to grow by 2.2%per year between 2008 and 2035, with more than 80% of the increase occurring in non-OECD

countries.

Fossil fuels (coal and natural gas) remain dominant, but their share in total generation dropsfrom 68% in 2008 to 55% in 2035. Nuclear and renewable resources expand.

Coal remains the leading source of electricity generation in 2035 although its share of electricitygeneration declines from 41% to 32%. A big increase in non-OECD coal-fired generation ispartially offset by a fall in OECD countries.

Demand for coal increases by around 20% between 2008 and 2034 with almost all the growthbefore 2020. Coal demand grows by 0.6% per year and each sector’s share of demand remainsroughly similar.

Cumulative investment to meet projected coal demand through to 2035 amounts to some $729billion (in 2009 prices). Two thirds takes place in Non-OECD regions with China alone needingover $260 billion.

Global coal production grows from under 4900 mtce in 2008 to just above 5600 mtce in 2035.China accounts for half of global coal production by 2035.

The share of nuclear power in generation increases only marginally.

The share of renewables in global generation increases from 19% in 2008 to almost a thirst in2035 (catching up with coal).

Figure A4.1 – Change in primary coal demand by sector and region in the New PoliciesScenario, 2008-2035



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450 Scenario

• Coal becomes the only fossil fuel that has a reduction in demand, reaching a level almost50% lower than under the reference scenario as a shift to cleaner fuels. This is due to the

impact of policy action to cut demand.

• Coal demand peaks before 2020 returning to 2003 levels by 2035.

• Renewables and nuclear double their current share to 38% in the energy mix in 2035.

• Shift in Chinese power sector to less carbon-intensive activities and building of moreefficient power stations.

• Production in exporting regions is lower, mainly due to lower demand in export markets

and lower prices.

Figure A4.2: World Primary Coal Demand by Scenario

Source: IEA, WEO (2010)

Cambridge Econometrics

• In general; UK prices are assumed to move in line with international prices, which alsodrive UK fuel import prices.



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Energy Information Administration

• Reference Case: Baseline economic growth (2.4% / year from 2008 to 2035, world oil

price and technology assumptions

• High Coal Cost: Lower productivity growth rates, higher mining wages, highertransportation costs, higher mine equipment costs

European Commission

• The baseline price assumptions for the EU27 are the result of world energy modelling(using the PROMETHEUS stochastic world energy model) that derives price trajectoriesfor oil, gas and coal under a conventional wisdom view of the development of the world

energy system.

Wood Mackenzie

• Near term: Weak demand in the near-term due to effects of recession and competitionfrom gas in the power sector

• Mid-term: Prices strengthen as dollar weakens, resulting in increased marginal costs ofsupply

• Long-term: Marginal costs increase in line with forecast mining cost escalation; prices

supported by need to finance new supply resources; Increasing inter-fuel competition;South African supplies shift to Pacific basin, but Colombian and Russian expansionsbrought into play; German demand increases as domestic mining phased out and newcoal-fired projects are completed; increase in prices 2020-24 related to increasing naturalgas prices in the US – increases demand for Colombian coal; US continues to be swingsupplier to the European market



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Figure A4.2: Coal Price Forecast – CIF ARA

Source: Pan-European Overview, Fuel Price Forecasts and Power Generation Economics,Wood Mackenzie, October 2010.

2936 Decc Coal Price Projections

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