Between 2005 and 2008 European utilities were determined to embark on a major coal-plant construction programme. They announced plans to build 49 GW of new coal-fired power capacity.
To date, 77% of this new capacity has been cancelled, with more likely to be cancelled soon. 20GW has been cancelled in Germany alone. The economics of existing plants have deteriorated too. For example, in the UK coal use fell by over half in 2016 and the country’s power system now experiences coal-free days for the first time since the 1880s.
New analysis from the University of Oxford Smith School of Enterprise and the Environment finds that unjustified optimism in the future of coal at a company-level combined with wishful thinking in sector-wide forecasting led to the proposed coal expansions that ultimately backfired. The scale and pace of the decline in coal’s economic attractiveness is significant and provides a cautionary tale for Asian utilities and their investors.
European utilities completely misjudged the prospects for new coal-fired generation and have since paid a significant price for this mistake. The subsequent stranded assets, underperformance, and reductions to balance sheet capacity still weigh down the sector.
Moreover, significant financial, human, and organisational capital was wasted taking forward so many coal projects through the development process. The proposed plants were also a major unwelcomed distraction for utilities just as the European power system entered an unprecedented period of technology, policy and market innovation.
While Europe and Asia are at different stages of development, the European experience provides some instructive lessons. Company executives are too optimistic about a technology that they believe is ‘safe’ or ‘tried and tested’. Coal is, in fact, perhaps the generation technology most vulnerable to low marginal cost renewables, commodity price volatility, concerns about air pollution, competition from gas, and of course, necessary action to tackle climate change.
Some Asian economies already seem to understand this dynamic. South Korea’s newly elected President Moon Jae-In's moves to phase out coal and shift into solar and wind will help avoid making the mistakes of European utilities. Taiwan is expanding its renewable energy plans whilst reducing its reliance on coal by a third, from 45% to 30% by 2025. Meanwhile, China continues to drive the long-term global coal decline. According to Wood MacKenzie, coal use in China has dropped by 40% in the last five years.
India has joined China and other East Asian economies in hastening the demise of new coal growth: no new coal plants are set to be commissioned for the coming decade, according to the Central Electricity Authority’s draft plan. And 37GW of old coal could be shut down, while Coal India plans to close 37 mines that are no longer viable. Indian utilities could face the same financial problems as European ones if they do not reduce exposure to coal.
In contrast, Japan and Indonesia's plans to build dozens of new coal plants will expose the countries to multi-billion dollar stranded assets risks.Plans in Japan to build 49 new coal-fired power plants and 28 gigawatts of additional capacity cannot be economically justified and would exceed the capacity required to replace the retiring fleet by 191 per cent. The resulting overcapacity, combined with stiffening competition from solar and other renewable sources, creates a risk that assets amounting to about 25 per cent of power companies’ market capitalisation could become stranded.
The implications for Asian utilities and utility investors are crystal clear: bets on new coal don’t pay off. The worryingly prevalent assumption that the power sector will remain static and “safe” for thermal coal assets runs counter to the evidence we see in Europe.
Dr Ben Caldecott, Director of the Sustainable Finance Programme at the University of Oxford. Views are personal