Coal as Global Price Shock Absorber

As disruption to energy markets continues from the war with Iran, this winter is shaping up to be a very expensive one for the world’s liquified natural gas (LNG) importers. For those with the option – from Europe to East Asia – the response is coal. That’s certainly the case in South Korea.

South Korea’s climate and energy minister told Bloomberg last week that reducing winter consumption of LNG is an imperative. The Koreans are actively rethinking their reliance on the LNG market. Two exorbitantly expensive LNG price spikes in just four years has Korea and a host of other nations doubling down on plans to pivot from gas.

According to the minister, the gas price shock following Russia’s invasion of Ukraine added roughly $22 billion in losses to state utility Korea Electric Power Corp. Now, with Middle Eastern LNG supplies disrupted and winter approaching, the Koreans are desperate not to relive that pain. Coal capacity is being called on as a price shock absorber. Even as coal prices in Asia have risen with increased regional demand, coal remains a far more economical option to LNG and a salve when heating and power needs compete for limited gas supplies.

Japan is facing similar pressure and finding similar answers. On October 19, its nationwide next-day wholesale electricity price reached its highest level in nearly four years, jumping more than 25% from a week earlier. The Japanese aren’t just using more coal in the near-term to reduce reliance on imported gas but they’re beginning to make more structural changes to provide flexibility for coal capacity to help relieve price pressure in the future.

In March, the Japanese government suspended a restriction on the utilization of coal plants to reduce exposure to the LNG market. That decision – like so many other pragmatic choices to pivot away from gas to coal this year – looks increasingly sensible as global competition for limited LNG cargoes sends prices higher ahead of winter.

Europe too is feeling the gas squeeze with remaining coal capacity providing an economic lifeline to crushing energy costs. Coal plants in Germany and Poland, used as a grid reliability backstop, have also become price shock absorbers as gas prices soar. Europe’s dash away from coal to overreliance on weather dependent renewable power and imported gas has proven an economic black eye.

Fuel optionality was once considered foundational to energy security and affordability. Where it has disappeared from Europe to parts of the U.S. – price spikes have become ubiquitous.

Painfully high electricity prices in the Northeast are a prime domestic example. As The Wall Street Journalobserved, “Electricity and heating bills have shot up more in the Northeast than elsewhere. Over the last six years, residential electric rates have climbed by about 20% to 30% in most states, yet far more in Maine (92%), New York (59%), Rhode Island (45%) and Massachusetts (43%). Some households are paying hundreds of dollars more a month than they did a few years ago.”

The Northeast closed its coal plants, refused to expand natural gas pipeline capacity, and left grid operators holding the system together with prayers and duct tape. It’s a supply crisis manufactured from inept policy that is costing consumers billions of dollars. It’s also an unmistakable reminder of the value of the existing coal fleet.

Electricity affordability is already a top-tier concern in the U.S. As surging U.S. LNG exports more tightly tie the U.S. to a volatile and expensive global market, and as power and natural gas demand surge from the AI revolution, preserving – even reinforcing – dispatchable fuel diversity should become an energy policy priority.

The lesson from South Korea, Japan, Europe and our own Northeast couldn’t be clearer: optionality matters. Coal capacity is an irreplaceable hedge on natural gas price volatility. It’s past time we recognized it.