Divestment (Part 2)

The FT reported yesterday that ‘Funds worth $2.6tn pledge to dump coal’. So, where does the industry go from here?
At the recent European Energy Venture Fair (http://bit.ly/1iwmyFU), I heard an excellent talk by Peter Tertzakian (http://bit.ly/1MpLEk7) during which he observed that the oil & gas lobby is doing as much as it can to ‘throw the coal industry under a bus’. The topic of his presentation was energy transitions and how incumbents react when faced with the threat of new forms of energy. He noted that their first instinct is to lobby for government assistance on the basis that jobs are at risk but that eventually they fight back by innovating and reducing costs.
Well, the coal companies in the US have certainly followed the first part of the game plan. So did the coal industry here in the UK, around 30 years ago, but that was in the face of competition from overseas not environmental regulations. We have seen similar tactics in Australia in opposition to carbon trading and, more recently, in Germany in support of lignite mining. So far, so predictable. The more interesting question is what the coal industry can/will do to adapt its offering to market conditions and compete against cleaner sources of energy which include oil, gas, nuclear, renewables and pretty much anything else.
Firstly, coal is a cheap source of energy and low cost is a powerful competitive advantage. According to Mr Tertzakian, history shows that new forms of energy need both greater utility and lower cost to displace the incumbents. It is also in plentiful supply from reliable sources, so confers energy security. And it’s easy to use; coal-fired plants are much easier to build and run than nukes and much larger scale than renewables. There remain willing customers in placed like India, for example, which has not suffered the kind of air quality problems that the Chinese are now trying to remedy.
But what about innovation? In theory, coal could be a low-carbon fuel; it just needs carbon capture and storage. Although CCS provokes both scepticism (too expensive!) and opposition on principle (it’s somehow cheating!), a few projects are now off the ground, or at least on the launch pad. The coal companies had a chance to put some financial muscle into the nascent CCS industry around 10 years ago but chose instead to engage in self-denial. Perhaps there is still time for them to back the technology, bring down the costs and demonstrate that coal has a future in a lower-carbon world. If not then the efforts of socially-responsible investors and regulators may call time on the industry.