The region is changing fast, writes Yulanda Chung from IEEFA

Moon Jae-In’s recent election as president of South Korea not only heralds a new dawn for the country, but his pledges on energy policy may well have serious ramifications beyond its borders, not least for Indonesia’s coal exporters.

Faced with growing unrest from an urban population choking in high levels of air pollution, Mr. Moon has promised to re-assess the construction of new coal power plants, close older ones and dramatically ramp up the renewable energy target.

Effectively, his pledges would halve the long-term growth rate for thermal coal imports at a stroke.

This is important because South Korea is Asia’s fourth-largest economy and the fourth-largest importer of coal globally, accounting for over 10 percent of world thermal coal import demand.

The bulk of the market – around 40% – is made up of China and India, which are already well along the path to cutting coal imports to zero. While China’s coal consumption peaked back in 2013, earlier this month, costs for solar in India hit another record low, dropping a remarkable 40% since the previous record which itself was only set 16 months ago.

With solar power already cheaper than imported coal, India’s Energy Minister Piyush Goyal has repeatedly stated that his country will end coal imports by the end of the decade.

Indeed, Moon’s policies are in no way revolutionary. In fact, they are entirely consistent with the technology-driven energy market transformation that is taking place globally—and in Asia in particular.

For the coal industry, faced with this rapid shift, South Korea had long been identified as one of the remaining growth markets of significant size and a key source of ongoing viability.

Moon’s ascension may well snuff out this bright spot in the bleak overall outlook for seaborne coal used for electricity generation.

The implications for Indonesia, as the world’s largest exporter of coal, are impossible to miss. As Bloomberg analysts noted in an April update, ‘Indonesian miners may have the most to lose if thermal coal prices weaken in
coming months’ and ‘will bear the brunt’ of the decline.

Notwithstanding the recently improved traded price of thermal coal, Indonesia’s major coal miners remain in financial distress and as such are extremely exposed to any sustained decrease in Asian imports.

Total Indonesian coal production for 2016 is estimated at 363 million tonnes, according to the Indonesian Coal Mining Association (APBI) & Ministry of Energy and Mineral Resources, 12.7% lower than 2015 production of 416 million tonnes.

Of this, the portion absorbed by the domestic coal market increased from about 21% in 2015 to 31% in 2016. This still leaves about 70% of the coal vulnerable to changes in the export market.

Indika Energy finds itself particularly in the firing line with over 74% of its product destined for export. Adaro Energy is not far behind at 70%. Being one of the top five thermal coal exporters in the world, Adaro sold 13% of its coal to South Korea in the first quarter of this year.

Granted, Indonesia’s primary markets are China and India, but any reduction in demand from the key North Asian markets will hurt pricing at a time when exporters are banking heavily on new growth.

Some of this new growth was also slated to come from Japan and Taiwan, but once again, the barometer is shifting away from coal.

Taiwan’s President Tsai Ing-wen in particular is pressing for a radical electricity sector transformation.  

May 2017 saw Taiwan update its new eight year green energy development plan that forecasts a fourfold expansion in renewables to 20% and a one-third decline in reliance on coal-fired power generation from 45% to just 30% by 2025. This includes constructing 4.2GW of on and offshore wind farms, with the first 1.5GW awarded to Copenhagen Infrastructure Partners earlier this month. Taiwan’s infrastructure investment plan today totals NT$955 billion (US$32bn).

In April 2017 Japan raised its cumulative installed renewable energy capacity over 100GW, a near doubling post-Fukushima. Adding to the long established 50GW of hydro-electricity capacity, Japan has reached over 45GW of cumulative installed solar, with onshore wind and waste-to-energy making up the balance.

Combined with the cumulative 12% decline in Japanese electricity demand since 2010, renewables and energy efficiency have transformed the electricity grid. IEEFA forecasts that a continuation of this trend coupled with possible nuclear restarts will see Japan’s thermal power generation decline 2-3% annually in the coming decade. May 2017 saw the commencement of the 258MW Okayama solar plant in Okayama, Japan’s largest solar project to-date.

The outcome of declining thermal power demand is that Japan’s open-ended plan to add 23GW of new coal fired power capacity is looking out-dated and largely redundant. As such, the January 2017 cancellation of the 1,200MW Ako coal plant conversion by Kansai Electric and March 2017 announcement by TonenGeneral to cancel a 1,000MW coal plant is likely to be the first two of many more over the coming year or two.

Industry optimists may still point to improved demand from Vietnam, Malaysia, the Philippines and Thailand, which may climb slightly over the next few years. But this possible increase is dwarfed by the scale of the decline in China, India and compounded by Japan, South Korea and Taiwan.

Perhaps sensing the writing on the wall, even Vietnam is increasingly looking to realign to cheaper, domestic renewable energy opportunities.

Whilst the popular push for cleaner air is an important catalyst, governments all across Asia are seeking the opportunity to rejig their energy economies toward domestic renewable energy for the simple reason that it is increasingly cheaper.

It should come as no surprise that South Korea is embracing the trend.

Coal has long been an important earner for Indonesia, but the tide has turned. The country is well placed to ride the momentum of declining solar PV prices. The International Renewable Energy Agency estimates over 530GW of solar potential up for grabs, not to mention the well-documented hydro and geothermal resources.

The faster policy-makers and companies face up to the stark reality of a export coal market in structural decline, the more they have to gain from the transition to renewable energy as it gathers pace.

Yulanda Chung is a Southeast Asia-based energy finance consultant at the Institute for Energy Economics and Financial Analysis (IEEFA).

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