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The West Is Missing Asia’s Coal Opportunity

 
 

As the mining boom which gave a boost to Australia’s living standards second only to the gold rush of the 1850s reached its zenith in 2012, industry observers feared that they would never again see an IPO like Yancoal Australia’s, which listed for roughly $1 billion. Asia’s ever-rising hunger for coal, however, is spilling over onto neighboring shores and prompted U.S.-based Coronado Global Resources, one of the world’s largest coking coal producers, to launch a $1 billion IPO of its own in Australia next month.

Even though Coronado is mostly producing coking coal used for heavy industries like steel production, the move is nonetheless symptomatic of a broader trend – Asia has become a hotbed for coal-related opportunities and the global market is increasingly centering around the region. China and India, as well as several Southeast Asian countries, are the drivers behind this. According to a recent Institute of Energy Research report, these countries are expected to “increase coal use for expanding power generation through 2040.”

The region is already leading the world in plant construction. Between 2016 and 2017, for example, China commissioned more than twice as much coal-fired capacity as the rest of the world combined. Several of these are planned to go online region-wide in the coming years, creating the basis for the 100 gigawatts (GW) of coal-fired capacity envisioned to be built by 2040most are high-efficiency, low-emission (HELE) plants relying on supercritical (SC) and ultra-supercritical (USC) technologies that reach up to 50 percent net efficiency in coal combustion compared to 30 percent of standard plants.

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Building these plants poses both a formidable challenge and a lucrative opportunity. Massive investments are required to realize these projects and bridge the region’s growing energy gap, but these investments may return as much as $250 billion in the coming years.

The reason behind this profitability is simple: For Asia, choosing coal power is an economic imperative. China, India and Southeast Asian countries — home to roughly 60 percent of the global population, many of which living in developing and emerging economies –are still reluctant to compromise on economic development: large-scale electrification is a much-needed catalyst for income and economic growth. Since coal is a comparatively cheap and abundant resource, shunning the fuel is not a choice many leaders are prepared to make.

These factors make future investment in Asian coal a certainty. The question is, given the geopolitical shifts remaking the global order today, who will answer the call for funding? The issue of Asian coal is emblematic of the declining influence of the West as much as it signifies its misreading of economic and political realities of a rising Asia. Western-dominated financial institutions used to be key in providing coal finance. Now, however, international financial institutions have greatly curbed financing for fossil fuel projects. Private banks such as Standard Chartered, HSBC and Societe Generale have announced they are terminating their financing of coal plants. However, the fact that the World Bank is equally ending all financial support for oil and gas extraction projects after 2019, in addition to having seized lending for coal-fired power stations in 2010, weighs heavier. Citing the need to change the way it operated in a “rapidly changing world,” the Bank has effectively closed the door on short-and medium-term Asian energy needs.

Meanwhile in Europe, the European Investment Bank (EIB) as well as the European Bank for Reconstruction and Development (EBRD) have been facing strong political pressure to radically scale down fossil fuel financing in the coming years. The EIB has been instrumental in providing the capital necessary for infrastructure projects to the tune of 5.3 billion Euro between 2014 and 2016. But here again, once lending to the fossil fuel sector dries up, those yearning for investments will be left grasping for straws.

All of these policy decisions are counter-cyclical to the developments in Asia, which is opening the door wide for those who are prepared to engage more in the region’s energy future. And as with so many things, China is more than willing to jump in and go the distance when the West is not.

Through bilateral means and its first major attempt at remodeling the traditionally Western-led international financial order, the Asian Infrastructure Investment Bank (AIIB), Beijing is bent on securing – and dominating – Asia’s energy future. Absent the traditional fund providers, Chinese financial institutions are now the world’s largest source of funding for overseas coal plants. Between 2013 to 2016, $15 billion were poured into coal projects via development funds.

There is, however, an angle: Chinese coal projects support is intrinsically tied to its mammoth foreign policy project, the Belt and Road Initiative. Recipient countries are often seen as eternally beholden to Beijing, trapped in debt which only enforces Beijing’s influence over its “satellite” governments. This pattern is placing countries along the BRI in a dilemma that many increasingly feel can only be resolved if dependence on China is reduced.

With regional energy planners stuck between a rock and hard place, there may be a new way out after all. Last year, U.S President Trump announced the establishment of a “Clean and Advanced Fossil Fuel Alliance” to pitch HELE coal technologies on a global scale. The alliance is as much a tool to circumvent the institutional funding ban as it is to increase U.S. coal exports in line with Washington’s goal of achieving energy dominance.

The project has since been upgraded to a fledgling global institution focusing on advising and financing HELE-related infrastructure projects. Presenting a way out of the need for clean coal and receiving funds from countries other than China, it is not surprising that India, and Vietnam among other emerging economies have signaled their interest in signing up.

While the alliance is still in the consolidation process, it represents a funding alternative to China and the World Bank. Western governments should look at coal as an opportunity to lift a significant proportion of the world’s population out of poverty. It may be more worthwhile to make coal more efficient rather than abandoning it.

Andrew Witthoeft is a EU affairs adviser for an international consulting firm. 

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