The announcements at the end of last year came like a drumbeat: the Philippines declared a moratorium on new coal plants; at the Climate Ambition Summit, Pakistan’s Prime Minister Imran Khan vowed his country would turn its back on coal; Bangladesh, Kenya and Egypt have all torn up plans for major coal projects.
These are only the latest blows for a thermal coal industry that is in terminal decline in Europe and North America. The sector has long looked to fast-developing Asian economies as a source of near-term growth, even as climate concerns make its longer-term outlook dismal. However, analysis of the ten countries with the largest pipelines of new coal-fired power plants (all of which, bar South Africa, are in Asia) shows a rapidly darkening picture for coal bugs.
Since 2014, the pipeline of planned coal projects in these countries has shrunk by around two-thirds, according to Global Energy Monitor, a US-based NGO that tracks coal, oil and gas projects.
“When it comes to policy decisions [and] the economics of power generation, it seems every day that the outlook for the coal industry gets worse,” says Toby Hassall, lead analyst for coal market research at financial data provider Refinitiv. “It comes as no surprise to me that planned coal power stations that have been in pipeline for a number of years, in places like Vietnam, Indonesia, and India, are increasingly being cancelled.”
This has contributed to a landmark for the coal-fired power sector; in 2020, the global capacity of operating coal-fired power stations shrank for the first time on record, from 2,055GW in 2019 to 2,048GW.
The proximate reason for this is the retirement of coal-fired power plants in Europe and the US. However, the more interesting story is in Asia, where key to the reversal of fortune for the coal sector (outside China, at least) has been the drying up of concessional, low-cost finance from South Korea, Japan and China.
“[Approximately] 90% of all coal-fired power plants built in Asia in the last five years were underpinned by export credit agency [ECA] finance,” says Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis (IEEFA). These agencies provide government-backed loans, guarantees and insurance to companies exporting to developing countries – in this case, underwriting billions of dollars of exports of turbines and other electrical engineering equipment.
As pressure has built on governments to address climate change, these spigots have been turned off. In July, Japan’s government tightened state-backed financing of overseas coal-fired plants. South Korea is mulling legislation banning state-backed financiers and utilities from backing overseas coal projects. In October, state-controlled utility Korea Electric Power Corp. said it would no longer promote new coal-fired plants overseas.
And the biggest financier, China, is backing away from the sector. Most of its support to overseas coal projects was directed through its Belt & Road Initiative (B&RI), a trillion-dollar programme of investment in infrastructure across Asia and into Europe. However, faced with growing international unease about the programme – over, for example, overburdening developing countries with unsustainable levels of Chinese debt – Beijing has applied the brakes.
Lending from the China Development Bank and The Export-Import Bank of China, the two key conduits for B&RI funding, fell from a peak of $75bn in 2016 to just $4bn in 2019, shows a Boston University database.
However, while China may be pulling back from overseas projects, it is expanding its own fleet. This is despite President Xi’s historic announcement in September than the country would be become carbon neutral by 2060, and its earlier commitment to peak carbon emissions by 2030.
Global Energy Monitor tracked an increase in China’s pipeline from 206GW in 2019 to 254GW in 2020.
Within China, a powerful coal lobby has allies in local government, where officials striving to hit GDP targets favour the quick wins possible from building large-scale infrastructure. However, the economic prospects for this new capacity are not good. Researchers at the University of Maryland forecast that, over the next five years, Chinese coal-fired capacity will grow 15% to more than 1,200GW. Given over-capacity in China’s power system, coal-plant utilisation will decline from below 50% to below 45%.
“As over half of China’s existing coal plants are already operating at a loss, lower utilisation will further undermine the performance and financial viability of the entire coal industry,” according to the study from the university’s Center for Global Sustainability.
These economic realities provide tailwinds for efforts to transition China’s power sector. Dave Jones, senior electricity analyst at Ember, a climate and energy think tank, notes that the central government is promoting financial transition mechanisms by which the banking sector is encouraged to provide funding to coal-dependent utilities to instead build-out renewable energy.
“They are paying coal companies to transition,” he says.
Jones is also anticipating the publication of China’s next Five-Year Plan, covering 2021–25 and due to be unveiled in March, which is likely to further elaborate how the country will begin to move away from coal. “They are in the process of rewriting their Five-Year Plan and developing the policies to incorporate a net-zero pathway,” he says.
A plateau in India
India, Asia’s other coal giant, appears to have turned a corner. After years of growth, its coal fleet shrank slightly in 2020, while its pipeline is dramatically smaller than in 2014.
The immediate reason is a combination of over-investment in coal capacity ahead of the 2008–09 financial crisis, and low power demand growth subsequently, says Thomas Spencer, a fellow in the electricity and fuels division at The Energy and Resources Institute (TERI) in Mumbai. And, supported by falling technology costs and strong policy and regulatory support, rapid growth in renewables has met demand growth, and will continue to do so.
Equally, the structure of India’s economy, which is dominated by agriculture and services rather than heavy industry and manufacturing, means it lacks China’s powerful coal-based industrial complex, he says.
Now the hard part
There are certainly grounds to be optimistic that the pipeline of new coal-fired power plants in Asia will shrink further in the years to come. However, to stand any chance of meeting international climate targets, existing coal-fired generation will have to close, and rapidly. “Coal use needs to collapse 80% by 2030 to hit the 1.5°C target,” says Jones at Ember, based on Intergovernmental Panel on Climate Change scenarios.
There are two elements to the transition: the first is shutting down coal; the second is replacing generating capacity with cleaner alternatives in the context of fast-growing demand, especially if countries are also going to electrify transport and heating. Energy markets consultancy Wood Mackenzie estimates that if China is to meet its carbon-neutral target and achieve this electrification, electricity demand will have to be 71% higher in 2060 than under its base case. That demand will require around 6,800GW of additional capacity.
This growth will require massive investment in renewables. If China is to decarbonise its power sector by 2060, it will have to begin closing down 40GW of coal-fired capacity, or fitting it with carbon capture technology, every year from 2030, says Trevor Sikorski, head of global gas and energy transition at Energy Aspects. “That is a big number,” he comments.
Given the lower load factor of most renewable energy sources, replacing those plants would require four times the nameplate capacity, he says. As a point of comparison, China installed 56GW of wind and solar in 2019. “It is easy to close down three or four gigawatts of coal-fired power plants with the stroke of a pen, but it is much harder to get the 12–16GW of renewables that will be needed to get the same amount of power,” Sikorski says.
Moreover, closing down coal-fired generation would imperil other sustainable development priorities, such as economic growth and electrification, argues Deborah Adams of the IEA Clean Coal Centre. “We have to get to zero carbon, but it doesn’t have to be zero coal,” she says. The inability of renewables to provide baseload power, and the additional costs involved in integrating large volumes of renewables into electricity grids, means there is a place for high-efficiency coal power fitted with carbon capture and storage, she argues.
Buckley at the IEEFA believes that arguments about the costs of clean-energy related grid improvements miss the point for emerging economies. Unlike countries such as Australia or Germany, which face issues with outdated infrastructure built for incumbents, many countries in Asia are starting with a cleaner slate and are planning for huge growth. “If demand [for power] is doubling, they will need to rebuild their grids anyway. They might as well build grids that are fit for purpose.”
Openness to international capital – both for transmission infrastructure and renewables capacity – will be critical to speed the transition. One factor behind India’s dramatic growth in renewables has been the willingness of overseas institutional investors to acquire projects once they have a year or two of successful operation under their belts. This significantly reduces the cost of capital for their domestic developers, says Spencer at TERI.
The concern for environmental campaigners is that, rather than being replaced with renewables, coal is instead replaced with natural gas. This would be a disaster for the climate, argues Buckley, noting research showing that, in many cases, leaks in the extraction and transportation of natural gas makes it more carbon-intensive than coal.
Despite planned increases in gas demand in some countries, notably China and Japan, those concerns may be overdone, says Sikorski. Gas will grow in China, “but they are not going to replace 1,000GW of coal with 1,000GW of gas-fired power,” he says. On energy security grounds, it will make more sense to use renewable energy resources than imported and potentially expensive liquified natural gas.
Analysts at Wood Mackenzie, meanwhile, predict nuclear will play a big role in closing the gap. In China, the company forecasts that the country’s nuclear capacity will need to rise from 50GW at present to around 620GW by 2060. “This level of growth in nuclear reactor builds will be exceptionally challenging,” writes Wood Mackenzie’s Asia-Pacific vice-chair Gavin Thompson, “and will require comprehensive planning and decades of continuous resource commitment.”
Nearer-term, there is an urgent need for policy frameworks that support renewables and discourage coal – or at least make it pay its way. Demand for Chinese-backed coal plants in India, Indonesia, Vietnam and Bangladesh is driven by domestic policy as much as it is enabled by Chinese finance, shows analysis from Tufts University and Fulbright University.
“In every case, there are explicit, preferential domestic policies for coal, and in at least one case renewables are disallowed by regulation from competing with coal on a level playing field,” the researchers found. “It is crucial for recipient countries to put in place the enabling policy conditions for an energy transition to a low-carbon future.”
There are clear lessons for Asia from experience in other parts of the world, says Christine Shearer, Global Energy Monitor’s coal programme director. “In the EU, they are making coal plant operators internalise their external costs; not only pollution but, increasingly, their climate effects. If you just make that part of the equation for coal plants, then coal power, as we saw in the EU, disappears pretty quickly.”