(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON Nov 20 A return to rising world coal prices next year would underscore the European Union's energy dependence, given global gas prices also appear on a long-term upward trend.
European coal import prices have this year fallen following a shale gas boom which suppressed U.S. power prices and coal demand.
But the forward curve projects steadily rising benchmark prices, presumably based on expectations of returning demand from Asian emerging economies including China where government stimulus efforts are expected to kick in (see Chart 1).
The forward curve suggests a return to levels seen either side of peak European coal import prices in 2011.
That is bad news for European wholesale power prices recently suppressed in countries able to substitute gas for cheaper coal.
For example, German power prices have fallen even as gas prices rose, reflecting lower power demand and growing use of cheap coal and zero marginal cost renewable energy (see Chart 2).
In Britain, by contrast, particularly exposed to gas and with less renewable energy, power prices have risen compared with levels at the start of 2011.
The EU-27 has seen a more than doubling of imports of U.S. coal since 2009. (see Chart 3)
In the first half of 2012, Germany, Italy and the Netherlands respectively imported 37 percent, 83 percent and 86 percent more hard coal from the US than in the first half of 2011, according to European Commission data published in last week's "Quarterly Report on European Gas Markets".
Chart 1: link.reuters.com/daj24t
Chart 2: link.reuters.com/faj24t
Chart 3: link.reuters.com/gaj24t
Higher coal prices would remove a buffer against higher gas prices and expose the EU vulnerability to globally traded energy.
Global traded LNG prices have risen on the back of demand from Japan (following the Fukushima nuclear crisis) which has replaced a U.S. collapse (following a domestic shale gas boom).
That rising trajectory in LNG prices may now be a long-term trend, reversing a previous dip.
"There is no guarantee that with recovering demand for natural gas in the EU, relatively cheap LNG ... will continue to be as easily or cheaply available as in recent years," said the EU quarterly market report.
"The significant falls in imports of LNG currently being observed in the EU (in excess of falling consumption) could be a first warning sign," it said.
The trouble for the EU is a high energy dependency, which has recently fallen, just slightly, to 52.7 percent from a 2008 peak of 54.6 percent, as reported in the European Commission's "Energy Markets in the European Union in 2011", published last week.
Import dependency is measured as the ratio of net energy imports to total consumption.
The EU's executive Commission has several approaches to curbing its vulnerability to global energy prices, including: increased investment in cross-border transmission capacity to balance EU-wide energy demand and supply better; and more investment in indigenous resources including renewable energy.
The trouble is that both are incredibly capital-intensive.
The Commission reports that Europe's energy system requires investment of 1 trillion euros ($1.28 trillion) by 2020 to secure the bloc's security of supply.
Some 750 billion euros of that total is required in power generation and electricity and gas networks, alone, it says.
That partly reflects a massive shortfall in installed renewable energy, for example, compared with binding 2020 goals under the bloc's energy and climate policies.
Installed renewable power capacity reached 288 gigawatts (GW) as of 2010, way short of the level of 487 GW which countries have committed to in 2020.
Member states have notified the EU of investment plans for an extra 40 GW, some way short of the nearly 200 GW additional capacity needed by 2020, the Commission reported in its briefing paper, "Investment projects in energy infrastructure", published last week.
It is tempting to view shale gas as a neglected plank in the bloc's energy strategy, bearing in mind how it has curbed U.S. power prices.
A case in point is Bulgaria, which has the highest and fastest rising gas price in the EU, at an average of 43.3 euros per megawatt hour in the second quarter (compared with an average UK market hub price of 24.5 euros), and which rose by half again between the first half of 2011 and the first half of 2012.
In conjunction with Hungary and Romania it has technically recoverable shale gas resources of 19 trillion cubic feet (tcf), according to the U.S. Energy Information Administration, compared with Bulgarian conventional natural gas production in 2010 of 0.002 tcf.
But it has maintained a ban on shale gas exploration using hydraulic fracturing, alongside France which has the top or second biggest estimated shale gas resource in Europe.
($1 = 0.7803 euros)
(Reporting by Gerard Wynn)