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Early entry into force of the Paris Agreement on Friday underlines risks to the economics of coal-fired power plants in Europe and further afield, raising the prospect of further write-downs by impacted utilities.
Some 191 countries signed the Paris Agreement last December, but a certain threshold had to ratify before it entered into force, as officially achieved on Friday.
The Agreement requires countries to submit new, more ambitious climate action targets every five years, towards achieving long-term goals to limit average warming to “well below” 2 degrees Celsius, and reduce net greenhouse gas emissions to zero before 2100.
Under the Agreement, almost all signing countries have pledged to climate action targets in 2025 or 2030. Countries agreed to submit new climate action targets every five years, with developed countries taking the lead. They would have to make each round of action more ambitious than the last, in “a progression beyond the Party’s current (action) and reflecting its highest possible ambition”.
It can be difficult to translate to the level of individual power plants in individual countries the impact of a multilateral agreement.
But it appears likely that the Paris Agreement makes less likely a return to fortune of coal-fired power plants, whose value has already fallen in Europe.
In a report published in June, Netherlands-based research group Spring Associates analysed the value of three new Dutch coal-fired power plants commissioned last year. They used cash flow analysis to calculate the net present value of the three power plants today at €3.5 billion. That compared with estimated construction costs of around €6 billion, implying hefty impairment losses.
What has caused such a revision? For sure, investment decisions were taken before the financial crisis, which cratered energy demand, in the short-term at least. However, more significant have been trends in energy markets, including: falling coal plant running times (capacity factor); lower wholesale power prices; and higher carbon prices in a minority of countries.
Lower capacity factors and wholesale power prices have much to do with growth in near-zero marginal cost, subsidised renewable power which has displaced more expensive generation, leading to lower running times for both coal and, in particular, costly gas-fired power plants.
Compounding this, increased cross-border interconnections and market coupling across central-western European countries, in particular, has increased the spread of renewables from high wind/solar/hydro countries including the Nordics, Denmark and Germany.
Lower wholesale power prices can also be traced to generating over-capacity in some countries. Over-capacity is partly about renewables growth, and also reduced energy demand, as a result of economic restructuring towards less energy-intensive manufacturing and services industries, and efficiency investment and innovation.
Finally, some countries have introduced carbon pricing above levels under the European Union’s wider carbon market. Britain’s carbon price floor, for example, has been one of the biggest factors behind that country’s collapse in coal generation this year. Meanwhile, reforms are underway in the EU’s carbon market to assure gradually rising carbon prices across Europe, although slowly and from very low levels.
For coal power plant operators, the alternative scenario assumptions that might turn around their power plants therefore include: zero growth in renewable energy; less innovation in renewable energy, grid and efficiency technology; lower investment in electricity interconnection and industrial efficiency; re-industrialisation of the European economy; a reverse in long-term reductions in energy intensity; and European carbon prices sustained at today’s low levels, as a result of less ambitious emissions targets.
The Paris Agreement has made most of, or all, these assumptions less likely. The near-term demands of the agreement are to ratchet tougher greenhouse gas emission targets every five years. Mandates requiring more zero-carbon renewables, energy efficiency and carbon pricing are among the least-cost ways of achieving this. As a result, if anything, the agreement may see even more aggressive trends against the economics of coal.