Investing in Energy Infrastructure
Ecoal, January 2011, Vol. 73
Investments in energy infrastructure are not only needed to support the low-carbon transition of our energy systems, but also to continue providing energy services at current levels. In this article, the World Coal Association looks at energy investments needed to keep the lights on and specifically investments needed in coal infrastructure.
In the recent edition of the World Energy Outlook, the IEA stressed the importance of investments in energy infrastructure over the next 25 years, as OECD countries need to retire significant amounts of ageing infrastructure and non-OECD countries have to provide for new energy demand.
According to the IEA, US$33 trillion will need to be invested in energy-supply infrastructure between now and 2035. This is over ten times more than the GDP of the UK or Germany and over twice as much as the GDP of the USA. Half of these investments are required in power generation and around 42% for transmission and distribution of energy. Non-OECD countries account for 64% of the total investment needs, with China alone representing 16% the of investment needed.
The IEA estimates that US$8.1 trillion will need to be invested in the oil-supply chain and around US$7.1 trillion in natural gas. In comparison to these figures, investments needed in the coal sector are low, with the IEA estimating that around US$721 billion is needed for mining activities and for the associated transport infrastructure. Less than 10% of this sum will be required for transport infrastructure, giving a price tag of around US$72 billion - an amount which is necessary to avoid bottlenecks and queues at international ports and on domestic transport routes.
Transporting coal is relatively inexpensive and, in comparison to other energy markets, the investments needed to ensure a stable international coal market are low. To give a sense of perspective, the IEA estimates that it will cost US$622 billion to develop liquefied natural gas facilities and over US$240 billion to provide for effective oil transport.
Regardless of the relatively small amount of investments needed to provide for coal transport in the future, these transport infrastructure investments are still vital if coal is to remain the most affordable and easily available energy resource.
China & India
According to the IEA, coal consumption could increase by as much as 53% before 2030. Roughly 85% of the new demand for coal is projected to come from China and India. As a result of higher coal imports in both countries, the IEA also predicts that international coal trade can increase by 15% - 50% between 2008 and 2030, depending on different scenarios. In order to benefit from this shift, new producers and existing coal exporters will need to invest in port and railway facilities.
A substantial part of the new demand for coal in Asia will be satisfied by an increase in domestic production. However, India and China are expected to cover part of their coal demand through increased imports. India is already a net importer and it is expected that China's coal imports could outgrow its coal exports even before 2015.
This means that greater export capacities will be needed in countries that can fill the emerging coal gap on the Asian continent. Moreover, given that China is expecting to rely predominantly on its own coal production, it is of particular importance that facilities for internal coal transport in China are fully operational.
In 2010, over 10,000 coal trucks transporting coal to the Western part of China from Inner Mongolia were blocked in a 120km traffic jam for around nine days. Although road transport for coal is twice as expensive as rail transport, Chinese freight capacity is already overloaded and coal producers also need to use trucks. Authorities in China are aware of the need to invest in energy infrastructure and transport infrastructure is being built at a record pace - Chinese freight capacity grew by 17% in 2009. However, infrastructure expansion is still not happening fast enough to match the country's growing coal demand.
Given the position of coal as a key energy resource for the economic development of China and its role as a central pillar of national energy security, investments in domestic transport infrastructure for coal are of great importance.
Rail Connections & Port Facilities
New railways and ports are currently being built in Mongolia and Mozambique as both countries prepare to increase coal exports. Public and private investors are willing to cover the costs associated with infrastructural works because of the expected high returns in terms of the future economic development and revenues from sales.
According to the IMF, the current development of mining activities in Mongolia is a great stimulus to the Mongolian economy and the country might register double digit growth in the coming years. However, it is necessary that new railway infrastructure is put in place to connect Mongolian coal mines with the Chinese and Russian markets. In fact, according to the chairman of South Gobi Energy Resources, one of the largest coal producers in Mongolia, the country's coal exports to China could total 30-50 million tonnes in 2015, allowing it to earn as much as US$400-600 million, or the equivalent of a quarter of Mongolia's total budget for 2010.
Mozambique follows a similar trend. The country has recently attracted US$1.4 billion in foreign direct investment from Vale, a Brazilian company which invested in Moatize - a region of Mozambique where coal resources could be as high as 2.5 billion tonnes. However, Mozambique's coal export potential depends on the future availability of rail and port infrastructure. A new railway line is needed to link the new coal extraction sites to the port facilities in the north and in the south of the country. Railway lines to these destinations are currently being rehabilitated and one of them - the Sena railway line - is expected to be operational before 2012.
Cumulative investment in energy supply infrastructure in the New Policies Scenario 2010-2035
Source: IEA World Energy Outlook 2010
Extensions to Existing Rail & Port Infrastructure
A strong economic rationale also supports greater investment in transport facilities in countries that are already active on the international coal market, including Australia, Indonesia, Colombia and South Africa. Additional capacity, notably at major coal export ports, will not only be necessary for these countries to benefit from growing coal imports in China and India, but also to ensure stable coal prices in the longer term.
In Australia, which represents 9% of the world's coal reserves and accounts for over 25% of internationally traded coal, it is expected that coal production will increase by 30% before 2030 to meet the growing demand for coal overseas. However, if this increase in production is to take place, the country's port facilities need to be updated and new capacities added.
Strong growth in the world coal market has, at times, led to bottlenecks in the country's biggest ports and it has also been reported that rail wagons and locomotives have been in shortage. In fact, queues of up to 200 ships were forming to gain access to Australian ports at peak times and although extension plans are currently under way, congestion in Newcastle, the biggest Australian port, has at one stage become so severe that port authorities asked coal producers to cap their exports.
The problem is that bottlenecks and queues make transport capacities scarcer and therefore more expensive. Freight typically accounts for around 40-50% of the final coal price, therefore ensuring that bottlenecks are minimised is essential.
Australian coal exports are worth over A$52 billion a year to the Australian economy and coal accounts for 23% of the country's total exports. Despite the importance of coal exports to the Australian economy, the Australian government has made it clear that future extensions of the country's coal export capacities will have to be covered by State governments and companies themselves.
Energy Infrastructure
Investments in transport infrastructure will be essential to meeting future demand for coal. If China and India do not make the necessary investments in transport infrastructure, their coal imports are likely to grow and more demand will be placed on Australia, Indonesia, South Africa and Colombia and on the newcomers to the coal business.
However, higher exports will again only be possible if ports and railways in these countries are sufficiently expanded. Bottlenecks and queues could lead to periodical shortages and to price hikes. As a result, investment in coal transport infrastructure is not only necessary to provide sufficient amounts of coal to electricity generators, steel producers and coal users, but also to ensure that coal remains a low cost and easily available energy resource.
It is important to put this in the wider context of the rising global demand for energy. By 2035, the IEA predicts that energy demand will be 36% higher than today and the power sector will account for 53% of this increase. This means that 213GW of power generation capacity - which is the size of the energy market of France and Germany put together - will need to be added every year.
As the IEA expects 32% of electricity generation globally to still be coal-fired in 2035, coal is an important part of future energy demand and the infrastructure needed for its transport will have a key role to play in unlocking its future potential.
Share of Key Regions in Global Primary Coal Demand in the IEA New Policies Scenario
Source: IEA World Energy Outlook 2010
Photo courtesy of PT Adaro
Further Information
