The Future of Coal: Implications for Public Policy and ... · The Future of Coal: Implications for...

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)

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


CCS Retrofitability


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


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


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


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


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


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


LRH-U6: ‘CCS Retrofitability’


Findings: Coal-Fired Power Utilities - NRHs


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.

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