Renewable Energy Boasts Mid/long-term Growth Potential
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
Renewable energy boasts mid/long-term growth potential amid a continued coal price uptrend.
Fossil fuel prices rise on demand for power generation
Due to Russia’s invasion of Ukraine in early 2022, oil and natural gas prices have soared, and most countries are increasing their use of coal again. Accordingly, coal prices are rising sharply. In 2H21, Australian coal prices exceeded US$150/ton amid conflicts between China and Australia. Due to the rapidly changing international environment, including intensifying political and economic conflict between the US and China and Russia’s invasion of Ukraine, coal has been trading at more than US$300/ton since March. And, prices are unlikely to fall in 2H22.
In April, the European Commission announced a fifth round of sanctions on Russia, including a ban on the import of Russian coal. Most of the countries opposing Russia’s invasion of Ukraine are expected to join the ban. We note that the countries participating in economic sanctions against Russia import roughly 50mn tons of coal pa from the country. As Indonesian coal has a lower calorific value than Russian coal, it cannot completely replace Russian coal for power generation. And, while coal will be imported from Australia, South Africa, and Colombia, given the distances involved, it will be difficult to fully replace Russian imports. As such, the ban on Russian coal is to lead to further price hikes.
In the event of abnormal weather conditions in 2022, electricity demand is likely to exceed predicted levels, and the price of coal and natural gas could rise further. Of note, unusually cold temperatures were recorded in January and February, and temperatures exceeded 50 degrees in India in May, so there is a high possibility of unusually hot temperatures this summer. On the demand side, abnormal weather conditions could lead to further increases in fossil fuel prices.
Fossil fuel consumption to end not due to shortages, but on emergence of alternatives
Ahmed Zaki Yamani, Saudi Arabia’s oil minister in the 1970s, once said, “The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.” In the age of fossil fuels in the 20th century, there were no competing fuels or power sources. However, in the 21st century, renewable energy has emerged, and calls for carbon neutrality have increased. In the 2020s, renewable energy is becoming more economical than fossil fuels, and Sheikh Yamani’s words are becoming a reality. A price reversal with renewable energy has already occurred in 2022 due to strong coal prices. Arguments predicting the mid/long-term expansion of renewable energy are gaining strength.