Nov. 13, 2018, SYDNEY (IEEFA): Thermal coal is fated for long-term structural decline and energy-related carbon dioxide emissions are increasing despite the Paris targets: those are the key take-outs in the International Energy Agency’s World Energy Outlook (WEO) 2018 report released today, which also finds wind and solar are now two of the top three global energy generation sources.
The International Energy Agency (IEA) models global energy demands through a variety of scenarios including ‘current state of play’ enabling catastrophic global warming to scenarios where people and countries work together to meet the Paris target of well below 2.0 degrees C. (See IEEFA fact sheet on IEA’s scenarios used in the World Energy Outlook).
Tim Buckley, Director of Energy Finance Studies, IEEFA Australasia, says he is not surprised to see another round of cuts to global coal demand under the 2018 World Energy Outlook’s New Policies Scenario.
“Whether we use the IEA’s New Policies Scenario (NPS) or their more realistic Sustainable Development Scenario (SDS) – which predicates a -3.7% compound annual decline in global thermal coal trade – it is clear that zero emissions technologies are overtaking coal,” Buckley said.
“The Sustainable Development Scenario forecasts coal use in the global power sector down 80% to just 732 million tonnes coal equivalent (Mtce) in 2040.
“Coal’s long goodbye has well and truly begun. It’s time to plan for a transition.”
Global thermal coal demand has been revised down another 3.5% by 2040 in the 2018 WEO report, following a 4.9% downgrade in 2017. Cumulatively, this is a downward revision of 8.3% in just two years; a downgrade equivalent to three times Australia’s entire export volumes in 2017.
The IEA’s 2018 New Policies Scenario forecast is 4,412Mtce for 2040, but 64% lower at just 1,609Mtce under the Sustainable Development Scenario.
“We don’t believe global coal consumption will ever regain the 2014 peak, and given relative pricing trends, we can expect to see more coal forecast downgrades in the WEO 2019 report,” Buckley said.
“Technology and relative costs have moved on, as has the global community’s willingness to tolerate coal pollution externalities. Meanwhile, global financial institutions are increasingly reluctant to fund likely stranded assets.”
A growing number of the world’s leading insurers are limiting their insurance of coal. To date AXA, Allianz SE, Zurich Insurance Group, SwissRe, MunichRe and SCOR, and in November 2018 Generali became the seventh insurer limiting their insurance of coal. This follows two of the world’s largest coal power financiers / developers – Standard Chartered and Marubeni Corporation – exiting coal in September 2018.
IEEFA notes the IEA is making credible strides to better reflect the trifecta of technology, policy and financial market-driven disruption of coal fired power generation in their 2018 report.
“There is, however, the same problem each year whereby the IEA’s New Policies Scenario is based on data some 12 months out of date,” Buckley said.
“The IEA is also forecasting 560GW of end-of-life coal plant closures by 2040 under the New Policies Scenario (24GW annually). The IEA assumes coal carbon capture and storage will be commercialised well before 2040 and that will allow financiers to invest upwards of US$1 trillion to build 740GW of new, largely imported coal-fired power by 2040.
“We see that as an extremely unlikely outcome, given clear carbon and hence stranded asset risks, and a lack of competitiveness.
“And while India is forecast to be the biggest coal growth market globally, the IEA makes no reference to the fact Indian banks are drowning under US$100bn of non-performing loans to thermal power plants,” Buckley said.
Coal is overtaken by both gas and solar well before 2040 under the New Policies Scenario in the Report, with the IEA forecasting a 3.75% annual real decline in solar costs out to 2040.
“This highlights the inevitability of a technological transition to new lower cost solutions,” Buckley said.
“Although the IEA has been fairly conservative in their solar technology deflation forecast, the evidence shows solar costs have halved in just two years in countries as diverse as India, the United Arab Emirates, Mexico and Australia.”
Buckley provides an example where the IEA estimates 2017 levelised cost of energy (LCOE) for solar at US$105/MW in the U.S. In June 2018, Berkshire Hathaway completed a US$2.2bn tender for new U.S. solar at US$22-26/MWh, and contractually locked in a real price decline annually for 25 years.
“While not an industry average, this transaction is noteworthy given the prominence of the investor, the transaction size, and the inclusion of low-cost battery storage,” Buckley said.
“This is 80% below the average LCOE that the IEA uses as its starting point.”
IEEFA cites another example in India, where 2017 LCOE solar is estimated at US$70/MWh and wind at US$60/MWh. Throughout 2017-2018, renewable energy contracts in India have been repeatedly signed at nearly half that cost, with 25 year fixed flat tariffs of just US$35-40/MWh (US$1-2bn of tenders awarded every month), giving an LCOE of US$25-30/MWh.
“It is clearly hard to forecast a technology driven disruption,” Buckley said.
“In the World Energy Outlook report 2018, the IEA underestimates installation rates, the cost and speed of price deflation, and the overall impact of newer technologies driving ever cheaper renewable energy, which in turn is having a massive effect on the thermal coal industry.
“They do however acknowledge that thermal coal is on the way out. The debate now is how long it will take.”
IEEFA Fact sheet here: IEA’s “Sustainable Development Scenario” best reflects our global energy future”
Media Contact: Kate Finlayson [email protected] +61 418 254 237
Tim Buckley, Director of Energy Finance Studies at IEEFA Australasia, studies the global technology disruption of energy markets and the implications for energy security and stranded asset risks, with a focus on Australia, South Asia through to China and Japan. Tim has 30 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director, Head of Australasian Equity Research.
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.