Power sector asset stranding effects of climate policies

ABSTRACT

Energy sector decarbonization to limit the temperature rise to well-below 2°C will result in stranded assets and capital stock replacement before its technical lifetime ends. In this paper, stranded assets in the global power sector are quantified based on a simplified bottom-up analysis that considers the capital stock turnover of fossil fuel-fired power plants in the G20 countries between 2015 and 2050. Power sector transformation starting now based on accelerated deployment of renewables results in US dollar (USD) 927 billion of global power sector stranded assets by 2050. Stranded coal assets would represent around three-quarters of total stranded assets value and China alone would represent 45% of the total. Delaying action to mitigate climate change until 2030 doubles stranded asset value. Countries should consider assets’ age profile characteristics in their decision making. Early action and avoidance of investments in new carbon-intensive assets can minimize stranded asset risks.

KEYWORDS:

• Electricity generation capacity
• power sector
• fossil fuels
• renewable energy
• stranded assets
• decarbonization

Acknowledgments

The working paper that is background to this paper has benefited significantly from expert input provided by Jakob Thomae and Christopher Weber (2° Investing Initiative), Julia van Huizen, Carsten Jung, Matthew Scott (Bank of England), Jeremy McDaniels (United Nations Environment Programme Inquiry into the Design of a Sustainable Finance System), Harald Hecking and Theresa Wildgrube (ewi Energy Research & Scenarios), Marius Backhaus, Martha Ekkert and Martin Schöpe (Federal Ministry for Economic Affairs and Energy of Germany), Laura Cozzi and Timur Gül (International Energy Agency). We are also grateful to the three anonymous reviewers for their useful comments.

The authors declare that there is no conflict of interest regarding the publication of this article.

Notes

¹ Carbon budget is defined as the maximum level of CO₂ that can be emitted to remain below a certain temperature with a probability value.

² During the 23^rd Conference of Parties, Canada and the United Kingdom has launched a new global alliance called “Powering Past Coal Alliance,” which is joined by more than 20 partners (DBEIS 2017). In Austria, Canada, Denmark, France, and the United Kingdom have recently announced phase out of their coal-fired power plants (BBC News 2016). In China and India, more than 100 construction projects have been stopped (Shearer et al. 2017). In India alone, 13.7 GW of proposed coal-fired power plants were cancelled (CleanTechnica 2017). Analysis for the European Union shows that more than half of all coal power plants are making losses, and this is to increase to cover nearly all power plants by 2030 as renewables grow. The same study estimates that a complete phase-out of coal by 2030 could reduce utility losses by USD 26 billion (Carbon Tracker Initiative 2017). Large fossil fuel exporting countries like Saudi Arabia are also implementing policies with the aim to diversify their economies through increased used of renewable energy resources (Demirbas et al. 2016).

³ The 19 countries included in this analysis are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Republic of Korea, Russian Federation, Saudi Arabia, South Africa, Turkey, United Kingdom, and the United States.

⁴ Under the Delayed Policy Action Case, the trajectory of emissions follows different pathways for power and other sectors. Until 2030, in all sectors, emissions peak by 2030 following the baseline envisioned by the Reference Case. In the power sector, 2030 onwards, emissions start to decline to reach the level of the REmap Case by 2050. In industry, buildings and transport sectors, emissions decrease to zero by 2050 which is more ambitious than the level in the REmap Case. We make this choice to ensure that the CO₂ emissions of the energy sector remains within the carbon budget.

⁵ This range refers to the 10^th and 90^th percentiles to limit global warming to below 2°C since 1861–1880 with more than 66% probability, and it is calculated from 2016 until year of peak warming.

⁶ This includes all sources (i.e., fossil fuel, fugitive, industrial process, and clinker, nonenergy (e.g., land use change, emissions during the life cycle of chemicals, etc.) and emissions from other sources (e.g., waste incineration, fuel fires).

⁷ Rogelj et al. (2018) provide a detailed range of carbon budgets that correspond to various levels of additional warming and the respective percentiles of probability for the 2018–2100 period. To place our carbon budget assumption with the range provided by the IPCC, we account for the annual CO₂ emissions in 2016 and 2017 according to Le Quéré et al. (2018) and the earth system feedback that reduce the carbon budgets reported by Rogelj et al. (2018) by 100 Gt CO₂ on centennial time scales. This results in a carbon budget of 698 Gt CO₂ for the 2018–2100 period.

⁸ The latter study concludes that “even under the very optimistic assumption that other sectors reduce emissions in line with a 2°C target, no new emitting electricity infrastructure can be built after 2017 for this 2°C target to be met, unless other electricity infrastructure is retired early or retrofitted with carbon capture technologies.”

⁹ For stranded coal-fired power plants, there is a temporary drop in years 2031 and 2032, explained by the shift in our approach to estimate the stranded assets before and after 2030.

¹⁰ Saving is estimated by dividing the difference between the stranded asset value between Delayed Policy Action Case and REmap Case by the stranded asset value of the Delayed Policy Action Case.

¹¹ IEA simulates costs and revenues for 87 types of fossil fuel technologies in the world regions of its World Energy Outlook model. A total operational life of 30–40 years has been assumed depending on technology type.

¹² According to the IRENA’s analysis, in 2050, there remains about 9.5 Gt of energy sector CO₂ emissions under the REmap Case. Around 90% of all these emissions are from sectors other than power, predominantly from manufacturing industry and transport sector activities. Energy use of residential and commercial buildings could be to large extent decarbonized together with the power sector.