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IEEFA Update: Global Energy-Finance Transition Gains Steam

March 07, 2017
Tim Buckley

[Editor’s note: This column is taken from a speech last month to the Australian Senate on its inquiry into the retirement of coal-fired power stations]

Good afternoon and thank you for allowing me the opportunity to speak on the critically important topic of Australian coal-fired power station retirements, particularly as it relates to energy system security and the need for a progressive planned decarbonization of our economy.

I work for IEEFA, a public interest research organization that does financial analysis of the global electricity sector transformation. Firstly, I’ll focus on how this transformation is driving rapid change in China and India, two of the largest economies globally. Secondly, I will illustrate how global financial institutions are rapidly evolving their investment programs to reflect this inevitable transition to a lower emissions economy. I would hope to provide this international perspective to illustrate that Australia’s own electricity sector transformation is being predominantly driven by global technology trends.

Our research finds rapid transformation is already well underway across the globe, and that this process is being driven by:

  1. continued technology innovation;
  2. economies of scale (particularly with the weight of China taking a global leadership position in this process) driving renewable costs down;
  3. the rapid build-up of global financial sector capacity in response to rising stranded asset risks;
  4. the global commitment to policy action as agreed at the COP21 in Paris; and
  5. the critical requirement for countries like China and India to deal with air, water and particulate pollution.

I’d like first to highlight a couple of key developments in China.

China has seen a rapid and unexpected decoupling of electricity demand from economic activity. The growth rate in China’s electricity demand has dropped by three quarters over the last three years to average just 1 to 2 percent per annum.

The rapid build-out of hydro, renewables and nuclear capacity has collectively been so successful at diversifying the generation capacity of China that it has seen high marginal cost coal-fired power generation decline in absolute terms since it peaked in 2013.

The consequence of this has been the construction of an unexpected US$200bn of stranded assets. The speed at which this has happened is unprecedented, and the economic cost is huge, similar to the US$80bn investment Australia has made in Gladstone LNG, now clearly also a stranded asset.

China has added 200GW of new, idle coal-fired power generation capacity since 2013. With total coal-fired generation declining in this period, the result has been a collapse to a record low 47.5 percent capacity utilization rate for the coal-fired power sector in 2016.

Turning to India, a similar electricity sector transformation has emerged subsequent to the election of Prime Minister Modi in 2014.

In December 2016, India released its draft National Electricity Plan, concluding that no new coal-fired plants were required in the next decade. The utilization rate of India’s existing thermal power plants hit a decade low of 59.6 percent in 2016, and Energy Minister Goyal acknowledged that utilization rates will continue to decline and stranded assets build unless new plant construction ceases.

This conclusion was entirely vindicated by the success of the reverse auction for solar at Rewa in Madhya Pradesh in February 2017. A total of 750MW of new solar infrastructure was contracted at just Rs2.97/kWh (US$44/MWh). This solar contract has seen pricing drop 32 percent year-on-year relative to the previous record low solar tariff, signed in January 2016 at Rs4.34/kWh, itself down 25 percent year on year.

By comparison, this pricing is below the average delivered price of India’s largest thermal power company; NTPC Ltd’s existing domestic coal fired power generation cost Rs3.20/kWh in 2016/17, and IEEFA estimates this solar auction delivers power to India’s poor at half the likely price required to justify new imported coal-fired power plants.

Financial markets are responding to this rapid change in global electricity markets, acknowledging that post-Paris COP21 global policy action is only a question of timing, no longer a question of “if.” Leading financial institutions are pricing in carbon emissions when evaluating long life new investment decisions. Leading financial institutions are also accepting that stranded asset risks are real and rising, and that failure to address this could undermine global financial system stability.

Key events recently illustrating the rapid shift in global finance:

  1. The Bank of England’s Mark Carney’s “Breaking the Tragedy of the Horizon: Climate Change and Financial Stability” speech at Lloyds of London in 2015;
  2. APRA’s February 2017 speech on financial system climate risk;
  3. Blackrock’s (the largest equity investor globally with US$4.9 trillion funds under management) September 2016 call for “a high and global price on carbon emissions”;
  4. the Norwegian Sovereign Wealth Fund’s decision to divest its equity holdings in the largest global coal mining and coal fired power companies; and
  5. Deutsche Bank’s January 2017 policy decision to cease all structured finance lending to new thermal coal mines and coal fired power plants globally.

Even Japan’s leading financial institutions are rapidly adapting their lending policies in acknowledgement of the changing global landscape with respect to investing in low emissions technologies. I was just in Tokyo last week presenting to the Japanese government, and it is telling that while there, Kansai Electric announced it was cancelling plans to build a US$3bn coal fired power plant at Hyogo. It was also reported that Mitsubishi UFJ Financial and Sumitomo Mitsui Financial were the two largest structured debt providers globally for renewables in 2016.

At the Paris COP21 Australia’s Prime Minister Malcolm Turnbull made a clear commitment to progressively decarbonize our economy in response to the pressing need to respond to climate change. A price on carbon pollution is the least cost market-based solution needed to sustainably achieve Australia’s global commitment.

With over 1.6 million household solar systems, Australia is already a world leader in rooftop solar. The advent of smart home energy management systems is likely to see the Australian people quadruple this investment to-date in distributed solar and storage within the coming five years. Australia’s total electricity demand has declined over the last decade, and greater rooftop solar with batteries penetration will accelerate this trend.

The boom in investment and jobs that has emerged across Australia in just the last 12 months for new wind and solar infrastructure projects, plus the call to modernize our grid and build in greater interconnectivity, combines with our government’s call this week for development of new pumped hydro storage capacity in South Australia. All of this points to the inevitability of the continued transformation of Australia’s electricity sector, consistent with the trends evident globally.

As such, a long-term plan for the orderly phase-out of end-of-life coal fired power plants is a critical requirement for Australia to ensure and maintain energy security. These plants are some of the most polluting plants in the world, an embarrassment for our country. The recent AiG report highlights coal-fired power as the high cost solution for new generation (particularly if an implicit carbon price is factored in), so an orderly transition away from generation technologies of the last century is the clear and pressing decision needed now.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.


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Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective.

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