Hundreds of Trillions Of Dollars Wasted On Coal
How to waste over half a trillion dollars; The Economic Implications of Deflationary Renewable Energy for Coal Power Investments
March 2020 (Carbon Tracker)
New investments in renewables are cheaper than new investments coal in all major markets today.
It could be cheaper to build renewables than run coal in all major markets by 2030.
Over half of coal plants operating today cost more to run than building new renewables.
Governments and investors should cancel coal power projects or risk wasting over $600 bn in capital costs.
This report analyses two economic inflection points critical to understanding the relative competitiveness of coal power.
1-When energy generated via investments in renewables is cheaper than that generated by new investments in coal.
2-When energy generated via new investments in renewables is cheaper than generating energy using existing coal.
In doing so, we find that inflection point one has already occurred in all major markets and inflection point two will have occurred in all major markets by 2030 at the latest. These findings have wholesale implications for coal power investments throughout the world.
New renewables cheaper than new coal in all major markets today
In Powering Down Coal: Navigating the economic and financial risks in the last years of coal power published in 2018, we found that declining renewable energy costs and existing carbon and air pollution regulations were already undermining coal as the least-cost option for power generation. Due to price deflation of renewable energy, we concluded that coal generation would become uneconomic in both absolute and relative terms. Regarding the latter, we anticipated that by 2025 at the latest, investments in new renewables would beat new coal investments in all markets. Using updated data from publicly available sources, we now believe these conclusions are too conservative. Our analysis finds that the LCOE of renewable energy is cheaper than the LCOE of coal in all major markets today
Over half of the operating coal fleet costs more to run than new renewables
The second inflection point, the year when the LCOE of renewables outcompetes the LRMC of coal, is where existing coal will start to become economically obsolete. Our modelling finds that around 60% of the global coal fleet already has a higher LRMC than the LCOE of renewable energy. This trend is most pronounced in the EU, which has a strong carbon price and has benefited from years of investment in renewable energy. The US, China and India are not far behind the EU due to excellent renewable energy resources, low capital costs and least-cost policymaking. In markets where renewable energy has yet to outcompete existing coal this is either due to market nascency or poor policymaking. For example, in several ASEAN markets and Japan, there is still not a route to market reliable enough to attract global capital like EU and US markets.
Cheaper to build renewables than run coal in all markets by 2030
By 2030 at the latest, we expect the average LRMC of coal in all major markets to be higher than the LCOE of renewable energy. Assuming competitive and non-discriminatory market regulations, renewable energy developers will take advantage of the difference between power prices and the LCOE of wind and solar PV. This new dynamic will have implications for power price shape and volatility. Increased variable renewable energy supply will increase price volatility and decrease prices during certain times of the day, forcing coal generators to be flexible during those times to avoid operating at a loss. Greater flexibility increases the LRMC of coal generation, exacerbating the difference between the LCOE of renewable energy.
Cancel coal power projects and deregulate markets or waste $600bn
There is currently 499 GW of coal capacity announced, permitted, pre-permitted and under-construction throughout the world with an overnight investment cost of $638 bn. The economics of coal power is far from straightforward and in an important respect bifurcated. We broadly categorise power markets two ways: deregulated and regulated. Deregulated markets are subject to a competitive wholesale power market where generation activities are completely separated from the rest of the value chain. Regulated markets are not subject to the competitive wholesale power market where generation activities are integrated into the rest of the value chain under the ownership of a vertically integrated utility.1 Our analysis highlights three trends2 across these markets:
• Deregulated markets where coal faces imminent economic obsolescence through market forces (for e.g., the EU).
• Semi-regulated markets and regulated markets where corporate welfare results in high cost coal being passed on to a captive consumer base (for e.g., the US).
• Semi-regulated and regulated markets where intractable problems are created due to coal generators selling – or being subsidised to sell – power below the cost of production (for e.g., ASEAN).
These dynamics in regulated and semi-regulated markets mean new investments in coal may continue and coal generators may not close, despite the economics of alternative power generation technologies. If investors and policymakers decide to build and operate the 499 GW of coal capacity permitted, pre-permitted and under-construction throughout the world, it will not have been the least-cost option in those regions, based on our analysis. Moreover, according to analysis of recent research from the UN’s Intergovernmental Panel on Climate Change, global coal use in electricity generation must fall by 80% below 2010 levels by 2030 to limit global warming to 1.5°C.3 We offer the following high-level recommendations:
China’s post-coronavirus stimulus must avoid costly coal power The outbreak of coronavirus has struck a significant blow to the Chinese economy. How severe the coronavirus may be will not only depend on the extent and depth of the outbreak but also the government response.4 Opaque and inappropriate pricing structures for power generation have long been a key distortion in the Chinese economy. For instance, according to Carbon Tracker analysis, around 70% of China’s operating coal fleet costs more to run than building new onshore wind or utility-scale solar PV. Despite this, China has 99.7 GW of coal-fired capacity under-construction and another 106. 1 GW of capacity in various stages of the planning process. The National Energy Administration’s recent circular on coal power planning and construction implies policymakers are prepared to approve investments in coal in the near future.5 China’s authoritarian governance means it can deploy capital effectively and do so in a way that does not stifle innovation. China must seize the opportunity and act on the risk by deploying stimulus capital efficiently and avoid investing in coal power which is economically redundant and environmentally disastrous.
Governments and investors need to act on the risk: cancel projects to avoid stranded cost risk Investors are increasingly recognising inflection point one and are responding by restricting thermal coal funding.6 However, several governments are continuing to incentivise and underwrite coal projects. The capital recovery period for new investments in coal capacity is typically 15 to 20 years, making these investments extremely risky given our finding that coal will not be a least cost option before debt is fully amortized. The large difference between the LCOE of renewable energy and the LCOE and LRMC of coal make it highly unlikely that these investments will be any less risky when system costs are considered. Therefore, governments – and investors who are relying on government-backed power purchase agreements (PPAs) – need to urgently reconsider these coal projects in light of prevailing economics. Table 2 details the level of stranded cost risk by region and offers high-level policy recommendations.
Policymakers need to increase price discovery to incentivise least-cost power generation technologies
Price discovery – i.e. determining the value of an asset in the marketplace through the interactions of buyers and sellers – is often limited in regulated and semi-regulated markets. Investment decisions tend to be made based on PPAs, and governments are predisposed to keep coal capacity operating for socioeconomic reasons. This dynamic means new investments in coal may continue, allowing coal generators to continue to operate despite the increasingly undisputable economic advantages of alternative power generation technologies. Policymakers urgently need to deregulate power markets to ensure least-cost power generation technologies are built as a priority.
Seize the opportunity: introduce phase-out schedules to avoid creating a negative investment signal for renewable energy
As well as disincentivising new builds, policymakers need to introduce regulations that maximise the systems value of variable renewable energy and retire the existing coal fleet through phase-out schedules. Failure to take these steps will exacerbate stranded asset risk and could result in overcapacity. This, in turn, will suppress power prices, create a negative investment signal for renewable energy and ultimately stifle the transition to a low carbon economy
This report analyses two inflection points critical to understand the relative competitiveness of coal power. The first inflection point considered when new investments in renewable energy (either onshore wind, offshore wind or utility-scale solar PV) are cheaper than new coal. The second inflection point considered when new investments in renewable energy cost less than the operating cost of coal power. Coal has long been considered the least-cost option for power generation throughout the world. This narrative is quickly changing as a confluence of factors are disrupting coal’s pre-eminence. Most notably, low-cost renewable energy, which will soon be cheaper to build than to run coal plants. Policymakers need to stop new investments in coal power immediately and redesign power market regulation to minimise stranded asset risk and accelerate the transition to a low carbon economy