Coal demand hits record 8.94 billion tonnes on gas price spike

Global coal consumption is projected to reach a record 8.94 billion tonnes this year, representing a 1.2% increase from previous levels. This surge is primarily driven by a significant rise in natural gas prices, which has made coal a more cost-effective fuel for power generation. The International Energy Agency (IEA) reports that this shift is occurring despite a concurrent expansion in renewable energy infrastructure, indicating that fossil fuels remain central to meeting growing global electricity demands.

The IEA attributes this resilience in coal demand to two main factors: the economic pressure of higher LNG costs and the physical impact of a strong El Nino weather pattern. The El Nino effect has increased the need for air conditioning in various regions while simultaneously reducing hydropower output in countries like India and Vietnam. Consequently, coal-fired plants have filled the resulting energy gap, reversing the long-term decline in coal use that the IEA had previously forecasted for the coming decade.

Gas price spikes drive fuel switching

The primary catalyst for the coal demand spike is the volatility in the liquefied natural gas market. Disruptions to LNG shipments through the Strait of Hormuz have pushed gas prices higher, making coal a cheaper alternative for electricity generation. This economic incentive has triggered a distinct fuel-switching phenomenon in major energy markets, including China, South Korea, Japan, and Europe. In these regions, power operators are increasingly utilizing spare coal capacity to replace gas-fired generation, directly boosting coal consumption volumes.

According to GN auto stocks/energy-stocks: natural gas demand, the link between gas prices and coal use is direct and mechanical. When gas becomes expensive due to supply constraints, the merit order in power dispatch shifts toward coal. This is not a long-term strategic shift but a short-term operational response to input costs. The IEA notes that while no coal ships physically pass through the Strait of Hormuz, the market impact is felt globally through price transmission, forcing operators to seek cheaper fuel sources to maintain grid stability and profitability.

Renewables insufficient to offset fossil growth

Despite the global rollout of wind turbines and solar panels, renewable energy growth has not been sufficient to displace fossil fuels. The IEA states that while green sources have blunted the rise of coal, they have not been enough to send it into decline. The underlying driver is the overall growth in global power demand, which outpaces the rate of renewable capacity additions. This gap is currently being filled by coal, particularly in regions where hydropower output has been reduced by drought conditions associated with the El Nino phenomenon.

Future demand hinges on strait stability

The IEA’s outlook for 2027 is conditional on geopolitical stability in the Middle East. If the Strait of Hormuz remains open and LNG flows resume to pre-disruption levels, natural gas prices may stabilize, potentially reducing the economic incentive to burn coal. In this scenario, global coal demand could decline next year as gas-fired plants return to the merit order. However, if disruptions persist, the IEA warns that 2027 could see another record year for coal consumption, as high gas prices continue to favor coal in the power mix.

This dynamic underscores the fragility of the transition away from fossil fuels. The IEA has been forced to revise its long-term projections, moving from a forecast of slight declines in 2026 to a prediction of record highs this year. The agency’s analysis suggests that without a sharp, sustained drop in fossil fuel consumption, the impact of climate change will intensify. The current record demand for coal highlights the continued reliance on thermal generation to meet peak demand, particularly during periods of high cooling loads and low hydropower availability.