Abbott bets house on coal, as price crashes. And Plan B is?

As Prime Minister Tony Abbott celebrated the promised axing of the carbon price and the re-focus of Australia’s economic future on the extraction of fossil fuels, the market price supporting his economic blueprint is in the process of collapsing.

The price for thermal coal has plunged more than 10 per cent in the last two months as the presumed major customers – China and India – make it clear that renewable energy is offering a competitive alternative to coal and gas.

Abbott has made much of wanting Australia to be a global energy superpower, providing cheap energy to the growing markets in the Asia-Pacific region and beyond.

But there are a couple of problems with this. One, the world does not want so much of Australia’s coal. China has dramatically cut its coal needs, and may cease importing in a few years, and India is now following.

That means that the international market price for thermal coal is now becoming so cheap that Australian coal producers are unable to dig it out of the ground and ship it overseas without losing fistfuls of dollars.

This graph, from Business Insider, indicates how various factors – lower demand and increased production from producers desperate to sell – has caused the price of coal – Australia’s biggest export commodity – to plunge another 10 per cent in the last two months.

Thermal coal is now sold below $70 on the spot market, well below the mark for Australian producers to make money, let alone get the finance for the massive new projects Abbott is hoping to encourage.

Despite this, there are reports that India’s Adani has convinced South Korean group Posco to help build a $3 billion train line to flood the market with even more coal. Adani has still to explain how it will source another $10 billion to build an export terminal and the mine itself.

Analysts are as gobsmacked about this news as they are about the carbon price removal. “This project requires a thermal coal price well in excess of US$100/t to be commercially viable – it is currently sitting at US$60/t- US$70/t,” says Tim Buckley,  IEEFA’s Director of Energy Finance Studies.

He said flooding the market will push prices lower – around 20 per cent below current commodity analysts’ projections. “This must surely send a shiver down the spine of any investor who has their money in global coal debt or equity investments, and rightly so,” Buckley said.

The one commodity that is in demand is LNG. But because that means that Australian gas will be used for export, local prices will now double – or perhaps triple – to meet export price parity (minus liquefaction and transport costs). This will see Australian energy prices soar.

This was not the only fly in the ointment of Abbott’s grand economic and climate plan:

In the same week that Australia became the first country to dump its carbon price ….

The incoming president of the European Commission Jean-Claude Junker said he wanted Europe to lead at the upcoming climate change talks, and said he supported much more ambitious targets for emission reductions, energy efficiency and renewable energy.

“We need to strengthen the share of renewable energies on our continent. This is not only a matter of a responsible climate change policy. It is, at the same time, an industrial policy imperative if we still want to have affordable energy at our disposal in the medium term. I strongly believe in the potential of green growth. I therefore want Europe’s Energy Union to become the world number one in renewable energies.”

“I would also like to significantly enhance energy efficiency beyond the 2020 objective, notably when it comes to buildings, and I am in favour of an ambitious, binding target to this end that continues the current energy efficiency pathway. I want the European Union to lead the fight against global warming ahead of the United Nations Paris meeting in 2015 and beyond, in line with the objective of limiting any temperature increase to a maximum of 2 degrees Celsius.”

The lead climate change negotiator for China, Xie Zhenhua, the vice chairman of China’s National Development and Reform Commission, said China would soon announce an overall cap on emissions, a key step towards its ambition to introduce an economy-wide emissions trading scheme. Zhenhua said China would announce “very ambitious” carbon dioxide goals.

“We’re hoping the contribution can be announced in the first half of next year; perhaps in the first quarter. The capping year might be included in that statement and if there is a capping statement, I hope and believe that would be a very ambitious one.”

In India, a budget that focused on solar technology – the building of “mega” capacity solar farms, off-grid solar pumps for irrigators, solar installations over canals, cuts in tariffs for solar components and a doubling of the tax on coal – has been followed by an announcement that the country will look to expand a “rent-a-roof” program from solar installations initially begun in Gujarat, the home state of new PM Narendra Modi, who has promised a “saffron revolution” of solar power.

Tata Power, the energy offshoot of the country’s largest industrial group, also said it would provide “interest free” financing for up to $4,000 to help consumers install solar power. The scheme will be rolled out in 20 Indian cities before being expanded nationally.

Bloomberg New Energy Finance last week predicted solar would beat coal plants on costs by 2020, resulting in high penetration of solar power in those nations’ rapidly growing grids, and much less coal-fired generation than presumed. AllianceBernstein has previously warned of “energy price deflation” as a result of the growing impact of solar, and the fact it was demonstrably cheaper than many fossil fuels in many countries.

In the world of global finance, the market for climate bonds – financing linked to clean energy and other climate change solutions – is estimated to have reached more than $US500 billion, triple estimates of just two years ago. The actual “green bonds” market has jumped five-fold to $US35 billion in just 12 months.

Sean Kidney, CEO of the Climate Bonds Initiative said:  “Investors are concerned about climate change. This report shows how they can invest in climate bonds without risk. The investment opportunities we find are safe and secure investment grade bonds. This is a Dull Green Market – just how pension funds and insurance funds like it.”

As an illustration, US chemicals maker Albermarle launched a $6.2 billion bid for specialty chemicals and advanced materials company Rockwood Holdings, as it to build a market leading position in lithium and the rapidly emerging electric vehicle and home and network battery storage market. It is the largest such play in the clean energy market to date. As on industry analyst noted of the corporate play, as Australia killed its carbon price: “Money talks, bullsh*t walks”.

Meanwhile, in Chile, a whole series of large scale plants have been announced. First Solar has just gotten a $230 million loan for a 141MW solar PV project, Acciona has begun construction of a 300MW solar project, Abengoa is building a 110MW solar thermal with storage project, SunPower is completing its 70MW Salvador project, while SunEdison has just obtained $190 million in financing for a 73MW solar project, to follow on from the 100MW and 50MW projects it has already completed.

In Ghana, construction has begun on a 155MW solar plant that is expected to “change the way African governments think about the future of energy.” South Africa has installed more than 500MW of solar power already, and has signed contracts for a total of 64 projects 3,900MW of wind, solar PV and concentrating solar power to be built in coming years.