Regional differences in the EU

Figure 40 shows the quarterly average steam coal import prices in various European countries. Only minor regional differences are visible with respect to volatility and the time lag to crude oil prices. Price levels show regional differences of up to about 20 €/t (see Figure 41).

Coal import prices of different EU Member States as displayed in Figure 40 show very similar overall patterns, although price differences exist. Italy and France show generally higher coal import prices than Germany or the UK, while Finland and Spain mostly have lower import prices. The ARA index⁷⁸ shows significantly higher values than the EU average before the price peak in 2008, while thereafter it shows significantly lower values than EU average until the end of 2009. Since then, the ARA index is close to average EU import prices until the mid-2011 when IEA data end. Until including the first quarter of 2013, the EU ARA index is very close to the German import prices.

Figure 40: Steam coal import prices in European countries

Source: Study authors based on (EIA 2013a), (IEA 2013), (Globalcoal 2013), (Eurostat 2013a)

The price of coal import into Northern EU Member States adds the transport costs from the ARA ports to the Member State border to the CIF ARA price. Alternative transport routes exist for the different Member States. For Germany as an example, coal can be transported directly from export terminals to Hamburg port. However, draught restrictions in Hamburg limit the ship size, and thus increase transport costs. Furthermore, costs for transport from the border to the consumer (in general a power plant) are also relevant for the consumer, but are not reflected in the import costs. Inner-European transport is mainly carried out by ship (seagoing or inland water vessel), or by rail, which is generally more expensive (Panos 2009).

78 The DES ARA Index for the price of thermal coal delivered at the ports of Amsterdam, Rotterdam, or Antwerp (ARA) is calculated based on firm bids and offers as well as transactions which are executed via the globalCOAL online trading platform. https://www.globalcoal.com/docs/ARAIndexMethodologyV1e.pdf.

Figure 41: Difference between steam coal import costs into selected countries and EU Member State average

Source: Study authors based on (IEA 2013)

Mediterranean Member States import coal directly from export countries. Port sizes and draught limits are factors leading to varying import costs. Also, import quantities are a cost element. Italy and France with relatively high import costs import lower coal quantities than Germany and the UK with relatively lower costs. Spain and Finland, however, have below-average coal import costs in spite of lower quantities. Coal qualities are another relevant factor. Depending on the power plant technology, some plants can only burn specific coal qualities while others can use “any-coal”. In general, the tendency towards “any-coal”

plants is stronger in markets with strong competition.

The structure of coal origins for the 10 selected Member States is shown in Figure 42. It shows that most countries have a relatively diversified import structure. This is in general not cost optimal, but has strategic reasons and may also be based on long-term supply structures. It is rather astonishing, from a cost perspective, to see imports of Australian coal with rather high marginal costs and the longest transport distance to Northern Europe.

However, (IEA 2013d) shows major Australian and US FOB export price discrimination, depending on the destination country. As an example, in 2009, Australian FOB prices were US-$67.68/t with destination France, while they were US-$44.47/t, or 34% lower for Spain.

Total quantities, however, were rather similar. These examples show that import cost differences depend on many factors and are difficult to explain.

Figure 42: Coal imports by country of origin for 10 Member States

Source: Study authors based on (Eurostat 2013j)

Note: AU: Australia, BG: Bulgaria, CA: Canada, CO: Colombia, CY: Cyprus, CZ: Czech Republic, DE: Germany, ES: Spain, FI: Finland, FR: France, HU: Hungary, ID: Indonesia, IT: Italy, LT: Lithuania, PL: Poland, RU: Russia;

UA: Ukraine, UK: United Kingdom, US: USA, ZA: South Africa

The coal market in Poland

In the current debate on energy and energy policies, Poland is frequently associated with shale gas. However, while shale gas may dominate the political debate, coal still dominates the Polish energy mix (particularly power generation) with the country being the EU’s largest producer of hard coal. Among all European Member States, Poland’s energy industry is the most reliant on coal. Roughly 85% of electricity produced in Poland comes from coal-fired power plants (further explained below). Therefore, this case analysis is interesting in order to assess the impact of oil prices on coal prices on a Member State level.

Supply

In 2011, approximately 138 million tonnes (Mt) of coal were produced in Poland, 55% of which was hard coal and 45% lignite/brown coal. With an annual production of 76 Mt, Poland was the biggest producer of hard coal in the EU in 2011. However, falling exports of hard coal (-35% in 2011 compared to 2010) widened the country’s trade deficit in the coal sector. In order to satisfy its domestic consumption, Poland imported approximately 15 Mt of hard coal (almost half of it from Russia) worth 1.5 bn €. The value of coal imports increased by 15.4% compared to 2010 and by 40% compared to 2008. Hard coal imports mainly originated from Russia (7 Mt) and the Czech Republic (2 Mt). Smaller amounts were imported from Ukraine, the US, Colombia, and Kazakhstan. The traded volumes of lignite/brow coal remained marginal as its transport over long distances is uneconomic.

Demand

In 2011, Poland consumed 146 Mt of coal. Hard coal accounted for 57% of the consumption, whereas lignite/brown coal had a share of 43%. While the mined volumes of lignite/brown coal were almost entirely combusted in plants located in close proximity to the extraction sites (for heat and power generation), hard coal was consumed in a variety of sectors. The majority of hard coal was used by the power sector (54%), followed by the industry (29%) and the household sector (12%). The remaining volumes (5%) were consumed in other sectors such as transport and agriculture.

In Poland, the production of electricity is largely based on coal. In 2011, Polish power plants produced 163,548 GWh of electricity. As shown in Figure 43, 85% of this volume was generated through hard coal and lignite combustion, followed by various types of renewable energy sources (RES) (8%), natural gas (4%), and other fuels such as oil or liquefied natural gas (3%).

Figure 43: Poland – Electricity generation by type of fuel (2011)

Source: Statystyka elekroenergetyki polskiej, Rocznik ARE, 2012.

The coal market in Poland

In Poland, coal is traded on a direct bilateral basis between suppliers and consumers or brokers. The duration of coal supply contracts between producers and electric utilities or industrial consumers usually ranges from two to five years. The price of coal is subject to negotiation between the parties. It is driven by a multiplicity of factors related to its quality (i.e. calorific value; sulphur, nitrogen, and moisture levels). Usually, these quality parameters are precisely defined in coal contracts. If contracted coal supplies do not fulfil the quality parameters defined in a contract, the buyer can either (i) refuse the shipments, or (ii) try to renegotiate their price. Depending on the type of freight, transport costs can represent a large share of the final price of coal. In 2006, transport costs accounted for over 30% of the final price of domestically produced coal stored in Polish harbours. For this reason, transport is also subjected to negotiations between the parties. Some buyers prefer to take care of transport themselves, believing that they can negotiate better deals with freight companies. Domestic prices of coal are also determined by international markets, i.e. by the prices of coal in Polish harbours.

Depending on the size of the ships, these prices are usually US$6–10/t higher than in the ARA ports. As prices of coal tend to decline on the international markets, coal producers operating in Poland have to face downward pressure from their consumers who are demanding lower prices for coal mined domestically.

The future of coal in Poland

The share of coal in electricity generation in Poland is expected to decline in the coming years. However, it might remain robust. In 2011, the Polish Ministry of Economy presented a document entitled “Energy Mix 2050: an Analysis of Scenarios for Poland”, outlining the possible structure of the Polish energy mix in 2050. According to different scenarios (e.g.

including a large scale deployment of electric cars and CCS technologies), the share of coal in power generation is expected to range between 21% and 32%.