Building and operating coal is becoming a political decision that increasingly conflicts with underlying economic realities.

In Political Decisions, Economic Realities we find nearly half of the global coal fleet could be cashflow negative in 2020 on an underlying basis, with new building concentrating in regions where generators are subsidised either directly or indirectly to maintain their financial viability.

Independent of COVID-19, our outlook for 2020 is shaped almost exclusively by developments in China.

While we believe COVID-19 will not fundamentally change the operating cashflows of coal power in the longer term, the economic downturn caused by the outbreak risks loosening the planning process and environmental regulations for coal power investments in China.

As a result, China and other nations could be burdened with uneconomic and climate unfriendly coal power for decades if they build new capacity to stimulate their economies in the wake of the COVID-19 pandemic, a move China appears to be already considering.

Key Findings

  1. In 2019, 41% of the existing global coal fleet could have been cashflow negative (i.e. the operating costs are greater than revenues received) based our modelling methodology, despite an 8% year-on-year decline in fuel prices.

 

  1. In 2020 we expect 46% of the fleet to be cashflow negative based our modelling methodology. We expect the impact of COVID-19 on coal power economics to be limited due to already suppressed coal prices and the insignificance of carbon pricing globally. Specifically:
    • For every $1/t move in the fuel price, operating cashflows increase or decline $0.4/MWh on average, but thermal coal prices were depressed before COVID-19 and have remained resilient amid sharp losses in other markets.
    • EU coal to gas switch levels are at €9/t well below the prevailing price of €16/t, meaning despite lower prices the EU ETS is still driving hard coal off the system in favour of gas.
    • The global weighted-average carbon price for the global coal fleet is $2.7/t, making the EU price crash trivial from a macro perspective.

 

  1. With the exception of China, which is prioritising growth targets, energy security and coal-related jobs over project viability, new build is concentrating in regulated markets outside the US and Western Europe where there is a lack of price discovery.

 

  1. We estimate only 28% (141 GW) of the pipeline of coal power will enter the market cashflow negative, despite previous analysis showing new investments in renewables are already cheaper than new investments coal in all major markets. This is mainly due to regulatory and policy structures that favour coal power.