Sunrise, Sunset – What’s Up: Solar. What’s Down: Coal. by Tom Sanzillo, IEEFA.org
If you follow this blog you already know the storyline on coal. Lost market share and severely depressed values. One headline put it gently last week: “No Near-Term Positive Catalysts.” Another was more blunt: “Run Screaming from the Coal Stock Bloodbath.”
Peabody added to the woe with a distressed-asset sale announcement saying that it had sold the mothballed Wilkie Creek mine in Australia for real cash—$20 million. True to form, the company put some beguiling spin on the news and The Australian picked it up, reporting that the buyer, Sekitan Resources (an as yet uncapitalized company seeking investors to reopen the mine), had announced that Wilkie Creek cost only $10 million. And indeed Peabody did say the $20 million price tag included other assets in Queensland.
I admit to an irrepressible impulse sometimes to reference song lyrics in certain circumstances. One that comes to mind here (thank you Robbie Robertson):
The Delbrook Resources Opportunities Master Fund was up 9.2% for May, bringing its year-to-date return to 33%. Q1 2021 hedge fund letters, conferences and more Dellbrook is an equity long/ short fund that focuses exclusively on the metals and mining sector. It invests mainly in public companies focused on precious, base, energy and industrial metals Read More
When your arms are empty,
Got nowhere to go,
Come on out
and catch the show.
There’ll be saints and sinners,
You’ll see losers and winners,
All kinds of people you might want to know.
And all kinds of people you might not want to know. Wilkie Creek was up for sale in 2012 for as much as $750 million, according to numbers tossed around in the business press at the time.
Robert Ukeiley pointed out in an IEEFA commentary last week that coal dropped to 30 percent of electricity-generation market share in the U.S. in April, a very low new low, and that renewables are showing strong signs of capturing part of coal’s lost market share. Both points are newsworthy.
So goes the coal industry these past few weeks.
On the solar front we hear of 30 percent growth. Warren Buffett’s Berkshire Hathaway (slightly better capitalized than Sekitan!) has scored the best deal in U.S. history for a solar power purchase contract at 3.87 cents per kilowatt hour. The deflationary impact of solar growth, by which it becomes increasingly affordable and competitive, is expected to continue for the foreseeable future—and the phenomenon is global. Robust solar growth faces hurdles, for sure. New business models come and go, and so do solar-energy companies; politicians who are still under the spell of fossil-fuel campaign dollars make sure that renewable incentives remain a matter of market uncertainty; annual growth rates fluctuate.
YET RENEWABLE-ENERGY MERGERS AND ACQUISITIONS LOOKING TO CAPITALIZE ON NEW TALENT AND NEW GROWTH ARE THE ORDER OF THE DAY—and these are most certainly not distressed sales. The solar and wind industries represent the kind of venture speculation that suggests a likelihood of success. The coal industry? Not so much.
It gets more interesting when you consider where the growth is coming from. The largest markets for solar today, in alphabetical order, are Chile, China, India, Thailand, the U.K. and the U.S. At IEEFA, we expect continued growth out of Asia, including in India and China, but also from most of the other nations in the region. Other surging solar markets: Brazil, Egypt, Mexico, Pakistan, the Philippines and Turkey. Many economists and financiers will find the solar trend surprising, but it’s only natural. As prices drop for solar power, money gravitates toward the solar industry.
Our friends in the coal industry are quick to point out—correctly—that many of these same countries also have significant existing coal-fired power-generation fleets and that some also have aspirations to build more coal-fired plants. Be that as it may, there is real competition now between coal and renewables.
The nature of that competition is what IEEFA pays attention to—both in the U.S. and around the world. Solar and wind have the edge on financing right now and are on a trajectory toward greater technological efficiency. The coal industry, by contrast, hasn’t shown that it is innovative enough to produce significantly improved power purchase contract pricing of the sort Buffet has announced. Boiler technology hasn’t improved much in 50 years, nor has the rest of the coal-fired electricity generation process.
IF SOLAR AND WIND CAN COMPETE ON DAY-TO-DAY PRICING AND CAN OFFER THE ADDED BENEFIT OF A DEFLATIONARY FORCE ON PRICE PRESSURES, you have to wonder why there is any support at all in the capital markets for coal. International financial institutions and development banks offer very flexible terms that allow capital costs to be adjusted in a manner that makes projects affordable, particularly those in poorer parts of the world. Such financing can be used for coal, for renewables, or both. With renewables being cheaper in the short term, deflationary in the long term and not subject to the volatility and obvious paroxysms that face the coal sector now and in the years ahead, the financial choice is obvious. Coal is risky.
Analysts at Coalswarm pointed out recently that the coal plant build-out promoted by the industry is losing steam everywhere. And our recent work in India supports that notion as the Modi government has lost considerable traction on its large-scale Ultra Mega Power Plant build-out scheme.
We aren’t arguing for a no-coal scenario. We are, however, seeing development choices favoring wind and solar, and it is difficult not to notice countries with solid growth potential beginning to choose solar and wind over coal. Rational markets will support the cheapest sources of energy most of the time, and will continue to do so until those sources have exhausted their usefulness and efficiency. Only then will more expensive (and more environmentally and climate risky) alternatives carry the day.
Coal is competing in the developed world today less on financial than political merit. Legacy relationships that keep coal alive will not end tomorrow, but new choices are being made in government capitals and in boardrooms of development banks around the world (when we say the coal choice is political, we point to Kosovo, where the World Bank is supporting build-out of an unnecessary and exp ensive coal plant). We point also to Plant Cheyyur in Tamil Nadu, India, where the government is doing cartwheels in trying to redesign an unworkable finance program for large-scale coal plant development. Countless other coal plant proposals around the world have similarly weak financial bona fides that move forward on political muscle alone.
A word of warning to bankers and government officials who think that capital deployment is just another political horse-trader’s game: Remember Greece and remember Puerto Rico. Decision makers might do well, too, to consider what would happen in their own backyards if sunlight were to be shed on legacy coal-generation financing.
For coal, a win here and a win there will keep the industry limping along. In countries where the government is footing the bill for costly subsidization of projects with rising public opposition and dubious financials—well that’s another story that bears following.
Another lyric comes to mind, from the same song cited above:
I’d rather die happy than not die at all
For a man is a fool who will not heed the call.
Tom Sanzillo is IEEFA’s director of finance.