Rising energy costs are increasingly dominating political agendas in many countries around the world both developed and developing. The U.S. shale revolution with domestic cheap natural gas has started to bite into coal’s U.S. power generation market share, which can be attributed to the coal-to-gas switch of power utilities. Note, that any change in U.S. regulation in the energy sector and any shift in the current coal/natural gas price differential can result in a reversal of the trend. Nevertheless, U.S. coal is here to stay and we are left to mull over its eventual domestic market share. Meanwhile, worldwide coal demand for power generation is alive and set up for further stable growth in crucial countries like China or India. Surprisingly, Germany may be “over-self-regulating” itself while being exposed to global knock-on effects of the U.S. shale gas revolution. Thus, could U.S. coal’s future economic viability lie ahead in exports to Europe – specifically to Germany – where “over-subsidizing” renewables and shutting down nuclear power plants at the same time have created perverse incentives?

Here, the case of Germany as largest energy consumer in Europe looms large. First, let’s take a step back and look at European energy policy, which provides the framework with minimum standards for any EU member state. In 2011, the EU unveiled its 20/20/20 energy roadmap to 2050 seeking a 20 per cent energy efficiency improvement and carbon dioxide emission reduction on 1990 levels, and a 20 per cent share of renewable energy sources in the energy mix across EU member states by 2020. Overall, policies in Germany not only reflect this mandate, they tend to be even more ambitious. In Germany, the so-called “Energiewende” (i.e. transformation of the energy market in the sense of a transition) – Chancellor Angela Merkel’s enacted policy to wean her country off nuclear power and fossil fuels at the same time while initiating an alternative subsidized energy boom in wind and solar – has saddled German residential energy users as well as the industrial sector with among the highest prices for electricity in Europe according to Eurostat data. Due to higher energy costs, the gap in competitiveness between European and U.S. companies is widening. Yet, some big German companies in energy-intensive sectors of the economy have managed to win exemptions from the “green energy surcharge” by lobbying Berlin. It was only in December 2013 that Germany’s industrial discounts on “green energy surcharges” came under fire from the EU Commission, which launched a probe into those exemptions.

The law in question here is Germany’s renewable energy law (EEG), which prioritizes wind power and photovoltaic solar over fossil fuels such as coal and natural gas in the power grid. As a result, many conventional power plants – especially gas-fired plants – sit idle on both windy and sunny days while the renewables are given feed-in priority into the grid. They are simply no longer profitable to operate given the much higher – vis-à-vis the U.S. – natural gas prices in Europe, which are linked to the price of oil. And despite the rapid and aggressive expansion in wind and photovoltaic solar power, it all creates the perverse – albeit unintentional – outcome that Germany’s carbon dioxide emissions are rising again. Coal displaced from U.S. power generation finds its way into Europe due to the comparative low cost of coal over natural gas in the EU. As a result, coal-fired plants have become cheap to operate, which, in turn, creates the seemingly perverse incentive within Germany’s transition to renewable energy sources to import more coal.

Germany’s Spiegel Online International news magazine reported this week based on preliminary figures from AGEB that even as power generation from renewable sources equaled 23.4 per cent of the German energy mix in 2013, these new figures also show that brown coal power generation in 2013 reached with 162 billion kilowatt hours its highest level since 1990 when Germany’s brown coal-fired power plants produced about 170.9 billion kilowatt hours of power. Note, that this was during the process of German reunification and, thus, many old coal-fired plants were still operating in Eastern Germany. About 25.8 per cent of Germany’s electricity comes from lignite, or brown coal, power plants located in major mining regions in industrial North Rhine-Westphalia (in the West), from where approximately 60 per cent of the German brown coal originates, and in parts of Eastern Germany.

Coal-fired Power Plants in Germany

Lignite, or brown coal, is considered the lowest rank of coal due to the relatively low heat content. Moreover, new brown coal power plant additions in 2012 actually added capacity by outpacing retirements of old plants according to Spiegel Online. Consequently, Germany’s carbon dioxide emissions are expected to rise. Analysts partly blame the failure – i.e. low price – of the EU’s carbon emissions trading system. To address this briefly, in the end any kind of trading scheme as well as subsidies promote an inefficient use of energy and create market distortions with often unintended consequences. However, let’s redirect the focus from the emissions trading scheme to a more fundamental question. Arguably, a reliable and affordable supply of electricity is crucial for a modern industrial country to stay competitive globally. Current German energy policy has noble and necessary goals, which, unfortunately, often interfere with each other in reality because all goals are assigned equal importance. However, “something’s gotta give” and if not, the U.S. coal industry could benefit from it.

After Chancellor Angela Merkel won re-election with her center-right Christian Democratic Union (CDU) in 2013, she had to form a coalition government with the center-left Social Democratic Party (SPD) and their leader Sigmar Gabriel. As now vice-chancellor, Mr. Gabriel will be heading a newly created “super-ministry” responsible for handling both Germany’s economic affairs and energy. He used to head the environment ministry from 2005 to 2009 in Germany’s last “grand coalition” government when he declared coal an indispensable source of energy for Germany’s energy supply security. This time around, he is in charge of successfully pushing ahead and managing Germany’s ambitious energy transition (“Energiewende”). And again he is standing up for coal. In an interview he gave to Wirtschaftswoche magazine even before the national elections in 2013 he pragmatically uttered the inconvenient truth that “you cannot wean your country’s energy system off nuclear power and coal at the same time.” This lesson from Germany’s energy transition endeavor so far also seems to have found its way into the new coalition government’s governing policy document.

Under the coalition treaty, which devotes a separate section to the energy transition, the German government reaffirms its commitment to its three-pronged energy transition approach without prioritizing one of the goals; namely, to mitigate climate change by reducing carbon dioxide emissions, while at the same time improving security of energy supply, as well as supplying affordable energy to its citizens. What is new and interesting is that the German government now makes further renewable energy development dependent on both cost efficiency and economic feasibility of the country’s entire energy system, while also taking into account network expansion and necessary base-load reserve capacity additions.

According to the IEA total integration costs of increasing the supply of renewable energy sources will have to put a price on additional capacity in order to manage the intermittency problem while also maintaining power grid stability as well as put a price on transmission and distribution to integrate renewable sources located far from large demand centers. It should come as no surprise that such an energy architecture overhaul will come with a huge price tag in the short to medium term. Therefore, the coalition treaty also sets a new lower ceiling for renewables than previously projected. Germany plans to raise the percentage of renewables in the energy mix to between 40 to 45 per cent by 2025 and to between 55 to 60 per cent by 2035. This compares to 23.4 per cent in 2013. And most importantly, the coalition treaty declares conventional power plants – meaning brown coal-, hard black coal- and natural gas-fired plants – indispensable for Germany’s energy mix for the foreseeable future.

Here the German government acknowledges two things. One, that renewable sources are not able to replace coal- and gas-fired power plants since their output depends on fluctuating weather conditions. Two, coal or natural gas capacity will then have to bridge any base load gap due to the legally-mandated shutdown of the last nuclear power plants in 2022. The typical capacity of a large nuclear power plant is 1 gigawatt with nuclear power’s share of the energy mix currently reaching still 15.4 per cent. As a result, Germany will have to add additional base load coal-fired or gas-fired power generation capacity and/or keep no longer profitable existing – i.e. not allowing them to go off the grid – plants as back-up to provide electricity during peak times. Given that even state-of-the-art gas-fired power plants are barely profitable under the current incentive structure and given that new gas-fired plants are immensely expensive to build, the only economically viable alternative left is coal-fired power generation.

RWE’s Matthias Hartung, CEO of one of Germany’s big power utilities, stressed exactly this point in an interview with manager-magazin online stating that even if renewable sources do make up about 50 per cent of Germany’s energy mix by 2030, there are logically still about 50% left that can only be supplied by coal and natural gas. This simply stems from Germany’s decision to phase out its nuclear power plants. Mainly coal-fired power generation has already replaced retired nuclear power generation capacity – eight power plants in 2011. Moreover, the increase in coal-fired power generation seems to have contributed to some over-capacity and accompanying crowding-out effect in the German energy market as reflected in a newly set record of 33 billion kilowatt hours in German electricity exports to neighboring countries. It is fair to assume that power utilities exported electricity generated from cheap brown coal-fired power plants to keep their overall businesses profitable.

No other country produces more brown coal than Germany according to the World Coal Association. Reflected in the figures from AGEB is also that power output from hard black, or bituminous, coal rose by over 7 billion to 124 billion kilowatt hours, while output from gas-fired power plants fell by almost 10 billion to 66 billion kilowatt hours. Hard black coal supplied 19.7% in 2013, which is the highest level since 2008 when a decline started, after only 18.5% in 2012. The trend has been reversed and black coal’s share is now on the rise again. This is very significant because it has to be viewed together with Germany’s 2022 nuclear phase-out and the fact that utilities already now satisfy about three-quarters of demand for bituminous coal by importing from international markets. Another little-known fact is that state aid for hard black coal mining in Germany is scheduled to run out by 2018 in order to allow for a socially responsible phase-out. Consequently, this means that after 2018, Germany will have to import all its hard black coal for its power plants from abroad. Colombia is the top hard black coal exporter to Germany, taking a market share of about 30% with the U.S. in third place taking just 15%. VDIK, an association of German coal importers, projects that overall German coal imports rose by 6.5 per cent to about 51 million tons in 2013. And this is exactly where U.S. coal supplies from international markets could come into play if coal export infrastructure in the U.S. is expanded and upgraded in order for U.S. companies to take further advantage of the globalized coal market, especially in Europe.

Major U.S. Coal Ports

The EIA points out in the Annual Energy Outlook 2014 (AEO2014) Reference case through 2040 – under the assumption that current laws and regulations remain generally unchanged throughout the projection period – that U.S. coal exports, which have surged from 50 million short tons in 2005 to a record 126 million short tons in 2012, have become an increasingly important source of revenue for both U.S. coal producers and coal transportation companies such as railroads and barge operators. In 2012, coal export revenues totaled about $15 billion, representing about 25% of all U.S. coal revenues, despite the fact that coal exports in 2012 represented only 12% of total U.S. production in short tons according to the U.S. EIA. Moreover, in the AEO2014 Reference case, U.S. coal export prices increase by 1.2 per cent per year, to $6.40/MMBtu in 2040.

Already these numbers show the export potential, not even taking into account the “German self-inflicted energy wound” scenario I have outlined above. As for the described scenario, there are two potential caveats: Germany outsources its base load reserve capacity needs to, for example, French nuclear power plants across the border as part of an EU-wide integrated energy system, which would clearly go against its objective of energy supply security, or adequate storage capacity is developed for renewables to mitigate the intermittency problem.

Louisiana accounts for approximately 20 per cent of U.S. coal exports with those exports mostly being steam coal due to its location at the intersection of Mississippi barge routes serving Midwestern states with large steam coal deposits and gulf shipping routes serving Europe and Latin America according to a May 2013 coal export report prepared by Ernst & Young. The report also points out that “of the top five states through which coal is exported abroad, Louisiana and Washington State are the only two that ship primarily steam coal”. Alison Sider writing for WSJ.com elaborates on this point by stressing that “the U.S. has typically been one of the top exporters of metallurgical coal” and also mentioning that “United Bulk Terminals bought its Davant, La., terminal in 2011 and is investing about $80 million to upgrade it. The company, a division of Germany’s Oiltanking Group, says the work will nearly double the terminal’s export capacity to 22 million tons a year.”