The European Union’s decision to ban imports of coal from Russia will affect up to 70% of Europe’s thermal coal imports, Rystad Energy research shows.
Eastern Europe and Germany will be particularly hard hit as they generate a significant share of their electricity with Russian thermal coal. The latest sanctions will send countries scrambling for alternative sources of supply in a market where prices have more than quadrupled in the past year.
The coal ban means European consumers will have to brace for high power prices throughout this year as supply shortages in countries that rely on coal generation will spread across the continent via its well-connected power grids.
“These latest sanctions are a double-edged sword. Russian coal exports are worth an estimated €4 billion per year, and there is no easy like-for-like replacement for Russian coal in Europe’s power mix. European consumers – from large companies to households – should expect high prices for the remainder of 2022 as coal and gas are essential to meet the continent’s power demand,” says Carlos Torres Diaz, head of Rystad Energy’s Power Market Research team.
Russia exported 238 million tonnes (Mt) of coal in 2021, with 90 Mt (or 38%) of this volume being destined to European OECD countries (plus Ukraine), according to the US Energy Information Administration. Europe’s total coal demand is estimated to have reached around 630 Mt last year, meaning that the continent relies on Russia for around 14% of its total coal supply. This is quite a significant dependency, with Germany and the Netherlands being the region’s largest coal importers. Looking at just thermal coal imports into the EU, the dependency jumps much higher as Russia supplies 70% of all imports – typically high-energy bituminous coal that is crucial for power stations designed to run on this coal specification.
Alternatives to Russian coal
The EU ban on Russian coal imports comes at a time when the international coal market is already very tight, with correspondingly high prices. A surge in coal demand in Asia, as countries try to minimise imports of expensive natural gas, has sent coal prices soaring in the past year. The API 2 May contract price, which is the main benchmark for coal imported into Europe, surged to $300 per tonne on 5 April (up $43/tonne) as traders followed the evolving ban discussion – compared to $70/tonne a year ago.
This tightness makes it quite challenging to find alternative sources of coal supply readily available in the market and means European consumers will need to pay a premium to attract flexible sources of supply into its ports. Suppliers into the seaborne thermal coal market are already maxed out in terms of export volumes, so there is a real shortage of coal available to fill the Russian gap.
The US could potentially free up some of its domestic coal supplies into the international market to help the balance, but not in the amounts that appear to be required. Prices are therefore set to rise even higher as buyers compete for non-Russian coal – and the situation will be magnified if other countries or companies in the Asia-Pacific region also decide to impose sanctions on Russian coal imports. Countries that continue buying Russian coal, such as China, may end up benefiting from what will likely be a heavy discount.
Even though it seems feasible to find partial solutions to the coal crisis that is developing in Europe, the European population will have to deal with the consequences and factor in historically high electricity prices for at least the remainder of 2022. Power prices across the region will be set by the marginal sources of supply, which are gas and coal. Both these fuels are now trading at exceptionally high levels and will therefore have a direct impact on the power market.
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