Fossil fuels’ price boom isn’t the ‘real victory’

From the price action, you’d think that fossil fuels are back in business. Since breaking above $100 a metric ton in May, the price of coal at Australia’s Newcastle port — a benchmark for Asia, which consumes about three-quarters of the world’s soot — has gone almost vertical, hitting a record $173.10 a ton. The key regional contract for liquefied natural gas, the Japan-Korea Marker, is in similar territory, hitting $18.02 per million British thermal units the same day. That’s not a record, but it’s still the
third-highest spike LNG has ever seen, during what’s typically the
low season for a commodity that tends to surge amid winter’s heating demands.
If you think of futures prices simply as a vote on the path ahead for the commodity in question, that should worry a world that needs to decarbonise. This view is simplistic, though. Commodity prices don’t rise and fall based on the level of demand itself, but rather as a result of the mismatch between demand and supply. A world in which fossil fuel consumption is on a downtrend can still see handsome prices for fossil fuels in any period when supply falls faster than demand.
The current price spike has multiple sources. One is the diversion of Russian gas from Europe to Asia, while another is China’s coal-to-gas switch. Then there’s the relatively warm, dry summer that’s reduced hydro generation and increased pressure on air conditioners. Most important, though, has been the bounce back from 2020’s bout of economic sickness, which has
sent electricity consumption surging — and with it, the dirtiest forms of generation.
One of the biggest drivers for growth in renewable power’s energy share over the past decade has been flat or declining electricity demand. Adding wind and solar capable of supplying 5% of a country’s grid power can drive a sharp reduction in emissions if output remains constant or falls. If, however, grid use climbs 5%, then all that new renewable capacity won’t make a shred of difference to emissions. If it climbs 14% year-on-year — as China’s did in July — then it’s likely to be fossil fuels that make up the shortfall.
That situation can turn even the economic disadvantages of coal and gas in their favor. For years now, the growth of renewable power with zero fuel costs has been pushing thermal generators out of use, dealing a severe blow to their economics.

—Bloomberg