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The Future of Coal: Implications for Public Policy and Investors
Ben CaldecottSmith School of Enterprise and the Environment University of Oxford
Email: [email protected]: @bencaldecott
• Why coal must go
• A framework for phasing out coal – mechanisms, practicalities, and coordinating action
• Managing political economy frictions
• The implications for coal companies and their investors
Agenda
Paris, coal, and CCS
• Air pollution
• Water stress
• Destruction of natural landscapes
• Governance and safety
• Climate change…
Why coal must go
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
Source: Pfeiffer et al. (2016 – forthcoming)
Source: Pfeiffer et al. (2016 – forthcoming)
0
100
200
300
400
500
600
700
800
900
1000
2015 2020 2025 2030 2035 2040 2045 2050
gCO2/kWh
CO2 intensityin 2DS
Subcritical
Supercritical
Ultra-supercritical
IGCC
Ultra-supercritical+post combcapture
Source: IEA (2016)
Carbon Capture and Storage (CCS)
• Current CCS deployment is 28.4 Mtpa, expected to increase to 80 Mtpa by 2025 – significantly less than 2oC warming scenarios
• First power station CCS project in 2014, 3 more expected operational by end 2016 - total 6.4 Mtpa
• Heavily dependent on enhanced oil recovery (EOR)
• Efficiency penalties and capital costs make the levelized cost of electricity (LCOE) from CCS-equipped generating stations higher than other mitigation options (e.g. wind and solar PV)
• Highly variable transport and storage costs
• Finite storage for NETs
• CCS-constrained mitigation pathways costs 138% more (IPCC 2013), though this is a modelling fiction
Conventional generation CCS options
Scenario Projected DeploymentIEA WEO: 450S 5 Gtpa, 60% in powerIEA ETP: 2DS 4 Gtpa, 57% in powerIPCC AR5: Cost-efficient 430-530 ppm
5.5 to 12.1 Gtpa (imputed)
Projections of CCS deployment by 2040
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
CCS Retrofitability
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
Rule: MW-weighted portion of assets NOT retrofitable with CCS.Retrofitable: <20 years old, >100MW, <1tCO2/MWh, <40km from ‘suitable’ or ‘highly suitable’ reservoir
CCS geological suitability
A framework for phasing out coal
• Efforts building on and complementary to the Paris Agreement and UNFCCC process
• Plurilateral effort – top 5 countries (China, US, India, Germany, Russia) account for 77% of coal-fired capacity. Plus G7 economies phasing out coal (e.g. UK, Italy, Canada)
• When, where, who pays?
• Faster for advanced economies, more time for emerging economies –climate future really depends on what they do
• Upstream production vs downstream generation – why not a moratorium on new coal mines?
Co-ordinated global action on coal phase-out
• Compensation for premature closure of newer plants?
• Reverse auctions to induce closure – Coal Closure Funds (CCFs) established with funds from governments, taxpayers, ratepayers, philanthropists, crowdfunding…
• Older plants in advanced economies – pricing (taxes or ETS) vs regulation/EPS
• Utilities desperate to get out – divestment, competition from renewables, environmental regs (scrubbers and cooling equipment etc). Small amounts of money could induce rapid closure.
• Replacement capacity is limiting factor – harder in countries with rapid demand growth
Mechanisms
• Reverse auctions could be a policy mechanism for cost-effectively retirement. Owners would bid to receive a fixed price for each unit of generation capacity retired. The lowest bids would win.
• Ways to reduce costs:
– Reverse auctions should be operated in tandem with the introduction of new emission regulations.
– There should be a timeline for the retirement of generators, which could be based on the ratcheting up of an appropriately strict Emission Performance Standard (EPS).
– Coal Closure Fund (CCFs) would have fixed and ring-fenced funds used to pay for reverse auctions – providing clarity on budget for auctions
– Auctions could be operated annually or semi-annually until the year of mandatory closure or retrofit. The amount of compensation available could decrease with each auction in a “degression”model to further incentivise earlier retirement.
• Reverse auctions help eliminate the problem of information asymmetry between government and the owners of assets.
• Political contestation is inevitable and should be expected; however, by creating a robust framework the potential for escalating compensation demands can be contained.
Reverse auctions
Implications political economy frictions
Employment in 2016 – less than 2,000
Credit: Rosamund Pearce/Carbon Brief
Royal
Proclamation
John Evelyn Mines &
Collieries Act
Railway
Clauses
Consolidated
Act
Alkali Act Public Health
Act
Committee for
Invest. of
Atmospheric
Pollution
Clean Air Act Miners’ Strike Dash for Gas EU Directives UK Joint Climate
Pledge
1273 1661 1842 1845 1874
1956 1984 1990s 2000s 2015
1875 1912
Timeline
• Faster the pace of decarbonisation, the greater the chance of stranded assets in different sectors and the larger the likely economic, social, and political consequences that might need to be managed.
• Mere threat of stranded assets could result in groups potentially affected actively or passively frustrating or destabilizing LCDPs.
• Consideration of these factors not factored into LCDPs. Risk to plan implementation in the short, medium, and long term. – Given pace of transition required, urgently need to understand
• Smart solutions to pre-empt opposition? – Scenarios + Data
Political economy of stranded assets
Implications for companies and investors
Environmental challenges
(e.g. climate, water, biodiversity)
Changing resource landscapes
(e.g. shale, fertilisers)
New government regulations
(e.g. carbon pricing, air pollution regulation)
Falling clean technology costs
(e.g. solar and onshore wind)
Evolving social norms
(e.g. divestment)
and consumer
preferences
Litigation & changing statutory
interpretations(e.g. directives,
state-aid, carbon liability, fiduciary
duty)
• Unanticipated or premature write-down, devaluation or become liability.• Creative destruction
• Technology and regulation
• Extreme events
• Confluence of new risks may make some assets more prone to stranding. • Significant and accelerating
• Rarely understood or considered in decision making, especially amongst investors.
• Significant benefits associated with managing these risks.
What are stranded assets in the environmental context?
Thermal Coal Value Chain
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
Prospecting Mining Preparation Transportation End Market Securing mineral
rights from government or land owners
Exploration and surveying
‘Open Cast’ surface mining
Underground ‘deep’ mining
Optional step to remove impurities and improve material consistency
Also called ‘beneficiation’, washing
By rail By ship
Heat and power generation
Gasification and processing
Country Production Trade Consumption Coal-fired Electricity
Hard[Mt]
Brown[Mt]
(Exports)[Mt]
Hard[Mt]
Brown[Mt]
Change in 2015 [%]
Capacity[GW]
Generation[%]
Australia 431 61 (376) 55 61 +0.3% 27 75%China 3650 - 271 3921 - -6% 826 75%Germany 621 47 238 859 47 -3% 49 44%Indonesia 471 - (409) 62 - -2% 18 50%India 8 178 51 59 177 +3 to 6% 154 73%Japan 0 - 187 187 - -5% 50 32%Poland 73 64 0 73 64 ND* 31 90%South Africa 253 - (75) 178 - -2.1% 39 94%United States 844 72 (79) 765 70 -11% 322 40%United Kingdom 12 - 36 48 - -16% 22 30%
Coal production, trade, consumption, and power generation for select countries
Top Companies
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
Coal-Fired Power Utilities [GWh]
1 CHINA HUANENG GROUP CORP 471,139
2 CHINA GUODIAN CORP 455,038
3 CHINA DATANG CORP 415,118
4 CHINA HUADIAN GROUP CORP 369,511
5 CHINA POWER INVESTMENT CORP 293,658
6 SHENHUA GROUP CORP LTD 292,107
7 ESKOM HOLDINGS SOC LTD 214,924
8 NTPC LTD 208,588
9 CHINA RESOURCES POWER HOLDINGS 171,178
10 KOREA ELECTRIC POWER CORP 128,189
Thermal Coal Miners [US$mn]
1 CHINA SHENHUA ENERGY CO 14,006
2 SASOL 11,050
3 COAL INDIA LTD 10,251
4 CHINA COAL ENERGY COMPANY 5,966
5 ADANI ENTERPRISES LTD 5,068
6 PEABODY ENERGY CORPORATION 4,890
7 INNER MONGOLIA YITAI COAL CO., LTD
3,397
8 YANZHOU COAL MINING COMPANY LTD
3,045
9 PT ADARO ENERGY TBK 2,909
10 ALPHA NATURAL RESOURCES 2,837
Coal-Processing Technology Companies [kNm3/d]
1 SASOL 90,260
2 DATANG 48,550
3 SHENHUA GROUP 43,360
4YITAI COAL OIL MANUFACTURING CO (INNER MONGOLIA YITAI GROUP)
33,700
5 SINOPEC 29,481
6 CHINACOAL GROUP 24,100
7 DAKOTA GASIFICATION CO 13,900
8 QINGHUA GROUP 13,860
9 YANKUANG GROUP 13,415
10 GUANGHUI ENERGY CO 12,600
Top 100 Coal-Fired Power Utilities
• By coal-fired power generation in GWh
• 42% of all world coal-fired powerstations
• 73% of all coal-fired generating capacity
Top 20 Thermal Coal Miners
• By 2014 thermal coal revenue
• Revenue ≥30% from thermal coal
• 70% of world thermal coal revenue
Top 30 Coal-Processing Technology Companies
• By normalised syngas production perday in Nm3/d
• 34% of all world CPT plants
• 63% of all world CPT products
Asset-Level Databases
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
DataData Source
(in order of seniority)Completion
[%]Notes
Number of Coal-Fired Generating Assets (N = 1,445 coal-fired power stations)
Location
CoalSwarm’s Global Coal Plant Tracker (CoalSwarm, Q4 2015)
EnipediaCarbon Monitoring for Action Database
(CARMA, v3.0 released Jul 2012)Platts’ World Electric Power Plant Database
(WEPP, Q4 2015)
100%
Capacity [MW] CoalSwarm, WEPP, Enipedia, CARMA 100%Generation [MWh] Enipedia, CARMA, Oxford Smith School 100% 26% estimated by regression
Plant Age CoalSwarm, WEPP, Enipedia, CARMA, Oxford Smith School 100% 31% estimated by regressionCO2 Intensity CoalSwarm, WEPP, CARMA, Oxford Smith School 100% 22% estimated by regression
Cooling TechnologiesWEPP, Oxford Smith School
71%12pp added from
GoogleEarth searchingPollution Abatement Technologies WEPP 73%
Coal TypeCoalSwarm, WEPP, Oxford Smith School
71%29pp estimated based on
proximity to reservesNumber of Thermal Coal Mining Assets (N = 274 thermal coal mines)
‘Top 30’ coal mining companies MSCI -% Rev by Activity MSCI, Trucost 97% Data unavailableMine Production Oxford Smith School 69% Data unavailable
Location Oxford Smith School 100%Number of Coal Processing Technology Assets (N = 63 coal processing technology plants)
Location World Gasification Database (Nov 2015) 100%
Capacity [Nm3/day]World Gasification Database, Oxford Smith School
100%14% estimated from product
energy contentPlant Age World Gasification Database 100%
Data sources and completeness
Risk Hypotheses
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
Local Risk Hypotheses (LRHs) and National Risk Hypotheses (NRHs)
# NAME SOURCE
Coal-Fired Power Utilities
LRH-U1 Carbon IntensityCARMA/CoalSwarm/WEPP/Oxford Smith School
LRH-U2 Plant Age CARMA/CoalSwarm/WEPP
LRH-U3 Local Air Pollution Boys et al. (2015)/NASA’s SEDAC
LRH-U4 Water Stress WRI’s Aqueduct
LRH-U5 Quality of Coal CoalSwarm/WEPP
LRH-U6 CCS RetrofitabilityCARMA/CoalSwarm/WEPP/Geogreen
LRH-U7 Future Heat Stress IPCC AR5
NRH-U1 Electricity Demand Outlook IEA
NRH-U2 ‘Utility Death Spiral’ Oxford Smith School
NRH-U3 Renewables ResourceLu et al. (2009)/ McKinsey & Co/SolarGIS
NRH-U4 Renewables Policy Support EY’s Renewables Attractiveness Index
NRH-U5Renewables Generation Outlook
BP/REN21
NRH-U6 Gas Resource BP/IEA
NRH-U7 Gas Generation Outlook IEA
NRH-U8 Falling Utilisation Rates Oxford Smith School
NRH-U9 Regulatory Water Stress WRI’s Aqueduct
NRH-U10 CCS Legal Environment Global CCS Institute
# NAME SOURCE
Thermal Coal Mining Companies
LRH-M1Proximity to Populations and Protected Areas
NASA’s SEDAC/UNEP-WCMC
LRH-M2 Water Stress WRI’s Aqueduct
NRH-M1 Remediation Liability Exposure Oxford Smith School
NRH-M2 Environmental Regulation Oxford Smith School
NRH-M3 New Mineral Taxes or Tariffs Oxford Smith School
NRH-M4 Type of Coal Produced IEA
NRH-M5 Domestic Demand Outlook IEA
NRH-M6 Export Sensitivity IEA
NRH-M7 Protests and Activism CoalSwarm
NRH-M8 Water Regulatory Stress WRI’s Aqueduct
Coal Processing Technology Companies
LRH-P1 Plant Age World Gasification Database
LRH-P2 Water Stress WRI’s Aqueduct
LRH-P3 CCS RetrofitabilityWorld Gasification Database/GeoGreen
NRH-P1 CPT Policy Support Oxford Smith School
NRH-P2 Oil and Gas Demand Outlook IEA
NRH-P3 Oil and Gas Indigenous Resources BP
NRH-P4 Other Local Environmental Oxford Smith School
NRH-P5 Regulatory Water Stress WRI’s Aqueduct
NRH-P6 CCS Policy Outlook Global CCS Institute
Findings: Coal-Fired Power Utilities - LRHs
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
LRH-U1: ‘Carbon Intensity’
1 EUROSIBENERGO2 GAZPROM3 ELEKTROPRIVREDA SRBIJE (EPS)4 CEZ AS5 OOO SIBERIAN GENERATING CO6 CHINA PETRO & CHEM (SINOPEC)7 AGL ENERGY LTD8 SHENZHEN ENERGY GROUP CO LTD9 HARYANA POWER GEN CO (HPGC)
10 PUBLIC POWER CORP (DEI)
LRH-U2: ‘Plant Age’
1 ELEKTROPRIVREDA SRBIJE (EPS)2 SCOTTISH AND SOUTHERN ENERGY3 DTE ENERGY CO4 AMEREN CORP5 DYNEGY HOLDINGS INC6 DOMINION7 SALT RIVER PROJECT (AZ)8 NRG ENERGY INC9 TENNESSEE VALLEY AUTHORITY
10 ECU - ENERGY CO OF UKRAINE
LRH-U3: ‘Local Air Pollution’
1 WEST BENGAL POWER DEV CORP1 SHENZHEN ENERGY GROUP CO LTD1 MP POWER GENERATING CO LTD1 SHENERGY COMPANY LTD1 TAMIL NADU GEN & DIST CORP LTD1 UTTAR PRADESH RAJYA VIDYUT1 MAHARASHTRA STATE POWER GEN CO1 TATA GROUP1 MINISTRY OF ECONOMIC AFFAIRS
Top 9 Companies Tied
LRH-U4: ‘Water Stress’
1 ELEKTROPRIVREDA SRBIJE (EPS)2 SCOTTISH AND SOUTHERN ENERGY3 DTE ENERGY CO4 AMEREN CORP5 DYNEGY HOLDINGS INC6 DOMINION7 SALT RIVER PROJECT (AZ)8 NRG ENERGY INC9 TENNESSEE VALLEY AUTHORITY
10 ECU - ENERGY CO OF UKRAINE
LRH-U5: ‘Quality of Coal’
1 ELEKTROPRIVREDA SRBIJE (EPS)2 PUBLIC POWER CORP (DEI)3 ENERGY FUTURE HOLDINGS CORP4 NEYVELI LIGNITE CORP LTD5 RWE AG6 CEZ AS7 PGE POLSKA GRUPA ENERGETYCZNA8 GAZPROM9 VATTENFALL GROUP
10 INTER RAO UES
LRH-U7: ‘Future Heat Stress’
1 GAZPROM1 BASIN ELECTRIC POWER COOP1 ECU - ENERGY CO OF UKRAINE1 DATONG COAL MINE GROUP CO LTD1 BERKSHIRE HATHAWAY ENERGY COMPANY1 DTE ENERGY CO1 AMEREN CORP1 GREAT PLAINS ENERGY INC1 ALLIANT ENERGY CORP1 ENTERGY CORP
Top 10 Companies Tied
LRH-U6: ‘CCS Retrofitability’
Top 65 Companies Tied
Findings: Coal-Fired Power Utilities - NRHs
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure
National Risk Hypotheses – Coal-Fired Power Utilities
• New, ‘bottom-up’ insight into thermal coal company exposure to environment-related risks, available in the public domain for the first time.
• Support for enhanced disclosure regimes via a ‘Principal of Asset-level Disclosure’, and the creation of a ‘Company Data Intelligence Service’.
• Proposals to augment existing disclosures by seeking out new data and making it publicly available, addressing some fragmented and inconsistent reporting frameworks.
• Significant opportunities for critical analysis and further research.
Next Steps
Stranded Assets and Thermal Coal: An analysis of environment-related risks exposure