G20 Executive Talk Series

September 2016

Energy Policy

Authored by: Benjamin Sporton

Coal Helping to Deliver the Four I’s of China’s G20 Presidency

Discussion on energy policy must balance the priorities of cost, security, environmental considerations, economic growth, poverty eradication and diplomatic relations.

The G20 was conceived as a forum for leaders from the major advanced and emerging economies to discuss and co-ordinate global economic policy. In recent years, however, this role has evolved and the organisation has now become one of the most prominent forums to address the broader challenges in global governance.

This explains why energy has become a major theme of the organisation’s work. Discussion on energy policy must balance the priorities of cost, security, environmental considerations, economic growth, poverty eradication and diplomatic relations. Representing 80% of world trade, two-thirds of the world population and responsible for three quarters of global annual greenhouse gases (GHG), the G20 has become an important multilateral support to established processes, such as the United Nations Framework on the Climate Change.

Expectations for this year’s meeting in Hangzhou are particularly high following the delivery of the Sustainable Development Goals (SDGs) and Paris Agreement on climate change late-last year. Energy is a central consideration for both. The G20 provides an opportunity to develop programmes that integrate the environmental imperatives with aims of universal access to energy, energy security and social and economic development.

Energy access and climate goals are not competing priorities. As demonstrated by the Intended Nationally Determined Contributions submitted in the lead-up to the Paris summit, each nation will choose an energy mix that best meets its needs. For this reason many countries have identified a continuing role for coal. Coal is a critical enabler in the modern world. It provides 41% of the world’s electricity and is an essential raw material in the production of 70% of the world’s steel and 90% of the world’s cement.

As a newly industrialised country, China’s G20 presidency will bring distinct energy policy insights to bear in development and environmental discussions. Coal will no doubt be a significant part of this outcome. China has been a remarkable example of the role that affordable coal can play in improving access to energy and supporting economic development. Now, as it transitions to a less energy-intensive period of development, it is a leading example of the opportunities cleaner coal technology can provide in meeting the challenge of reducing emissions. As such energy, and therefore coal, will have a strong influence on the four I’s that make-up the Chinese presidential theme: ‘Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy’.

People without access to modern energy services by region


Coal ensures inclusive economic growth
According to the International Energy Agency (IEA), 1.2 billion people – 17% of the world’s population – lack access to electricity. A further 3 billion or more than one in three of the world’s population use wood, charcoal, or animal waste for cooking and heating. Energy – along with food and shelter- is one of the fundamental elements of modern society. Without energy, people cannot access the opportunities provided by the modern world. Before we can attempt to resolve the myriad development challenges facing those most in need, we must provide access to energy.

Coal is the de-facto energy source for electrification. Since the 1980s, coal consumption has grown by over 140% in Brazil, 425% in India and 514% in China. The economic and social progress made across these countries over the same period is well-documented. Globally coal accounts for around 29% of primary energy. Coal use for electricity is forecast to rise over 23.5% through to 2040, with developing and emerging countries responsible for most of this increase. Coal will therefore play a major role in supporting the development of base-load electricity where it is most needed. Coal-fired electricity will be fed into national grids and it will bring inclusive economic growth to the developing world.

The IEA has predicted that more than half of the on-grid electricity needed to meet their ‘energy for all’ scenario would need to come from coal. Even this is not a particularly ambitious target. The ‘energy for all’ target is equivalent to five hours of electricity a day and excludes electricity for basic amenities, such as businesses, industry, hospitals, schools and public buildings. If we are going to be more ambitious, coal will clearly play a fundamental role in supporting modern base load electricity.

Coal has become the fuel of choice for many developing countries because of its status as a widely distributed, reliable and affordable fuel. This has been demonstrated in Viet Nam, South Africa, India and many other developing countries. Over the last three decades, according to World Bank estimates, 600 million people have been lifted out of poverty – almost all of those in China. Remove China from the mix and poverty levels in the rest of the world have barely improved. The link between access to affordable power from coal, economic growth and prosperity is clear. In China close to 99% of the population is connected to the grid. Looking ahead, coal is likely to remain the most affordable fuel for power generation in many developing countries for decades to come. Analysis presented in the WCA’s 2016 study, the Power of High Efficiency Coal, supports this forecast. The report considers the levelised cost of electricity (LCOE) for various technologies in non-OECD Asia. In 2035, data suggests that coal will generate electricity at a lower cost than other technologies – including gas – in ASEAN countries plus India, Bangladesh, Sri Lanka and Pakistan (grouped as South East Asia in the graphs below). The LCOE cost for the high efficiency low emission (HELE) coal technologies – supercritical (SC), ultra-supercritical (USC) and integrated gasification combined cycle (IGCC) – ranges from 55 to 60 $/MWh. In comparison, the LCOE of Open Cycle Gas Turbine (OCGT) for gas production is almost double. It should also be taken into consideration that for many of these countries coal is more readily available than gas, which requires the development of pipeline infrastructure for its delivery. The comparative cost advantages of coal generation are even clearer in China – the main economy represented in the ‘Rest of non-OECD Asia’ graphs below. The various HELE technologies have an LCOE of around $50/ MWh, a third of the price of gas production.

By 2040, power generation from coal will reach 2843 GW compared to 1805 GW today. In order for economies to use coal in a way consistent with development and environmental imperatives, the G20 must support action that promotes the deployment of the cleanest and most efficient coal technology available –HELE coal-fired power generation.

This will require developing economies to receive international financial, technological and policy support to accelerate deployment. To support the transition away from older, less efficient subcritical technology countries will require financial and technical support, including through existing structures such as the G20 Energy Sustainability Working Group.

Lifetime Cost of Electricity per MWh Across Generation Technologies in 2035

Electricity from coal fuels dynamic interconnected economies
Inclusive growth delivered through affordable energy is the spark that drives important economic processes, including urbanisation and industrialisation. Business requires stable electricity to trade and innovate. The growth of industry, particularly in the small and medium enterprise sector, promotes opportunities for local populations through more diverse employment, which in turn leads to higher disposable income.

The recent construction of the Sasan Power Coal-Fired Power Station in Madhya Pradesh, India, for instance, supports this premise. The facility has been credited with adding $2.5 billion to the local economy through improved energy access for local businesses. Improved energy access has allowed electric pumps to be deployed in the state’s farming and allied services sector. Farmers have also benefited from improved access to market information, such as online agricultural market places. These developments have led to productivity gains through increased yields and more crop diversity.

Over the coming decades as the SDGs are realised, urbanisation is forecast to rise dramatically. People will move to cities for greater economic opportunity, modern amenities and access to education. Cities are also the most productive places to do business, because they bring firms and customers and workers together. Continuing population growth and urbanisation are projected to add 2.5 billion people to the world’s urban population by 2050, with nearly 90% of the increase concentrated in Asia and Africa. India and China alone are projecting an additional 700 million urban dwellers. Growing urbanisation will require the construction and development of transport, energy, housing and water management infrastructure. As the most widely used fuel source for energy-intensive industries and a critical raw ingredient in making steel and cement and other industrial products, coal is a major part of this outcome. For instance, one tonne of metallurgical coal is required to produce 1.3 tonnes of steel, an equivalent of 18 household refrigerators.

The economic development pathway for countries is paved with coal. Indeed, the IEA’s 2015 World Energy Outlook forecasts coal demand to grow by 4.6% per year through to 2040 in the rapidly industrialising economies of Southeast Asia. It is therefore vitally important as G20 countries seek to invigorate growth and strengthen trade through policy that ensures national governments extract and utilise coal in the most sustainable and efficient manner possible.

Innovation in coal technology brings broader economic benefits
Innovation is an important driving force for strong, sustainable and balanced growth. This understanding forms the basis of China’s G20 priorities. These priorities outline how innovation in science, technology and business can bolster growth to the global economy. China regards innovation as an important domestic priority and is making significant progress in many sectors, including energy. Over the last ten years, for instance, the operational efficiency of the country’s coal fired power fleet has risen by 6% reaching a level above that of western countries. This is a significant development and has in part played a role the gradual decoupling between energy demand and economic growth. Indeed the BP Energy Outlook, forecasts energy intensity, the amount of energy required per unit of GDP, to decline by 36% (1.9% p.a.) between 2012 and 2035. China and several other G20 member states are now working to support others to deploy HELE technologies, rather than older inefficient subcritical coal-fired power stations.

There are likely to be significantly different opinions among members in terms of how to achieve innovative growth. A successful innovation agenda will require policy coordination, sharing of innovation benefits and incentives. As governments take stock and consider the implications following the increased ambition of the Paris Agreement, innovation in carbon capture and storage (CCS) should feature as a core focus in translating positive intention and rhetoric into action.

CCS is a low-carbon technology that must form part of a balanced portfolio approach to address climate change. The technology offers economic and development advantages when compared to a renewable-centred mitigation portfolio. Today, CCS is the only technology that can achieve significant emissions reductions (90% capture or higher) from existing fossil fuel infrastructure. Indeed, many studies have suggested that unless CCS becomes a key part of a low carbon technology portfolio, it is increasingly likely that energy-system carbon emissions will not be reduced to levels that limit global warming to 2 degrees Celsius.

While the commencement of operations at two coal-based CCS projects this year will no doubt be a major milestone, it is fair to say the pace of CCS deployment has been disappointing. The low-level of CCS deployment in power generation is not a reflection on the viability of CCS technology (as some argue), be it commercial or technical, but a reflection on the lack of equivalent policy support. For instance, in 2007 European leaders laid out plans to establish 12 demonstration CCS power plants by 2015, so far none have been developed in the region. Investment has been underwhelming and dispersed across silos of projects, technologies and regions; growth in renewable energy technology has been driven by policy that provides $100 billion in subsidies every year. The value of government policy support provided to CCUS to date is approximately 1% of the cumulative value of policy support provided to renewable technologies. In the absence of government leadership, fossil fuel firms, including coal companies, have used their own resources and expertise to accelerate the development and deployment of CCS.

As a matter of priority the G20 should initiate a high-level consultation on strategies to increase deployment of CCS. G20 Energy Ministers should affirm their commitment to CCS and articulate deployment targets and strategic plans via the Mission Innovation initiative. Other strategies could include inviting the World Trade Organisation to promote trade in CCS infrastructure with the financial support provided through development banks.

India’s electricity generation by source and CO2 intensity in the New Policies Scenario

Over the coming decades, energy policy will feature as one of the world’s most profound and pressing challenges.

The SDGs call for universal energy access to ensure social and economic development. Equally influential, the Paris Agreement provides an impetus for governments to ensure that efforts to improve energy access are balanced with action on reducing emissions. The G20 provides an important adjunct to these multilateral initiatives. In order to best serve the global public good, however, member states must acknowledge the role that coal will continue to play in the global economy and develop initiatives to support the deployment of HELE technology. Moving the current average global efficiency rate of coal-fired power plants from 33% to 40% by deploying more advanced off the-shelf technology could cut 2 gigatonnes of CO2 emissions now, while allowing affordable energy for economic development and poverty reduction.

This will require an international mechanism to be established to provide the necessary level of support to accelerate construction of such projects. To this end, the WCA have proposed the establishment of a Platform to Accelerate Coal Efficiency (PACE) and stand ready to work with international partners to support its implementation. G20 is well-placed to translate the PACE vision to reality. Moreover, G20 must refocus governments to support the development of CCS, including the provision of CCS infrastructure in developing countries. All credible climate scenarios identify a key role for large scale and rapid deployment of CCS. While developed economies operating in advanced economies with established electricity markets are likely to lead development of CCS given the scale of resources that will be required to drive CCS to broader commercialisation, G20 provides a key forum to promote energy research and disseminate results.