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Is coal is on the way out?

With around 75% of coal production now more expensive than renewables, and with the global financial industry continuing their capital flight from thermal coal, what does the future hold for new coal projects?

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Coal, Power plant, Renewable energy, Curtis morgan
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Around three-quarters of US coal production is now more expensive than solar and wind energy in providing electricity to American households, according to a new study.

“Even without major policy shift we will continue to see coal retire pretty rapidly,” said Mike O’Boyle, the co-author of the report for Energy Innovation, a renewables analysis firm. “Our analysis shows that we can move a lot faster to replace coal with wind and solar. The fact that so much coal could be retired right now shows we are off the pace.”

The study’s authors used public financial filings and data from the Energy Information Agency (EIA) to work out the cost of energy from coal plants compared with wind and solar options within a 35-mile radius. They found that 211 gigawatts of current US coal capacity, 74% of the coal fleet, is providing electricity that’s more expensive than wind or solar.

By 2025 the picture becomes even clearer, with nearly the entire US coal system out-competed on cost by wind and solar, even when factoring in the construction of new wind turbines and solar panels.

“We’ve seen we are at the ‘coal crossover’ point in many parts of the country but this is actually more widespread than previously thought,” O’Boyle said. “There is a huge potential for wind and solar to replace coal, while saving people money.”

Coal plants have suffered due to rising maintenance costs, including requirements to install pollution controls. Meanwhile, the cost of solar and wind has plummeted as the technology has improved. Cheap and abundant natural gas, as well as the growth of renewables, has hit coal demand, with the EIA reporting in January that half of all US coalmines have shut down over the past decade.

“Coal is on its way out,” said Curtis Morgan, the chief executive of Vistra Energy, a major Texas-based coal plant owner. “More and more plants are being retired.”

Data released last week highlighted the rise of renewables, with electricity generation from clean sources doubling since 2008. The bulk of renewable energy comes from hydro and wind, with solar playing a more minor, albeit growing, role.

Renewables now account for around 17% of US electricity generation, with coal’s share declining. However, the power of coal’s incumbency, bolstered by a sympathetic Trump administration, means it isn’t on track to be eliminated in the US as it is in the UK and Germany.

Fossil fuels continue to receive staunch institutional support, too. A recent report released by a coalition of environmental groups found that 33 global banks have provided $1.9tn in finance to coal, oil and gas companies since the 2015 Paris climate agreement.

In sobering figures released last week, the EIA predicted that US carbon dioxide emissions from energy will remain similar to current levels until 2050, with coal consumption dropping but then leveling off beyond 2020.

Such a scenario, disputed by other experts who argue the transition to renewables will be more rapid, would be compatible with disastrous climate change, causing vast areas of the US coastline to be inundated, the spread of deadly heatwaves, growth of destructive wildfires and food and water insecurity.

The Trump administration has largely ignored scientists’ warnings over these dangers, instead pushing ahead with an “energy dominance” mantra whereby enormous tracts of federal land and waters are opened up for oil and gas drilling.

The Energy Innovation report, which suggests the “smooth shut down” of ageing coal plants, comes as states and territories start to rally to California and Hawaii’s lead in committing to 100% renewable energy.

Lawmakers in New Mexico recently decided to follow suit, with Puerto Rico poised to vote on the issue this week as states and territories attempt to address climate change in lieu of the federal government.

“It would be better if we had a federal cohesive policy because not all states will take the initiative,” said O’Boyle. “In order to get an affordable, clean energy system we need both federal and state actors involved.”

Capital flight

In the last four weeks, four globally significant financial institutions – one leading Chinese financier, two European insurers and one French asset manager - brought in new restrictions on thermal coal financing, insurance and/or investments.

Additionally, two significant Australian regulatory authorities called on governments and financial markets to prepare for an urgent but orderly financial, energy and climate change transition.

Five weeks ago, IEEFA released a major report highlighting over 100 globally significant financial institutions had restricted coal financing and/or insurance. In compiling the report, we found that since the start of 2018 there had been a new announcement on coal restrictions occurring on average every two weeks.

In fact, the announcements are coming in faster. To date in 2019 there have been nine announcements including UNIQA of Austria, MAPFRE of Spain, BNP Paribas of France, and SDIC of China in just the last four weeks.

This trend is expected to continue to accelerate. The global financial industry is continuing their capital flight from thermal coal.

Most notably, the first Chinese domestic financier has announced a total coal exit.

IEEFA views this announcement as globally significant. The State Development & Investment Corporation (SDIC) is the first leading Chinese financial institution to completely exit the coal industry as part of China’s national plan to develop low emissions energy industries of the future.

SDIC is the largest Chinese investment holding company with US$1,461bn assets under management (AuM). As a leading state-owned enterprise, SDIC has focused on reform and innovation, facilitating and guiding the development of new industries across China. Over the last decade, coal-related investments have been one of SDIC’s leading profit contributors.

Last month, Mr Wang Huisheng, Chairman of SDIC told Chinese reporters that SDIC had accelerated its 2016/17 five year plan to exit coal to align with national energy structure adjustment measures with a view to redeploying capital into growth areas of new energy, including renewable energy, energy storage and biofuels.

SDIC has now finalised its complete withdrawal from the coal industry and will no longer invest in thermal power plants.

Also in the last five weeks, a leading insurer in Latin America - the Spanish group MAPFRE (€68bn AuM) announced ‘the Group will not invest in coal-powered electricity utilities or insure new coal-related projects.’

This was followed by UNIQA Insurance Group AG (€20bn AuM) of Austria who last month announced their divestment from new coal-related investments with limited guarantees for the future insurance of their existing coal industry clients beyond 2025.

Additionally, last month BNP Paribas Asset Management (€537bn AuM and assets under advisory mandates) also announced a new coal exclusion policy stating it is ‘accelerating its commitment to climate change’. The banking arm of BNP Paribas first announced it was divesting from thermal coal in 2015, and this is the second subsequent policy tightening by BNP.

BNP’s policy shift is again reflective of a global transition away from thermal coal and intensive carbon emitting industries.

The four institutions exiting coal have looked at the evidence and found renewables are increasingly deflationary while coal will become increasingly uncompetitive, and counter-productive to the objectives of the Paris Agreement.

In Australia, the Australian Prudential Regulation Authority (APRA) recently asserted a new urgency. Commissioner Geoff Summerhayes noted the threat of climate change is ‘distinctly financial’ and that it is crucial for companies and countries to seize emerging opportunities or risk being left behind.

APRA’s Commissioner also noted that ‘the companies leading the shift towards the low carbon economy’ tended to be ‘most sophisticated businesses’ – a clear message to both governments and companies to increase their risk mitigation strategies and a program of transition away from carbon intensive industries.

Then last month the Deputy Governor of the Reserve Bank of Australia highlighted the key systemic financial risk to institutions and the economy by not driving transition to mitigate climate change. Guy Debelle suggested countries like Australia are economically vulnerable to global reductions in carbon intensive energy use, as well as exposed to the increased severity and frequency of extreme weather events.

With Japan – Australia’s biggest thermal coal export market – emerging as a new leader in exiting thermal coal mining and new coal-fired power plant development, coupled with the rapid cost decline and increased uptake of renewable energy sources, Australia needs to urgently review its forecasts in a market that is changing rapidly.

German utility RWE is to cancel future investment in coal-fired power plants, including a large brown coal power plant at Niederaussem near Cologne, to focus on renewables.

The company is planning a major reorganisation later this year under which RWE will take over 10,000 MW of renewable power assets from subsidiary Innogy and rival E.ON, making it the world’s number five renewables company.

“In the future, RWE will focus on electricity generation from renewable energy sources. Consequently, the company will no longer invest in new coal-fired power stations,” says the company.

RWE had originally started planning for the for the 1,200 megawatts (MW) BoAplus lignite-fired power station at Niederaussem in 2012 to replace older generation units at the site that uses locally mined brown coal with latest coal-burning technology at that time.

But the project was languishing when the wholesale power market slumped between 2012 and 2016 in the wake of the financial crisis and because of overcapacity, which led to major reorganisation in the industry.

Analysts say that global climate goals and the environmental case against carbon emissions from coal burning now make projects such as Niederaussem unrealistic.

RWE’s chief financial officer Markus Krebber last week told Reuters the company would spend billions of euros in coming years on green power, alongside storage technologies and gas-fired power.

But RWE also says coal would still remain part of its power systems during a transition period. The company still operates 10,300 MW of brown coal and 6,500 MW of hard coal fired capacity in its core European market.

Currently some 40% of Germany’s power comes from green sources. RWE said as a result coal plants were needed to provide stable backup capacity, although their share in the electricity mix would decline gradually.

The heavy contribution from volatile renewables puts major stress on power grids and can threaten supply security for consumers. Round-the-clock supply from coal-burning plants can help to keep grids stable.

RWE is holding out for compensation under a German plan to abandon coal burning by 2038 at the latest.

But although fewer new coal-fired power stations are being planned, those already approved are still being built. Global Energy Monitor says there was a 12% increase in the amount of coal-fired capacity under construction last year. And the IEA reported this week that coal usage rose last year for the second year in a row, reversing two years of decline up to 2016 and contributing to a 1.7% increase in CO2 emissions.

Two-thirds of new coal-fired capacity coming online last year was in China and almost a fifth was in India. Indonesia, Japan, Pakistan, the Philippines, South Africa, Turkey and Vietnam also increased coal burning capacity in 2018.

Paradoxically, despite using more coal, China also achieved the world’s biggest increase in solar and wind generation last year. Renewables now account for more than a quarter of world power generation, and last year they delivered close to half of the growth in global capacity.

The amount of coal-based capacity closed down last year was almost equivalent to China’s capacity growth which meant the growth rate of coal capacity slowed to the lowest on record, the fourth straight year of decline.

The US led the way, shutting down 18 gigawatts of capacity. India and China both plan large scale closedowns in coming years. Over half of EU member states have committed to phase out coal by 2030. In the UK, coal provides just 5% of capacity, down from two-fifths six years ago.

Disappointing as it was, last year’s 0.7% increase in coal use was much slower than the 4.5% annual rate in the decade to 2010. But coal still remains the largest source of global power generation and the second largest source of primary energy.

The World Economic Forum’s 2019 Fostering Effective Energy Transition Report found that the pace of the world’s transition towards clean energy had slowed to the lowest rate for five years, with investment in clean energy down by almost 10% last year.

Over 100 global institutions and counting are exiting thermal coal finance and insurance. The momentum is increasing, and governments and corporations must get ahead of the transition challenge to reduce cost exposures coupled with climate change.

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