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Global thermal, coal-fired generation rebound at odds with accelerating net zero pledges

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Global thermal, coal-fired generation rebound at odds with accelerating net zero pledges

While momentum from policy makers around emissions reductions has been gathering pace, with over 46 countries announcing long-term net zero pledges so far, accounting for about 70% of total electricity power demand, the reality is that short-term energy markets are moving in the opposite direction as global thermal and coal-fired generation are increasing across key markets.

Based on numbers largely official for Q1 2021 and forecasts through the end of the year, S&P Global Platts Analytics puts 2021 power demand at almost 5% above 2020, with thermal needs increasing by a similar amount. This growth is driven by global GDP, which is expected to rise 5.0% in 2021.

While mobility restrictions related to the COVID-19 pandemic and the shift to working from home have impaired demand for fossil fuels, particularly refined petroleum products, electricity demand has been buoyed by industrial demand and elevated residential consumption in major markets. Consequently, it is remarkable that thermal dispatch is on track to recover the historical high reached in 2018, exceeding 2019 pre-COVID levels. Further, the higher thermal needs are driving a strong rebound in coal-fired generation to a new all-time high, with coal's share of electricity supply gaining 1% globally to 36% at the expense of gas (22%).

Global thermal power generation gas coal fossil fuel

Asia is clearly the major driver of this growth, with China and India exhibiting large rebounds, to-date this year. Although we expect growth to moderate for the remainder of the year, with particular downside possible in India on account of the COVID-19 pandemic, coal is likely to hit multi-year highs, accounting for about 80% of global coal-fired generation.

South Korea is clearly moving in a different direction to the rest of Asia. The South Korean government has asked five power generation subsidiaries of state monopoly Korea Electric Power Corporation, or KEPCO, to reduce output from coal-fired plants by 18%-24% over April-November, compared with the 2017-2019 average. While this is not a new formal policy, yet the request is interesting, as the government is looking at curbing coal as a first step towards meeting the country's greenhouse gas emissions target, which is a reduction of 24.4% from their 2017 level by 2030. South Korea already has a policy in place to curb coal-fired power generation during the December to March period, but that has been tied to air quality improvements, less so to meet carbon reductions.

Global coal generation share by country

Outside of Asia, coal-fired generation has been rebounding in the US, with coal-fired dispatch up 35% year on year so far in 2021. We forecast US coal-fired dispatch to remain firmly above year-ago levels for the remainder of 2021, with full-year 2021 up by 20% versus 2020.

Similarly, Europe's coal-fired generation has also seen some strength in Q1, and we still see coal up year on year across the main European countries, notably Germany and the Netherlands. Strengthening EUA prices are starting to erode some year-on-year gains, but gas prices have also been trending higher, although the final say on Europe's coal-fired dispatch will be tied to the availability of renewables and weather.

The strength in thermal generation, and coal in particular, is also interesting in the context of strong renewables additions, with capacity of 260 GW added in 2020, up almost 50% year on year. Wind additions were about twice as much in 2020 as compared with 2019.

Although strong corporate demand and policy support is building in the US and across the globe, we see some short-term headwinds for renewables project developments. As noted in S&P Global Platts Analytics' global solar PV market outlook, firmer solar module prices, higher freight and raw materials costs are putting pressure on project developments. Additionally, we do not see wind additions in China remaining as strong as 2020, due to the end of the feed-in-tariffs.

Global renewable capacity additions and demand growth

At current levels, renewables growth accounts for only about 40% of global annual power demand growth. We reiterate the point that, while almost 80% of the total annual capacity additions are represented by renewables and hydro, this amount of capacity installed is not sufficient to deeply decarbonize the power sector in line with long-term net zero aspirations.

Platts Atlas of Energy Transition