Closing Out Coal The Right Way
How To Retire Early; Making Accelerated Coal Phaseout Feasible and Just
June 30, 2020 (Rocky Mountain Institute, Carbon Tracker Initiative, Sierra Club)
Although coal has long been viewed as the cheapest way to power the global economy, this is no longer the case. New renewable energy is now cheaper than new coal plants virtually everywhere, even before considering coal’s dire health, climate, and environmental impacts. The cost of renewables has fallen so far that it is already cheaper to build new renewable energy capacity, including battery storage, than to continue operating 39 percent of the world’s existing coal capacity.i Based on a new global analysis—by Rocky Mountain Institute, the Carbon Tracker Initiative, and the Sierra Club—of nearly 2,500 coal plants, the share of uncompetitive coal plants worldwide will increase rapidly to 60 percent in 2022 and to 73 percent in 2025.
The total cost of phasing out the global coal fleet through efficiently structured financial solutions is already surprisingly small and shrinking quickly. Replacing uncompetitive coal with clean energy could already save electricity customers around the world $39 billion in 2020, and these annual savings rise quickly to $86 billion in 2022 and $141 billion in 2025. Phasing out and replacing the remaining competitive share of the global coal fleet would require $155 billion in subsidies in 2020,ii with this figure dropping rapidly to $80 billion in 2022 and $36 billion in 2025 (see Exhibit ES1). In other words, the theoretical net cost to society of completing the coal-to-clean transition in 2020 would be $116 billion, but this figure drops below zero by 2022 and generates net financial savings of over $100 billion by 2025.iii Those savings—which already exist for many geographies—can be captured and recycled to support a just transition for workers and communities. These figures do not even account for the social and environmental benefits of reducing carbon dioxide and other coal pollutants.
However, coal phaseout hasn’t kept pace with eroding economics, and the slow pace of transition is costing consumers and taxpayers money while posing a significant threat to the climate, public health, and the environment. To keep the Paris Climate Agreement’s temperature targets within reach, global coal use must decline by 80 percent below 2010 levels by 2030, requiring rapid transition in Organisation for Economic Co-operation and Development (OECD) countries over the next decade and phaseout in the rest of the world by 2040. Instead, according to the International Energy Agency, global coal use has continued to increase in recent years. Meanwhile, consumers are stuck paying for expensive and dirty coal generation, the public bears the health and environmental burdens of increased air and water pollution, and taxpayers bear the expense of redressing these costly environmental and health impacts.
A key barrier to accelerating phaseout is that the vast majority (93 percent) of global coal plants are insulated from competition from renewables by long-term contracts and noncompetitive tariffs. Customers are locked into paying for dirty and expensive coal power for years or even decades into the future, with limited options to alter these arrangements without facing penalties and costs or protracted legal and political battles. The Paris Agreement timeline necessitates switching from coal to clean long before most longterm coal power contracts expire or before coal plant investors have been fully repaid.
In many cases, a more rapid phaseout could be unlocked by aligning the incentives of customers and taxpayers, coal plant investors, and workers and communities with moving on from these legacy contracts and noncompetitive tariffs. An approach to dealing with legacy contracts and noncompetitive tariff structures that can align incentives would simultaneously achieve the following goals: Customers would save money on day one, while taxpayers and the general public would benefit from improved health and reduced climate-related risks. Coal plant owners and investors would have the opportunity to replace coal returns with clean returns by reinvesting capital into clean resources. Workers and host communities could access resources to preserve livelihoods, protect benefits, and ensure that they can continue to thrive.
Governments and public finance institutions can accelerate coal phaseout for assets with legacy contracts or tariffs through an integrated three-part approach: (1) refinancing to fund the coal transition and save customers money on day one, (2) reinvesting in clean energy, and (3) providing transition financing for workers and communities.
Where clean energy already outcompetes existing coal, it may be possible to achieve all three parts as a package without additional public funds. As demonstrated by phaseout deals struck recently in the United States, funding packages can turn the value remaining in legacy contracts and noncompetitive tariffs into an engine for transition by:
• Refinancing to free up capital to help fund coal transition while lowering customer costs (e.g., assetbacked securitization, ratepayer-backed bond securitization, and green bonds)
• Using the new low-cost capital in part to reinvest in clean energy to allow owners to phase out coal plants and reduce customer costs further, while replacing returns from coal plants with returns from clean energy
• Utilizing a portion of the new capital raised through refinancing to provide transition financing to coal workers and communities, offering immediate resources to preserve livelihoods, protect benefits, and ensure that host communities can continue to thrive
In circumstances where coal remains competitive (ignoring its unpriced health and environmental costs), this three-part approach may require additional public resources in the short term. We propose two concessional finance tools that can be used in conjunction with the refinancing, reinvestment, and transition financing mechanisms to achieve these objectives. First, governments or public financiers could offer “carbon bonuses” to better reflect the unpriced benefits of transitioning from coal to clean energy, making the economics of coal phaseout more attractive. These concessional payments for each ton of emissions abated are intended to reduce the cost of coal phaseout for customers while continuing to deliver the same electricity services and providing for a fair workforce transition. Second, instead of providing subsidies for emissions reductions through direct payments, the concession could be provided through debt forgiveness. For both mechanisms, public resources should be allocated through transparent and competitive processes. We propose using reverse auctions to maximize the emissions reductions achieved and limit the risks of excess subsidies. OECD countries should finance these mechanisms domestically and fund them in poorer countries as part of their climate and development assistance. However, one point bears repeating: with the share of uncompetitive coal plants increasing quickly, this kind of financing would be needed mostly in the short term to accelerate action.
Whether they require concessional funding or not, financial approaches to accelerating coal phaseout offer several advantages and are especially relevant to COVID-19-related stimulus spending. First, they can be structured as voluntary programs for both governments and asset owners. For example, a reverse auction to acquire outstanding debt on coal plants in exchange for closure does not mandate participation—but it can serve as a powerful mechanism to reveal the true appetite for accelerated phaseout on which subsequent policies can be built. Second, these approaches can help stakeholders find agreement on an acceptable allocation of savings and benefits, thus allowing nontraditional allies to find common ground. Third, these financial approaches can work in conjunction with local regulatory structures and market conditions. Fourth, the need to allocate stimulus spending as part of COVID-19 economic recovery presents a special opportunity to accelerate the coal-to-clean transition.
The United States could help customers save up to $10 billion annually using the three-part approach to phase out the 79 percent of the 236 gigawatt (GW) coal fleet that is uncompetitive today. More than three-quarters of the US coal capacity is in markets where customers are locked into paying utilities based on a cost-of-service tariff. As a result, in this time of national economic distress, customers are paying more for electricity from expensive coal just when they can least afford to. Refinancing customers’ tariff obligations to phase out uncompetitive coal can bring down customer costs and fund transition assistance to support a fair and more robust recovery.
Beyond the United States, the opportunity is ripe to accelerate the coal-to-clean transition using financial approaches that save customers money.
•In the European Union: 81 percent of the 140 GW coal fleet is uncompetitive in 2020, and that will rise to 99 percent in 2022 and 100 percent in 2025. Phasing out and replacing uncompetitive coal plants with renewable energy plus storage would generate savings of $10 billion in 2020, $16 billion in 2022, and $21 billion in 2025.
•In China: 43 percent of the 1,142 GW coal fleet is uncompetitive in 2020, and that will rise to 70 percent in 2022 and 94 percent in 2025. Phasing out and replacing uncompetitive coal plants with renewable energy plus storage would generate savings of $18 billion in 2020, $49 billion in 2022, and $98 billion in 2025.
•In India: 17 percent of the 283 GW coal fleet is uncompetitive in 2020, and that will rise to 50 percent in 2022 and 85 percent in 2025. Phasing out and replacing uncompetitive coal plants with renewable energy plus storage would generate savings of $2 billion in 2020, $8 billion in 2022, and $17 billion in 2025.
We plan to undertake further analysis on other regions in a second edition of this paper, but the preliminary data for these regions is also striking. For instance, for a group of other developing economies with aggregate coal capacity similar to that of the United States,iv replacement of the entire fleet would cost $38 billion in 2020. By 2026, continuing to operate 51 percent of this fleet will become uncompetitive relative to building new renewables plus battery storage. Given the long lead times for electricity system planning and decision-making, as well as the size of the opportunity, now is the time to start structuring accelerated coal phaseout in all regions.
Who should take the lead in exploring and implementing these approaches at the intersection of finance and policy? We make the case that public finance institutions—green banks, multilateral and national development banks, and development finance institutions—have the mandate, capital, and expertise to create programs to deploy these innovative financial tools and help countries capture the economic opportunity of transitioning away from coal. For the past decade, these institutions have been under pressure to end financing for new coal plants, and they have largely done so. In the next 10 years, they should help take the lead in accelerating phaseout of the existing coal fleet. In so doing, they can simultaneously address multiple development challenges at low or negative cost, reducing carbon pollution, alleviating severe public health impacts, improving standards of living, reducing mortality and illness, and enhancing economic productivity.
This report describes the coal phaseout and transition opportunity in five sections. Section 1 presents new data on the collapsing competitiveness of coal with respect to renewables. Section 2 addresses how coal phaseout can be accelerated using a three-part approach consisting of refinancing to save customers money, reinvesting in clean energy, and supporting a just transition for workers. Section 3 describes financing options for accelerating this threepart transition. Section 4 provides specific examples of how these tools could be applied in the United States. Section 5 considers their application in other jurisdictions around the world.