Coal power is losing its economic footing. As detailed in Figure 1, according to Carbon Tracker analysis, which is based on boiler (or unit) level models, 60% of global coal capacity is uneconomic on a long-run marginal cost basis. In the absence of changing circumstances (i.e. lower costs and/or higher revenues) coal power is, and will continue to be, inherently risky.
Figure 1. Unit-level economics of global operating coal capacity in 2019
Source: Carbon Tracker analysis (2019)
Notes: The modelling results in this article are provisional and may be subject to change. Gross profitability is defined as in-market and out-of-market revenues minus the long-run marginal cost. The LRMC includes: the total fuel cost, carbon cost (where applicable), variable O&M and fixed O&M. No hedging is assumed. Please refer to our methodology document for more information.
The trend is more widespread in liberalised markets, such as those in Western Europe, as wind and solar, with their near-zero marginal costs, drive power prices below the operating cost of coal generation. For example, based on a recent Carbon Tracker report, 79% of operating hard coal and lignite capacity in the EU28 is uneconomic.[i] This dire situation contrasts with coal generators in South Korea, where all operators are cash-flow positive due to market structures that effectively guarantee a rate of return regardless of cost.[ii]
Irrespective of whether plants are in liberalised or regulated markets, low-cost wind and solar is a mega trend coursing through regions at varying levels. As detailed in Figure 2, this trend has accelerated in 2019, to the extent where we now believe over 50% of global coal capacity has a higher marginal cost than the levelised cost of either solar PV, onshore wind or offshore wind. Even nations such as Japan, which is known to have limited renewable resources due to topographical and land-use constraints, low cost wind and solar could soon eclipse the economics of incumbent coal as early as 2024.[iii]
Figure 2. Percentage of operating coal capacity that is higher cost than new renewables in 2019
Source: Carbon Tracker analysis (2019)
Notes: The modelling results in this article are provisional and may be subject to change. Based on capacity-weighted averages. The LRMC includes: the total fuel cost, carbon cost (where applicable), variable O&M and fixed O&M. No hedging is assumed. Please refer to our methodology document for more information.
How governments and their policymakers deal with these economic realities will have widespread implications for the transition to a low carbon economy. As with all economic transitions, high-cost producers should expect to phase-out their coal generation first, and low-cost last. Carbon Tracker has developed unit-level retirement schedules which allow policymakers to appropriately calculate compensation payments and minimise the risk of stranded assets. These retirement schedules aim to assimilate market conditions and regulatory constraints. To illustrate the scale of the challenge and the need to act with conviction, our retirement schedules suggest one coal unit needs to retire every day until 2040.[iv]
It is essential we stop new investments and develop retirement schedules to avoid stranded assets. We are thrilled to be a partner organisation to the PPCA and look forward to working with its members to help ensure an orderly transition away from coal power.
Written by:
Matt Gray is the Head of Power & Utilities at Carbon Tracker
Durand D’Souza is a Data Scientist at Carbon Tracker
Notes: the modelling results in this article are provisional and may be subject to change.
[i] https://carbontransfer.wpengine.com/reports/apocoalypse-now/
[ii] https://carbontransfer.wpengine.com/reports/south-korea-coal-power/
[iii] https://carbontransfer.wpengine.com/reports/land-of-the-rising-sun/
[iv] https://carbontransfer.wpengine.com/earth-to-investors/
