The International Energy Agency’s (IEA) 450 Scenario, which outlines an energy pathway that limits global temperature increases to 2°C, would result in a significant reduction in coal’s share of the global generation mix, according to analysis from Wood Mackenzie.

According to the research consultancy, a 2°C limit on temperature rise would reduce coal’s share to just 16% by 2035, compared to 41% in 2013. It would also see long-term prices fall and stay below real US$50 per tonne and could prompt massive industry consolidation.

The IEA 450 Scenario is based on high improvements in energy efficiency and an increased share of nuclear, renewables and gas in the generation mix. It also assumes the carbon capture and storage will become commercial post-2020, supporting 980 million t of thermal coal consumption in 2035.

The scenario is important following last year’s COP21 in Paris, where agreement was reached to limit global temperature rises to “well below 2°C”. The world’s two largest carbon emitters, the US and China, recently ratified the Paris Agreement at the latest G20 talks with India expected to join them later this year.

Yet achieving the 450 Scenario will be challenge for nations at early stages of maturity that hold significant fossil-based reserves (think India) and mature economies that are “fossil-fuel free islands” (think Japan), Jonny Sultoon, Research Director for Global Coal Markets at Wood Mackenzie, told World Coal.

“The IEA 450 Scenario as it has been interpreted looks very restrictive beyond 2030 for countries like Japan, South Korea and Taiwan,” Sultoon said. “Taking Japan as an example, in the Ministry of Economy, Trade and Industry’s Nationally Determined Contribution (NDC) base case scenario, coal takes approximately 25% share of fuel mix by 2030 with a fairly strong return for nuclear generation.” This would result in the country’s thermal coal imports falling to the 100 million tpy range, according to Wood Mackenzie’s analysis.

“But all country level NDCs are not strictly speaking setting up a plan to limit global temperature rises to 2°C. Various estimates suggest anywhere from 2.7°C to 3.3°C of rise given all of the NDCs submitted,” Sultoon continued.

So to reach that 2°C goal (as per the 450 Scenario) or lower (as per the Paris Agreement), Japan’s coal use may well have to fall further than currently planned. “Japan would have to rely on a combination of much stronger nuclear (which we feel is very challenging, following Fukoshima), lower carbon-intensive generation (highest efficiency CCGT plants and/CHP, some possible also equipped with CCS) and more aggressive renewables growth,” said Sultoon.

This could conceivably see Japan’s coal imports fall to the 50 – 60 million tpy range – a 60% reduction from today’s levels.

As well as impacting the level of coal usage, the 450 Scenario would also require use of only the highest-quality coals. Taking Japan again, the imported coals would need to be “of the highest quality (in kcal terms), low ash, low sulfur to feed a fleet well into the 40%+ efficiency range,” Sultoon said.

That trend would be evident globally too, added Prakesh Sharma, Research Director for Global Coal Markets at Wood Mackenzie. “Our analysis suggests demand for high-energy bituminous coals will be more resilient compared with low-energy lignite-type coals,” Sharma said.

This would see Australian exports holding up better than most on the country’s higher-quality coal, although still falling 35% from 210 million t in 2015 to 135 million t by 2035. “In comparison, Indonesian exports will decline from 340 million t in 2016 to 193 million t by 2035. Colombia, Russia and South Africa combined will export less than Australia in 2035,” Sharma continued. 

One potential impact of this upheaval could be significant coal industry consolidation as the industry attempts to maintain control over prices in a shrinking market. And then there are the unknowns: “Many unintended consequences may emerge that have not yet been evaluated nor integrated into corporate strategies and governmental plans,” Sharma concluded.

In the post-Paris world, it seems the coal industry will to get used to significant volatility and uncertainty as it attempts to keep its place in a changing energy landscape.

Edited by Jonathan Rowland.