VINACHEM

“Sustainable Energy for All” is themain theme for this week’s Rio+20 United Nations gathering in Brazil. The challenge of making energy both accessible andsustainable has grown more complicated in the past year or so,and also more exciting. These are tough times for coal and otherhigh-carbon sources of energy, while the news about clean energyis more promising.

In March, the power generating arm of India’s largestconglomerate, the Tata Group, announced that it was shifting itsinvestment strategy from coal-fired thermal plants to wind andsolar renewable projects. Coal projects, Tata said, werebecoming “impossible” to develop, and investment in them hadstopped.

With this declaration, one of Asia’s biggest energy playersconfirmed an emerging reality. The U.S., Europe, Russia,Australia and Japan all had created modern consumer economiesdependent on abundant, cheap fossil-fuel energy. In the 21stcentury that is no longer viable; the high-carbon growth path isclosing.

The reason is cost. Oil has long been expensive, becauselow-cost oil producers such as Saudi Arabia have learned todemand high prices by limiting supplies and refusing to signlong-term price agreements. Coal had always been different --traded locally, on both long-term concessions and short-termspot contracts. Two years ago, China and India could supplementtheir domestic coal supplies with imports from Indonesia,Australia and South Africa. Some of the cheapest coal minesserving China in 2010 were in Indonesia, where India’s AdaniPower Ltd. and Tata were purchasing coal mines and buildingtheir own shipping and port facilities to ensure they couldsupply a wave of huge new power projects.

While coal is geologically more abundant than oil, cheapcoal, close to population centers, is not. The biggest coal-producing region in the U.S. -- the Powder River Basin -- canget coal out of the ground for about $12 a ton. It costsroughly $60 a ton to ship it to power plants in the Ohio Valley.China’s vast reserves near Inner Mongolia can be mined for $25 aton. But by the time it travels by rail across North China, thenby sea to southern coastal cities, the cost rises to more than$125 a ton.

Shipping coal is more difficult and more expensive thanshipping oil. Only a few coal-exporting countries are close toAsian markets; Australia and Indonesia dominate the trade. In2011, countries with abundant accessible coal, such asIndonesia, began to demand high prices -- two times higher infact. Coal became the new oil. An informal cartel of coalexporters emerged with the same strategic goal as theOrganization of Petroleum Exporting Countries -- obtaininghigher prices.

China and India, which had been counting on buying coal for$40 a ton, now find that imported coal at $120 a ton is “cheap.”Dozens of coal plants in China and India cut back capacitybecause of fuel costs and shortages. Indian power companies scrapped 42 gigawatts worth of new power plants. The Reserve Bank of India warned investors that coal projects were veryrisky. India’s largest coal company tried to raise its prices,only to be forced to back down by the government, which ownsmore than half of it. Eventually, Indian Prime Minister Manmohan Singh ordered Coal India to provide adequate coal deliveries forpower projects in the pipeline. Coal India grudgingly agreed,but markets didn’t believe it could deliver; banks continued torefuse to lend, leading to Tata’s announcement. Meanwhile, inChina, the government tried to reverse its previous deregulationof the coal-mining and transportation sectors in an effort toget prices under control, causing friction with state-owned coalmines.

Expensive Shipping

India and China, respectively, are home to some of theworld’s largest coal reserves. They are the fastest-growingglobal coal markets. But most of their coal is distant fromtheir booming coastal regions. Their rail systems are inadequateto ship the volumes needed to fuel existing needs, much less thegrowth expected by 2020. And shipping coal by rail is expensive.Most of the cost of coal is not wages, but diesel fuel usedeither to mine or transport it. As oil grows more expensive, itdrags the price of coal up with it.

There is cheap coal in the Powder River Basin, in partbecause U.S. demand for coal is slumping as American powercompanies shift to cheaper and cleaner natural gas orrenewables. Peabody Energy Inc. would love to ship its surplusWyoming coal to Asia, if it can get it there. Peabody promisesinvestors that it can make money shipping coal to China --precisely because it expects the price to remain at $120 ormore. But U.S. coal companies must first overcome localcommunity opposition to shipping and loading hundreds ofmillions of tons of dirty black dust through West Coast portssuch as Longview, Washington.

What does $120-a-ton coal mean for the development plans ofIndia and China? At $120 a ton, electricity from coal costsabout 10 cents a kilowatt-hour, before installing pollutioncontrols. But India and China built their economic plans on 4cents-a-kilowatt-hour power, presuming that cheap Indonesiancoal would keep the price down.

Indonesia is no longer willing to be the low-costprovider; it sees China and India using imported coal to fuelindustrialization and economic development, and would rathersee that development taking place at home. So the island nationannounced that it will impose a tax on coal exports, leading toan actual ban in 2014. If Indonesia follows through, it wouldpull about 320 million tons -- roughly 40 percent of the Asiancoal transported by sea -- off the market, creating a powercrisis for China and India (and other importers, such as Japanand Korea) that would make the shortfalls of 2011 seem minor.Even if Indonesia merely insists on keeping prices at more than$100 a ton, the cost of electricity in China’s and India’s booming, but still fundamentally poor, economies will double.

Transportation Fuel

Oil, clearly, is already too expensive to power Asia’sgrowing electricity demand. The price of liquefied natural gas,which most Asian nations import, is linked to oil. India andChina are now aggressively seeking their own versions of theshale-gas boom occurring in the U.S. But even if they manage toincrease domestic supplies, they would be shrewd to convertnatural gas to a transportation fuel rather than devoting it toelectrical generation.

Because as the cost of high-carbon electricity soars, thecost of low-carbon alternatives is plummeting.

China’s wind industry is eager to provide power at pricesranging from 7 cents a kilowatt-hour to 13 cents, and India’slatest solar projects are bid at 15 cents. Costs of wind andsolar continue to decline. The conventional wisdom is that,because wind and solar are intermittent sources, they can’t beused to power an entire economy. It’s true that it will takesome time before renewables can compete with the $40-a-ton coalthat Asia had been counting on. But as challenging as the low-carbon path to growth may be, coal markets are telling Asia ithas no choice. High-carbon growth not only would cook theclimate. It would also derail Asia’s economies.

(Carl Pope is a former chairman of the Sierra Club. Theopinions expressed are his own.)

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