Europe's sanction on Russian coal fosters call of duty toward energy transition

As the flow of coal from Russia to Europe trickles down to a stop, the immediate concern is replacing the Russian thermal coal, but the focus on transition to greener sources of energy has gained attention at the same time, market sources told S&P Global Commodity Insights.

In the week ended April 9, the European Union adopted a sanctions package banning Russian coal in response to alleged war crimes by Russia in Ukraine, leading to key regional economies stepping up their commitments to meet future power requirements through renewable energy in the same week.

Germany, for instance, moved a law called the Easter Package on April 6 to produce solar photovoltaic capacity of 215 GW by 2030, a jump from 200 GW in the earlier target and more than double the target that was set in 2021 of 100 GW.

The draft law also increased the onshore wind capacity target to 115 GW from 71 GW in 2021 and the offshore wind capacity target to 30 GW from 20 GW last year. The law is now in discussion stages in the parliament.

The UK too has put up a plan to produce 50 GW through wind energy and 10 GW through low carbon hydrogen production by 2030. The UK government has announced that it would create a publicly owned Future System Operator, a new independent body, to ensure that the country's energy infrastructure is fit to meet the country's net zero and security of supply targets.

Coal still immediate priority

Market sources said while the transition to cleaner form of energy is inevitable for Europe, the sanctions are likely to give a major fillip and increase the pace of adaptation.

However, in the short term, the focus is increasingly on securing alternative supply of coal. S&P Global reported April 8 that Eurocoal expects 50 million mt supply to be secured from the US, Australia, Indonesia, Columbia and South Africa to replace Russian coal.

"Short term, buyers [utilities etc] will seek alternative supplies from South Africa and the Americas, but strategically it should accelerate developed nations' move toward a post fossil future by investing heavily in renewables," a Europe-based trader said.

Global coal and gas prices jumped to record highs in the aftermath of Russia's invasion of Ukraine as risks of disruption to energy markets rose and users were insecure about supply.

However, as panic receded and the imminent risk to gas and coal supplies eased, prices retreated as well. UK's NBP day-ahead gas price had risen from $23.41/MMBtu on Feb. 18, two days before the escalation in the Russia-Ukraine conflict, to $40.55/MMBtu on March 11, while the Dutch TTF day-ahead contract rose to $41.80/MMBtu from $24.20/MMBtu during the same period. The UK NBP price then eased to $24.25/MMBtu on April 11 and the Dutch TTF day-ahead contract to $32.20/MMBtu.

Sanctions to steadfast shift

"When coupled with a week-on-week decline in European gas hub prices, which fell in part due to increased Russian imports, but also on cooling sentiment as European buyers' fears of being forced to pay for Russian gas in rubles were somewhat allayed, this has seen gas push some coal out of merit for 2022," according to a report by S&P Global on April 7. "Forecast gas generation across the EU10 is up 0.7 GW across the balance of the year, with coal generation down 0.8 GW in the same period."

The CIF ARA 6,000 kcal/kg NAR coal price has risen to $315.05/mt on April 11 from $176/mt on Feb. 18, after touching a high of $386/mt March 11.

"I believe the European policy makers and politicians have come to realize that they need a balance of all energy sources," a US-based trader said. "I think the Germans are going to have to restart the Nukes they shut down and cancel the closure of the one that is still operating. And yes, the EU is going to have to buy more tonnage elsewhere because cheap energy from the Russians has been lost."

The persistently high coal prices have not prompted investment into coal projects, which would make it harder for coal prices to correct and lead to a fall in its competitiveness and consequently lead to structural decline, noted Australia's Resources and Energy Quarterly report released April 4.