Australia is rich in natural resources and is one of the world’s largest producers and exporters of coal. But despite Australia’s plentiful reserves, the rising international cost of coal has been one of the key factors behind the recent surge in Australia’s wholesale electricity prices.
Here’s why the global cost of coal has an impact on Australian power stations, and why those costs have been going up.
Why are Australian power stations impacted by the international coal market?
Australia produces two types of coal – brown coal and black coal.
The high moisture content of brown coal reduces the amount of energy that can be produced by burning it. It’s not considered viable for the export market, and even within Australia, only three remaining coal-fired power stations – all located in Victoria – are fueled by it.
Black coal, on the other hand, contains more carbon and less ash and moisture than brown coal, and therefore produces more energy when it’s burned, making it a more efficient fuel source. Black coal is mainly used for two purposes – to generate electricity (thermal coal) and make steel (metallurgical coal).
Australia is ranked fourth globally for recoverable black coal resources, but the overwhelming majority of that coal is exported. In fact, Australia is the world’s largest exporter of metallurgical coal, and the second largest exporter of thermal coal – according to the Office of the Chief Economist’s most recent Resources and Energy Quarterly report, 75 to 80 per cent of Australia’s thermal coal is exported.
Because Australia is part of a global trading market and has longstanding agreements in place with countries such as Japan and South Korea to export most of our black coal, Australian buyers must compete with overseas buyers to purchase black coal.
And since every coal-fired power station in Australia’s National Electricity Market (NEM) outside of Victoria runs on black coal, and these stations still provide the bulk of baseload power in the NEM, that means that when international coal prices rise, so do our wholesale electricity prices.
Why has the price of coal been going up?
The coal market is going through a continued period of volatility, which has largely been attributed to market uncertainty in the wake of Russia’s invasion of Ukraine.
Russia’s coal and gas exports have traditionally helped to fuel the global economy. But with the European Union imposing economic sanctions on Russia in the wake of the invasion, and enforcing an embargo on Russian coal from 11 August 2022, EU demand for coal from South Africa, India and Australia has soared.
The EU has also sharply increased its imports of liquefied natural gas (LNG) from alternative suppliers, leading other countries that have relied on LNG to turn to coal.
Even before the invasion, however, coal prices were already surging as COVID-19 lockdowns ended and economies opened back up around the world.
At the height of the pandemic, demand for energy fell, as businesses were required to shut down or scale back their operations. Supply fell accordingly, but when the global economy began to recover and demand increased, supply couldn’t keep pace, and prices rose to then-record highs late in 2021.
Heavy rainfall and floods in Australia have also impacted the supply chain, while power shortages in India and Japan, the world’s second and third biggest coal importers, respectively, have also contributed to the boost in demand and the rise in prices.
Coal demand in China, the world’s largest consumer by far, also reached an all-time high in 2021. And while Russian coal has been redirected to China in light of western sanctions on Moscow, this has been limited by the availability of vessels and eastbound infrastructure.
But there are signs of relief for the market. In China, strong hydro generation, and ongoing lockdowns which have affected several industrial zones, have led to a recent reduction in demand for thermal coal.
At the same time, the Office of the Chief Economist’s report notes that supply disruptions are easing in Australia, Indonesia, Columbia and South Africa.
Regardless, prices are expected to remain relatively high and volatile for the foreseeable future. Globally, the uncertain duration of the Russia-Ukraine conflict, and the extent to which it will disrupt the coal and gas trade, continues to cloud the outlook for the market.
Domestically, Australia could see more weather disruptions later this year, with forecasts of a third straight La Niña summer resulting in above-average rainfall for northern and eastern Australia during spring and summer. The Office of the Chief Economist’s report notes that, with Australian coal remaining in high demand, any further supply disruptions here could result in more price surges internationally.
In the long term, Australia is evolving towards a grid powered largely by renewable energy, and will gradually become less reliant on thermal coal for baseload power.
For the time being, however, Australia’s traditional generation assets continue to play an important role in ensuring the grid provides stable, secure and reliable energy for homes and businesses – and that means Australia will continue to be part of the global coal market.