background image

EU energy security could mean a comeback to coal using CCS

Equities 10 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  Europe's fragmented energy policy has led to a national security crisis which will now be addressed by Europe at the fastest pace possible. Of all the options including coal, nuclear, solar and wind, thermal coal is by far the quickest way to convert power plants from using gas. But the gas-to-coal switch comes with a cost to the environment and our narrative in Europe about the green transformation. However, the carbon capture storage (CCS) technology is rapidly advancing and Europe could bring coal back contingent on combining it with CCS creating a new industry. We explore combining coal with CSS and highlights the different companies involved in those two industries.


All options are on the table

The last week’s developments are existential for Europe, and defence and energy policies have moved from being uncoordinated among European countries to be a supranational issue. Europe’s dependency on Russian gas and oil has weakened Europe’s military flexibility and as a result Europe’s energy policy will be totally changed in the years to come. Germany has basically said that all options are on the table including nuclear, coal, and LNG. The German Chancellor Scholz said in the Bundestag on Sunday that "We must change course to overcome our dependence on imports from individual energy suppliers".

LNG terminals and nuclear power plants are longer term solutions, and renewable energy projects such as solar and wind are medium-term solutions because scaling these projects up takes a long time. In addition increasing the mix of renewable energy sources come with extra costs in terms of energy storage to mitigate the intermittency of renewable energy production spikes.

Europe is galloping into a ‘gas crisis’ and given the recent mild weather in Europe means that Europe will likely get through this cold period, but the pressure is on for European countries to fill up natural gas storage before next winter and Russia will likely not be a helping hand here. Germany has said that it is already building up coal reserves and will extend the life of coal power plants. Many gas power plants can be switched to coal, so the rebirth of coal in the energy policy is very likely at this point in history.

Realistically the only short-term solution Europe has to its energy crisis and to change its energy security policy at the maximum speed is by focusing on coal power plants. There is plenty of coal reserves in the world with the US having 24% of the world’s coal reserves and Australia with the third largest reserves at around 14% of the world’s coal reserves. Coal is cheap, it is great for baseload electricity production, Europe can get massive amount of coal from geopolitical partners, but it is dirty which is a problem relative to climate change and the green transformation.

Combining coal power plants with carbon capture

Coal power plants are the quick and scalable solution to lower the impact from Russian natural gas, but environmental groups among voters would resist. However, one strategy could be to accelerate coal power plants with the contingency of implementing carbon capture storage (CCS) as fast as possible. Is it even possible?

First of all, it is important to notice, that when energy policy becomes a critical national security issue, the equation is no longer a free market decision; just like the green transformation is a policy decision that dilutes free market forces. The extra cost of CCS on top of coal power plant costs might just be the cost of energy independence from Russia and Europe will have to swallow that cost in the short term.

The good thing about CSS is that the technology is already here and it is coming down fast. The report Technology Readiness and Costs of CCS (March 2021) from the Global CCS Institute is a good 50 pages report providing the highlights of the technology.

CCS is basically a three-stage process of first capturing carbon emissions from industry and power plants and transport that CO2 via ships, trucks or pipelines, and the final step is the storage which requires the CO2 to be compressed to very high pressures of minimum 74 bar which can be achieved at depths of minimum 800 meters. Storage is typically done in depleted oil and gas fields or saline formations. The picture below shows the process of carbon capture in a power plant.

02_PG_1
Source: Global CCS Institute

IEA has also some quite useful illustrations and information on CCS as it relates to power production, and the chart below shows the CCS projects that are in the pipeline in terms of million tons of CO2 extraction. According to IEA second-generation CCS could extract at a cost of $45/tCO2 which means that combining cheap thermal coal (if supply was greatly expanded) with CCS could make this solution cost effective enough to function next to nuclear power and renewable energy sources. These second generation CCS units will also come with 67% lower capital costs and 95% capture rate.

02_PG_2
Source: IEA

One of the key drivers that has recently made CCS possible on a scale we have not seen before is the EU Carbon Emission price which recently surged past €90/tCO2, but the rising energy and metals prices have increased input costs on top of the price for carbon emission that total costs of producing industrial goods and have reached levels where there is real demand destruction.

02_PG_3
Source: Bloomberg

Companies with exposure to carbon capture and coal mining

The carbon capture industry is growing fast and maturing with lower implementation costs for CCS making the technology a viable solution to limit climate effects from carbon emissions. There are few pure plays on carbon capture, but we have tried to come up with a list of pure and partly carbon capture stocks.

  • Aker Carbon Capture (pure play)
  •  CO2 Capsol (pure play)
  • Occidental Petroleum (partly involved in CCS)
  • Schlumberger (partly involved in CCS)
  • Equinor (partly involved in CCS)
  • California Resources (partly involved in CCS)

The list below shows companies that extract coal or related coal mining services, and listed on a developed market exchange.

  • Glencore
  •  China Shenhua Energy
  • Yancoal
  • Arch Resources
  • Alliance Resource Partners
  • Warrior Met Coal
  • Consol Energy
  • Peabody Energy
  • Whitehaven Coal

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.