Coal Contracts Lock In High Costs and High Emissions. It’s Time to Break Free.
Transitioning coal power purchase agreements is key to a prosperous and low-carbon future.
Picture this: It’s 1990, and you’re beaming with pride. You are now the proud owner of the world’s largest facility for manufacturing floppy disks. You daydream of all the money you’re going to make, all the houses you will buy, and all the vacations you will go on. Boy, are you in for a surprise.
Coal contracts today are the floppy disks of the ‘90s. Staking a bet on those disks in 1990 was the easiest thing in the world — floppies were ubiquitous, where were they going to go? Fast forward ten years, and they were nowhere. They had been swiftly replaced by cheaper, better, and more efficient alternatives.
Coal contracts — specifically power purchase agreements (PPAs) — are also everywhere today, and their replacement by cheaper and cleaner alternatives is coming.
Coal-fired power is the single largest source of carbon emissions in the world — it is responsible for three-quarters of all power sector emissions, and a fifth of all energy-related emissions. Thankfully, there has been significant momentum to transition from coal to clean energy in the past few years amid historic challenges. Even with coal emissions breaking all-time records, more than 95 percent of global coal consumption is now in markets with a coal phaseout or net-zero commitment (see Exhibit 1, below). An unprecedented $45 billion has been committed to finance the shift away from coal in Indonesia, Vietnam, and South Africa, through mechanisms known as Just Energy Transition Partnerships (JETPs).
Exhibit 1: Growth in country-wide commitments to phase down coal use and reach net-zero emissions.
However, more than 93 percent of global coal capacity is shielded from competition, and a significant portion of that sits under coal PPAs. This makes these contracts a major challenge to a secure, prosperous, and low-carbon future.
It is worth noting that PPAs as a contract structure have been widely used in the electricity sector and for a variety of technologies. They reduce risk for power projects, which boosts financing and lowers costs for stakeholders. In fact, PPAs are going to be critical to a successful buildout of clean power — they will be needed to finance the massive amount of clean electricity required to support climate ambitions and economic growth around the world.
In the context of coal-fired power, however, PPAs have made it challenging for customers, communities, investors, and workers to fully realize the benefits of the clean energy transition:
- Coal PPAs “lock in” costs for decades to come. Renewable generation is the cheapest form of new electricity in most geographies today and is increasingly competitive with existing coal power. The International Energy Agency (IEA) projects that renewables will account for more than 90 percent of new generation globally over the next five years. Coal PPAs are locking taxpayers and utility customers into higher-than-needed costs and are preventing them from enjoying the savings of ever-cheaper clean electricity.
- They lock in emissions far beyond what the world can afford. According to the IEA, if left unchecked, the existing fleet of coal power would consume two-thirds of the remaining budget for limiting warming to 1.5°C — emitting 330 gigatons (Gt) of CO2 by 2100. Coal plants under PPAs in the Asia Pacific region — which account for three-quarters of the global coal fleet — are very new. Given that these contracts span decades, coal PPAs are a critical challenge to achieving a 1.5°C-aligned future.
- They encourage continued inflexibility on the grid. Many coal PPAs have clauses that guarantee high levels of coal generation, and buyers of that power are subject to heavy penalties for violating these clauses. As a result, utilities and grid operators are strongly incentivized to run these plants as much as possible, even with difficult demand and supply dynamics. This encourages continued inflexibility on the grid precisely as energy security concerns stemming from Russia’s war on Ukraine and climate-fueled disasters challenge grid integrity. Furthermore, continuously high utilization of coal power creates less room for clean energy to grow.
A managed, accelerated decarbonization of coal PPAs is critical to the success of the broader power sector and energy transition. Unlocking coal PPAs can benefit multiple stakeholders along the way by:
- Lowering costs for customers and taxpayers and improving the affordability of the transition
- Providing opportunities for clean jobs and improving local environmental and health outcomes for communities, while providing short-term economic relief and longer-term economic diversification for those impacted by the transition
- Helping governments in making significant progress in their climate commitments while supporting their economic growth and development targets
- Reducing investor exposure to fuel price, political, and regulatory risk and expanding investment opportunities
While PPAs are and will remain critical mechanisms for scaling the clean energy transition, their use for coal-fired power is quickly becoming outdated. In these cases, they prevent stakeholders from sharing in the many benefits of the clean energy transition.
For more information on coal PPAs, read our explainer brief that describes how they are structured and developed. This knowledge is foundational to then explore how these contracts can be effectively decarbonized, and how those solutions could be scaled to the broader power system.