For 200 years, coal has powered the modern world. It was the prime fuel for the industrial revolution and along with hydropower, coal-burning technology gave the world its first electric power plants. It has been essential in making steel, one of the main materials with which our modern world is literally built. It’s hard to imagine the development of industrial civilization without coal.
But it’s dirty. Burning coal releases nitrogen oxides, sulfur oxides, and even mercury and lead into the air. It also produces giant piles of toxic ash, which can pollute waterways. And perhaps most significant of all, at the point of combustion coal is one of the most carbon-intensive sources of electricity generation. When you factor in coal mine methane releases, the life-cycle emissions of coal make it likely the worst fossil fuel for the climate.
Because of this, a central goal of climate campaigners has been to reduce coal use and shutter coal-fired power plants, and most serious climate plans involve entirely phasing out coal in electricity generation as soon as feasible.
But emissions are not the only problem with coal. The fuel is simply no longer the leader in low-cost power that it once was. In nations with shale gas deposits such as the United States, natural gas-fired generation is cheaper. And across the world, the continuously falling cost of solar and wind have made them less expensive forms of electricity than coal.
With coal plants increasingly unable to compete in wholesale power markets, the number of hours that they run has fallen, meaning less revenue for plant owners. This has led to waves of coal plant closures over the last two decades in the United States and Europe. And with a global decline in demand for electricity due to economic restrictions imposed as a result of the COVID-19 pandemic, coal has been under even more pressure; a report released by the International Energy Agency (IEA) in April forecasts that global coal demand will fall 8 percent this year.
And yet despite this dismal economic picture, coal plants are still being built in large numbers, and the size of the global coal fleet continues to grow. According to an analysis by Carbon Tracker, 500 gigawatts of new coal-fired power plants—roughly half the capacity of the entire US electric fleet—are either under construction or planned across the world.
Crisis in Coal
The crisis in the profitability of coal-fired power plants is not new. And it doesn’t come from coal itself, or the technology used to turn the heat from burning coal into electricity. Instead, the challenge for coal is that other technologies have improved and become less expensive.
Combined cycle gas technology, which uses a second turbine to capture the waste heat from the first turbine, has shown particular improvement. GE boasts 62 percent efficiency with its combined cycle gas plants using its H-Class turbines, while the efficiency of even the most advanced ultra-supercritical coal technology is still below 50 percent.
But the biggest advantage that gas has had is the development of horizontal drilling and hydraulic fracturing technologies. These have allowed gas producers to access previously unavailable gas deposits in shale leading to a superabundant supply. This has meant sustained low prices in nations with shale gas deposits but has also freed up surplus gas for global liquefied natural gas (LNG) markets.
This effect has been particularly profound in the United States. Coal had been the largest source of electricity generation for more than a century when gas eclipsed coal in 2015. Gas generated 38 percent of all US electricity in 2019, compared to only 24 percent from coal.
But the greatest long-term threat to coal comes from solar and wind, which have seen dramatic cost declines over the past two decades. For the second half of 2009, BloombergNEF’s (BNEF) estimate for the global average levelized cost of electricity (LCOE) from onshore wind was US$111 per megawatt-hour (MWh), with offshore wind even higher at $190/MWh. For the first half of 2020 BNEF put these figures at $44 and $78/MWh, meaning that costs fell by more than half.
The cost decline for solar photovoltaics (PV) was even more dramatic. Here costs fell from $347–$362/MWh in the second half of 2009 (for fixed-tilt and tracking systems) to $39–$50/MWh in the first half of 2020, which translates to costs being less than one-seventh what they were in 2009.
Consultancy Lazard has released similar figures, showing similar dramatic cost declines for solar and wind over the last decade. But while the costs of solar, wind, and gas have fallen, coal has stayed relatively steady.
And in competitive wholesale power markets, solar and wind eat coal’s lunch. With no fuel costs and only the long-term costs of building the plant and minimal operations and maintenance, there is no reason not to sell power from wind and solar plants, even when the price falls to zero. This is not the case for coal or gas-fired power plants, which must pay for fuel, and this has been particularly damning for coal during the current downturn in demand.
In March, London-based Carbon Tracker issued a new report, How to Waste over Half a Trillion Dollars, which showed that it is cheaper to build solar and wind than new coal plants in every major geography. Even more significantly, it found that in some cases it was cheaper to build new wind or solar than to even keep running existing coal-fired power plants. And by 2030, the think tank found that this would be the case everywhere.
These are radical findings, even for Carbon Tracker, which found that coal was much less competitive than was indicated by the research it had published only sixteen months prior. Lazard has issued similar findings; its latest LCOE estimates put the global, unsubsidized cost of coal-fired power plants at US$66–$152/MWh, roughly double that of combined-cycle gas plants, more than double the cost of wind, and nearly triple the cost of utility-scale solar.
And this is not theory. Global coal demand peaked in 2013 and has been falling since. The subsequent fall in prices has hit the highest-cost producers the hardest, with devastating impacts on the US and Polish coal sectors. In the United States, the blow has been particularly hard, with both a massive reduction in domestic demand and low prices for export. As a result, the US coal industry has seen wave after wave of bankruptcies.
As the COVID-19 pandemic reduces both industrial and electric demand, coal is under even more pressure. Because buying the coal as fuel makes up much of the cost of coal-fired power, coal plants are some of the first to turn off when power demand falls. The US Department of Energy’s Energy Information Agency is predicting a 20 percent fall in electricity generation from coal this year, while coal prices plunge even further.
The Building Goes On
And despite all of these economic cases against coal, more coal-fired capacity is put online every year than is retired, with the result that there is a greater capacity in coal-fired power plants this year than at any time in history. But this fact conceals profound regional differences.
Coal plants are increasingly going offline in Europe and not being replaced at the same rate. In the United States, no coal plants have been built for several years. Additionally, several nations have set phase-out dates for coal. Coal-fired power has disappeared or nearly disappeared in some nations and regions, including Austria and Sweden; in both nations the last coal-fired power plant shut off in April.
In Asia, it is a different story. India, Turkey, multiple nations in Southeast Asia, and especially China are building dozens of gigawatts of new coal plants, and this has more than made up for the retirements in Europe and North America.
It is not an accident that most coal plants are being built in the developing world. In more affluent nations, electricity demand is flat or declining. But in the developing world there is a need for more electricity to power growing economies: more people and more wealth. “When you are a country that is looking for steep economic growth and you already have an infrastructure that is built around fossil fuels, it might seem easier to do it that way,” explains Sriya Sundaresan, a senior analyst at Carbon Tracker and co-author of its latest report on coal.
And in nations without domestic gas reserves, imported LNG is unlikely to be able to compete with coal—even if those nations have the infrastructure to import LNG. Furthermore, in many nations there are incentives for coal-fired power plants, which distort the raw economics.
Indonesia has the third-largest fleet of coal-fired power plants currently under construction, which Global Energy Monitor puts at just under 12 GW. Lauri Myllyvirta, the lead analyst at the Centre for Research on Energy and Clean Air (CRECA) notes that it is also one of the nations that most heavily subsidizes electricity generation from coal. Not only are coal producers required to sell a portion of the coal they mine at a discount to domestic power plants, but Indonesian state utility PLN also has a system of guaranteed, must-take contracts for coal-fired power. Myllyvirta describes this as a “feed-in tariff for coal.”
However, Indonesia is not unique, and Myllyvirta notes that similar dynamics play out in Turkey, India, China and other developing nations that mine coal. “If you look at the countries that still have coal-fired power pipelines, it is by and large countries with a domestic coal mining industry,” explains Myllyvirta. “It is about creating demand for that domestic industry.”
China’s Coal Boom
As far as the energy transition goes, China represents a paradox. The nation has grown the amount of renewable energy that it puts online every year much faster than its Western counterparts, growing wind and solar generation 12-fold over the last decade.
However, the nation’s ever-growing appetite for more electricity to power its expanding economy means that China’s raw consumption of coal has been on a growth path over the last decade. This is happening even as renewable energy takes up a larger portion of its power mix, and as the share of coal in primary energy consumption has fallen from 74 percent in 2013 to 58 percent in 2019.
According to the analysis by Carbon Tracker, China has the largest capacity of coal-fired generation under construction of any nation on earth, at nearly 100 gigawatts. The think tank identified another 106 GW of plants that are being planned after that, which translates to roughly 40 percent of the total underway globally.
And yet Carbon Tracker’s analysis shows that on a long-term basis of power delivered, new wind and solar are cheaper sources of power than new coal. BNEF agrees, and its latest LCOE estimates show solar as the cheapest form of new electricity in China at US$38/MWh; although this figure conceals significant regional differences in cost.
So why is China building all of these coal plants? There are several factors. First, unlike petroleum or gas, coal is domestically produced. That means that coal is not only seen as a means to energy security and less dependence on imports, but as the world’s largest coal producer there are millions of Chinese workers employed in the coal sector, from mining to running power plants.
“Coal has been seen as the only self-sufficient industry here in China,” explains Xiang Li, the manager of RMI China’s power initiative. “Everything here in the power sector was constructed with coal as the cornerstone.”
Policy decisions have a role as well. While China has passed a number of policies to prioritize renewable energy, some also have benefitted coal. In 2014, authority for permitting was transferred from the central government to the provincial level, and over the next two years local governments permitted dozens of gigawatts of coal-fired power plants.
In 2016, China’s central government began issuing a series of restrictions on coal-fired power plants. However, many of the coal plants which were permitted or proposed during the 2014–2016 period are being built today.
These new projects are coming into a power market where there is significant overcapacity, with utilization rates for the nation’s coal fleet falling to only 50 percent. However, the provincial governments approving these plants have even stronger economic reasons to do so than they do to build solar factories. “Every province has an incentive to improve its GDP,” notes RMI’s Li. “They are fully aware of the overcapacity situation.”
The raw numbers here also conceal a geographic shift. Li notes that in recent years the more affluent, urbanized provinces have been tightening air control rules, leading to the shutdown of coal-fired power plants near large cities. Meanwhile, the central government is prioritizing coal-fired power plants in the more rural provinces of Western China, near where the coal is mined.
China is engaged in not only expanding its domestic coal fleet, but also funding overseas projects. Even as many Western banks have stopped financing coal-fired power plants, Chinese banks are currently financing nearly 40 GW of coal projects, many of which are in Southeast Asia, South Asia, and Africa. This is led by state-run banks, with the Export-Import Bank of China, the China Development Bank, and the Bank of China as the three largest funders.
Japanese banks are also funding nearly 20 GW of coal-fired power plants. In both cases the motivation for doing so may be in part to support domestic industries; CRECA’s Myllyvirta notes that China exports both coal and machinery while Japanese companies often make the power plants themselves.
Every investment in a power plant is a bet on future power prices. However, Carbon Tracker says that in many cases, the institutions investing in coal-fired power are looking at short-term profitability. “It’s an issue of not thinking long term,” states Carbon Tracker’s Sundaresan. “10 years can seem a long time away, if you are looking at an investment that might bring in returns in the short term.”
There is also some debate about the economics. While Carbon Tracker, BNEF and Lazard put the cost of new wind and solar below that of coal-fired power in most or all of the world, the IEA’s World Energy Outlook put the LCOE of coal-fired power at only $50 per megawatt-hour in China in 2018, below the cost of either solar or wind (each at $60/MWh).
IEA’s assumptions for its LCOE are different than those used by BNEF, Carbon Tracker or Lazard, and these appear to be consistently more favorable to coal. As one example, IEA estimates a 70 percent capacity factor for new Chinese coal plants, which is far above the current fleet-wide utilization rate.
Additionally, IEA’s cost estimates for new wind and solar plants are much higher than those produced by BNEF or Lazard. However, given the global clout of IEA these LCOE figures may be leading institutions and other investors to see a future for coal-fired power.
It may be one that does not materialize. While there is more capacity in power plants to burn coal for electricity than there ever was, we aren’t burning as much coal in those plants. Even with demand rising in the developing world, global coal use peaked in 2013 and has been essentially flat since then. And with these two trends, the number of hours that coal-fired power plants are used has fallen not only in China, but also globally.
Carbon Tracker has warned that despite mechanisms to protect the investments of state-owned banks, China is still at risk of stranded assets. “China is prioritizing growth targets, energy security and coal-related jobs over project viability,” notes Carbon Tracker’s Sundaresan. She warns that lowering risk ratings for coal-powered capacity could be dangerous. “More capacity will be constructed, creating potential overcapacity and increasing the likelihood of those assets becoming stranded.”
Carbon Tracker is warning of an “extreme” risk of stranded coal assets not only in China, but also in India, the European Union, and the United States. In each of these regions, the think tank estimates that at least 45 percent of the coal-fired capacity costs more to operate than installing new renewable energy today, and that all of it will cost more by 2030.
Walking into Disaster
It is important to note that new coal-fired power plants are already having economic trouble in some markets. In 2018, the Reserve Bank of India identified a number of coal-fired power plants as “non-performing assets.” Furthermore, as of May 2019, 19 GW of Indian coal-fired power plants that were being built have been halted for two or more years, with the Global Energy Monitor identifying financial issues as a factor in most cases.
And while India has seen a particularly steep fall in its pipeline of new projects, the cancellation of coal-fired power plants is a global issue. Despite net capacity additions of coal-fired power plants rising globally in 2019 for the first time in five years, the preconstruction pipeline shrank, as did construction starts. Overall, the capacity of coal-fired power plants under construction fell 16 percent from 2018 to 2019.
It is important to note that the slowing trend in new coal projects does not put us anywhere near the goals of the Paris Agreement, which would require an 80 percent decline in coal-fired generation by 2030. But some nations are taking a more active role. South Korea is the third-largest financier of overseas coal projects, and the incoming ruling party has vowed to stop funding coal plants as part of its Green New Deal.
Yet even as some plants are canceled, others are still moving forward. For those who continue to fund new coal-fired power plants, there is a tremendous amount of capital at risk, which Carbon Tracker puts at $638 billion. This could have major repercussions not only for individual investors, but for banks in China, Japan and other nations.
We are walking into a disaster of epic proportions, both for climate and for the economies that are tied to coal. There is still time to turn this around, and it will require funders and governments to take a serious look at the risks that they are taking.