German Coal Investing

Brian Hicks

Written By Brian Hicks

Posted November 5, 2013

Have you ever been in a position where you wanted to get that new car but couldn’t afford it?

We’ve all been there at some point. We scraped and saved to get that shiny new set of wheels, but it always seemed beyond our reach.

That’s very much how Germany feels right now.

coal handsGermany’s overall goal was to turn most – if not all – of its power into renewable energy by 2050. But cheap coal is the most realistic option at the moment.

Germany is in a fierce dichotomy when it comes to energy policy. On one hand, the nation hopes to replace half of its energy grid with solar power, but it is still heavily reliant on coal consumption.

And while increasing solar and wind power is a noble pursuit, there are a few things getting in the way.

Because of the instability of wind and sun power, Germany sometimes produces more power than necessary, causing price instability. And since the power of the wind and the sun’s rays are intermittent, Germany is forced to rely on fossil fuel resources to counterbalance this – most notably coal.

Germany uses lignite coal – considered the dirtiest form of coal to burn. This in fierce opposition to Germany’s solar ambitions, but cutting costs and maintaining a steady supply of energy is taking precedent.

Germany plans to add 7.3 GW of coal-based energy by 2015, Platts reports, 4 GW of which will be ready by 2014. Coal production increased 5 percent in the first quarter of 2013.

In response to the Fukushima Daiichi disaster, Germany developed a plan to shut down nine nuclear reactors within the decade, replacing the power loss with wind and solar energy.

As of now, coal power is the best source of energy stability. But this isn’t to say Germany has given up on its renewable plans.

Chancellor Angela Merkel Is planning a $757 billion project that will shift the nation’s renewable power from 23 percent of total supply to 35 percent by 2020, Bloomberg reports.

German Energy Supply

Because of the combination of cheap coal and renewable power, Germany is undergoing an energy glut like never before. The nation will surpass its 2012 record of energy exports, but this isn’t necessarily a bad thing in a country known for its manufacturing and exporting capacity.

One of the reasons Germany’s energy prices are so high is because of renewable power, since it is more expensive and less reliable. And this is where cheap coal comes in.

Over the last few years, coal prices have dropped by one-third because of lower demand. But in Germany, demand is rising. In 2012, the nation relied on coal for 46 percent of its supply. But this increased to 50 percent in 2013.

Meanwhile, renewable power makes up 22 percent of German energy supply, nuclear provides 16 percent, and natural gas accounts for 11 percent. But as nuclear will soon be phased out, look for coal demand to expand.

Germany is the primary place to look for long-term coal investments – along with Europe as a whole.

Since Western Europe is going through hard times, cheaper coal is the most viable source of energy to cope with tight budgets. And this is greater news for coal companies and towns in the U.S.

Coal Demand

In 2011, the U.S. exported 5 million short tons of coal to Germany, according to the Energy Information Administration.

Companies like Alpha Natural Resources (NYSE: ANR) and Peabody Energy (NYSE: BTU) have been primary exporters of coal to Europe.

And while there are new stipulations in the EU that require older coal plants to shut down, coal demand will also remain strong in response to higher natural gas prices on the continent, mostly due to Russia’s virtual monopoly on the natural gas market in the West.

This is good news if you’re a coal investor.

And you still have Asia to look forward to, since countries like India and China will continue to invest in coal.

This will benefit coal states like Kentucky, Pennsylvania, and Montana down the road.

Kentucky-based FJS Energy signed a $7 billion contract last year with India to supply the nation with coal for the next 25 years, selling 9 million tons per year.

And as long as renewable power continues to be unstable and expensive, countries that rely heavily on wind and solar will continue to need steady sources like coal and nuclear to balance this out.

The Netherlands ranked highest in terms of U.S. coal imports in 2011, taking in 11 million short tons. The U.K. imported 7 million, France 4 million, and Belgium 3 million that same year. South Korea ranked highest in Asia, importing 10 million from the U.S.

The U.S. isn’t the top supplier to these regions. Australia, Indonesia, and Russia are ahead of the U.S. in supplying coal to European and Asian nations. But many major U.S. companies are going to be looking abroad as domestic demand continues to shrink.

Unfortunately for Europe, things in the economy are not improving. We’re seeing growing social and political discontent across Europe as shrinking job growth presses on. But this can mean an opportunity for you, since cheap coal will always have a place in downtrodden European countries.

For now, at least, Germany will have to keep dreaming of a more progressive energy economy.


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