High Voltage: Financing the Path to Zero Coal
Working Paper Series no. 960. Keeping global warming under 1.5°C requires a complete phase-out of coal for electricity generation by 2040 according to the International Energy Agency’s Net Zero Emissions by 2050 (NZE) scenario. In this paper, we use unit-level data from the Global Coal Plant Tracker database to build a phase-out priority score and identify the coal-fired power plants that would need to be decommissioned now to comply with this pathway. We assume the other coal power plants continue to operate to the end of their lifetime. We show that 70% of the capacity of the operating coal fleet should be shut down now, which corresponds to stranded assets worth $842 billion globally. Replacing the coal capacities by equivalent low-carbon capacities would imply a much larger one-off cost of $4.5 trillion worldwide. This upfront investment would also imply large debt financing costs, estimated at $3.1 trillion globally, which would drive up the total cost to $8.4 trillion. But coal plants have much higher operational costs than low-carbon ones, in part because they need fuel to operate, and the cost of CO2 emissions need to be priced. We show that cumulated net operational gains linked to replacing coal plants with low-carbon alternative to comply with the 1.5°C would amount to $3.8 trillion worldwide, thus offsetting close to half of the total costs. By lowering financing costs and increasing carbon pricing in line with the International Energy Agency’s NZE scenario, the total equation could become positive, that is, total savings from the transition to clean energy would be higher than the total costs.
Coal is the largest single source of CO2 emissions, making its phase-out a critical objective for mitigating climate change. As mentioned in the press release of the COP28 initiative "Coal Transition Accelerator," the IPCC, UN, and IEA projections emphasize the urgent need to accelerate the phasing out of unabated coal in the global energy mix to maintain the 1.5°C target set by the Paris Agreement. This paper addresses the question of where to start and the extent of efforts needed.
We focus on coal-fired power plants, which account for two-thirds of total coal emissions and a quarter of global CO2 emissions. We develop a multi-layered scoring system based on plant characteristics (age, emissions, and technology) and the transition readiness of host countries. This analysis encompasses the 7,573 coal plants currently operating or under construction as listed in the Global Coal Plant Tracker database. Our findings suggest that prioritizing the decommissioning of older, higher-emission plants in countries more prepared for transition is essential. Under such strategy, the plants that need to be shut down account for 70% of the global current coal power capacity, with associated stranded asset costs amounting to $842 billion. Remaining coal power plants could continue operating until the end of their lifetimes, assuming no new plants are built.
However, merely shutting down coal power plants is not feasible without replacing them with low-carbon energy capacity. We estimate the cost of this replacement, including upfront costs (stranded assets and investment capital for new low-carbon plants) and the present value of operating costs (debt interest and differences in fuel, CO2, and operation and maintenance costs). Upfront investment needs are high, and the cost of debt exacerbates this challenge, creating a "high voltage" danger zone for the net-zero transition. Replacing coal capacities with equivalent low-carbon capacities to meet the NZE scenario is estimated to cost $8.4 trillion, including $3.1 trillion in debt financing costs.
Despite these high costs, exiting coal can yield substantial net savings due to lower operating costs for low-carbon energy, amounting to $3.8 trillion. Additionally, increasing the cost of CO2 emissions through carbon pricing and reducing the cost of capital for developing countries would further strengthen the business case for replacing coal with renewables. Under certain scenarios, such as the IEA NZE carbon pricing trajectory with lower capital costs, the coal phase-out required by the NZE scenario could result in net economic gains of $2.6 trillion globally.
Keywords: Coal Phase-out, Transition Pathways, De-carbonization; Early Retirement Strategy; Just Transition
JEL classification: Q58, Q48, Q50
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Updated on 3 September 2024