Coal phase-out: Challenges and an emerging roadmap
- Complexities range from retiring coal assets to the effort needed to add renewable capacity
- Millions of jobs are at stake, requiring deep collaboration between the public and private sector
- The banking sector is innovating with clients and regulators on coal phase-out
- Parallel action on renewable energy production and required infrastructure is imperative
- Generational, not just short-term, dividends of coal phase-out is a key consideration
A daunting landscape
The modern world runs on electric power. About 60% of our electricity energy needs are met by fossil fuels, with coal making up almost 60% of that. Underscoring the long road ahead, the power sector makes up for a third of the world’s greenhouse gas emission.
Asia, with 60% of the world’s population, largely middle and low income, is not at the top of per capita emissions, but given its scale and growth prospects, clearly falls at the centre of the imperative to reduce emissions in order to meet the goals of the Paris Agreement to limit global temperature rises to below 2C as compared to pre-industrial levels. It is estimated for Asia, $3.1tn of average annual financing is needed, amounting to more than 100% of India’s GDP each year, to transition to net zero by 2050. These are extraordinarily challenging figures, unprecedented in scope, unparalleled in urgency.
Coal is by far the majority source of energy and emission in Asia. Its share of the energy mix varies from 25% in Japan and 29% in Indonesia, to 61% in China and 74% in India. There are around 5000 operational coal plants in Asia, of which China and India represent about 86% of total power generated. In South-East Asia, Indonesia, the most populous nation in the region, represents the largest coal-related activities and emissions. Many of these are fairly new, hence have a long runway to go before the assets are depreciated substantially.
Globally, years have gone by with numerous action plans and pledges to achieve meaningful green transition and net zero outcomes by 2050 or beyond. But the reality remains grim. Coal generated power capacity is still rising, with Europe’s consumption temporarily resurging after the war in Ukraine broke out, and both China and India pushing ahead with capacity addition.
The fact remains that many Asian nations lack the infrastructure, suitable land, and coastline, not to mention financing, available to push for major indigenous renewable power generation. The coal sector also generates substantial employment, nearly six million in Asia, mostly in China, India, and Indonesia, when the entire coal supply chain is considered. Given that the region has invested in building such massive coal capacity, it follows that the financial and employment dimensions of phasing out coal are also exceptionally daunting.
The world is changing
Thankfully, the world is rising to the challenges. Instead of despairing over the long runway ahead, climate transition related target setting, financing, and technological breakthroughs are proliferating by the day.
In 2019, only 10% of global emissions were covered by national pledges to achieve net-zero emissions. Today, more than 140 countries, representing almost 89% of global emissions, have announced or are considering net zero targets. Out of these 140 countries, 25 are in Asia and their pledges cover about 47% of global emissions.
Asia’s corporate sector is also making tangible progress. In 2019, only 60 companies in Asia had committed or set science-based targets, that number is now over 1000, making up a quarter of signatories globally. Support for the UN Principles of Responsible Investment has similarly picked up, growing from 181 signatories in 2019 to more than 500 today.
Momentum and support for climate disclosure has grown rapidly. Globally, more than 3800 organisations have committed to supporting the recommendations of the Task Force on Climate-related Financial Disclosures; in Asia, supporters number at more than 2000.
Cost and technology
The cost of producing wind and solar energy has declined sharply in recent years, thanks to public sector support, technological progress, and production reaching scale. This has taken place just as regulation and taxes have begun pushing up the cost of producing fossil fuel-based energy. More importantly, the cost and efficiency of transporting and storing renewable energy has been improving.
A critical issue for Asian countries is the lack of indigenous production capacity, especially in Southeast Asia, where challenges such as high installation costs and limited financial resources persist. Renewable resource potential also differs between countries. For example, low wind speeds in Malaysia means that total wind capacity stands at 2GW, while in Vietnam there is a much higher potential of 311 GW.
One fear with renewables is their intermittency, which is being addressed increasingly by improvements in storage technology and changes in demand management practices. If these challenges are overcome, renewable energy capacity additions can increase up to 40% of total power capacity by 2030 in Southeast Asia, compared to one-quarter today. This would entail about 300GW of new renewable capacity installations, most of it solar and wind. An important complementary consideration is that the avoidance of costs related to health and environmental damage caused by fossil fuels can bring savings of up to USD1.5 trillion cumulatively to 2050, as emissions stabilise and then decline.
As cost considerations shift and regulatory environment becomes more enabling of renewable power generation, governments are also facing demands from their population. No longer is green transition considered the rich nations’ burden; here in Asia, both at the corporate and household levels, there has been substantial change in awareness and drive in recent years, as seen in opinion surveys.
There is also a stark reality associated with coal power; climate change related disruptions are in fact lowering the returns on coal projects in areas with diminishing water supply. Water is critical as like all thermoelectric power systems, coal plants require cooling, which is mostly done by water. Like it or not, virtually all countries will find coal power more costly and less popular going forward.
Facing the complexities
Energy transition is a complex task. An unprecedented degree of restructuring needs to be carried out over a short period of time to keep the goals of the Paris Agreement in reach. We need another industrial revolution, but at the speed of digital transformation.
No one can tackle this alone. Intensive collaboration is imperative, between law makers, regulators, tax authorities, firms, financial institutions, scientific researchers, all embedded in the community at large. This will unlock new solutions. Key functions of financial institutions include allocating capital to finance energy transition, pricing of such capital in a way that considers environmental and social risk factors, and rolling out financial innovation.
Perhaps no area requires more profound transformations than coal. Phasing out coal would be an instrumental part of the energy transition journey, given its considerable carbon footprint and systemic implications. Of course, coal related investments can’t go to zero overnight; nor can existing coal related activities.
While public policies on coal phaseout are strengthening globally and regionally, it is possible to further accelerate the phase out of coal by designing credible financial incentives for early shutdowns of power plants. Banks can apply innovative financial models to attract new owners of coal power plants to commit to early phase outs, while existing owners receive a compensation that is appropriate, among others, by taking into account their existing power offtake agreements as well as increasing awareness that they might be holding onto a stranded asset in the long run which might turn away investors, lenders, and even insurance providers. One critical element of such financial mechanisms is to source concessionary forms of capital alongside private finance to create a blended finance solution, which ultimately enables the accelerated phase out of a plant earlier than scheduled. In doing so, countries can herald the deployment of renewable energy even faster.
Apart from the need to source public and private capital, these projects require the optimisation of trade-offs between environmental goals and broader socio-economic considerations, which can only be accomplished with the support from government, the relevant regulators and private sector companies, as well as the affected communities.
After getting all relevant ecosystem partners involved, the first step in approaching a managed coal-phase out transaction is to ensure its credibility. This requires an assessment of the overall energy transition plans of the country in which the coal power plant is located. For instance, it would not make sense to retire a coal power plant in one part of a country, if new plants are still being built in other parts of the same country. Furthermore, the energy transition plans of the current and new owners of the coal power plant are equally important. A company’s decarbonisation plans should be assessed in their totality; early phase out of a plant in one country cannot be negated by building new ones in another country.
Critically, the selection criteria of specific coal power plants need to assure real and material emissions reductions secured by new financing, which will depend on the coal plant’s technical specificities, age and other considerations. Additional environmental benefits such as a reduction in air pollution and reduced water stress should also be considered.
Phasing out coal can only happen with parallel action on renewable energy production and supporting infrastructure, such as energy storage systems and upgrading the transmission and distribution systems to deal with the intermittency issues of renewables. Failure to do so could result in communities not having adequate access to an affordable and reliable source of electricity, a sure-fire way to impede growth and public support.
Jobs are key; impact on workers that are either directly or indirectly impacted by the early retirement of a coal power plant would have to be estimated, with a comprehensive community engagement and transition plan. And finally, it will be instrumental to publicly disclose the approach to phasing out a coal plant, as well as to continuously update on progress made.
The debates about a ‘Just Transition’, a path to a low carbon society that also assures social equity, are typically focused on the current generation’s needs and constraints. This is understandable for those focused on making a daily living; the aim is for people to live well, which means many things such as living in good health, having access to food, shelter, fresh water, a decent job, and affordable energy. It is also somewhat understandable for a company fixated on short-term profit maximisation. For developing nations, having to deal with climate change related restrictions on fossil-fuel based activities feels naturally unjust, as many industrial economies have already reached comfortable living standards, built on decades of past heavy emission inducing industrial activities.
While recognising such considerations, there is still scope for broadening the lens of cost-benefit calculations. The transition cost today comes across as much more meaningful when multi-generational dividends are brought into the picture. Today’s decarbonisation helps humankind today and forever. Clean and cooler air provides dividends for physical health, mental well-being, ecological balance, food security, and societal stability. Regardless of context, the benefits of greening the global economy must be considered in light of welfare enhancements over multiple generations.
There is no question that employment, financial, and energy security considerations are paramount as green transition takes place. But when it comes to laying down the cost-benefit calculations of the transition, the generational dividends make such calculations ever more persuasive.
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