Planning a Graceful Exit for Coal: RMI Launches First Global Playbook To Minimize Stranded Assets
As political debates about the future of coal reach fever pitch in the United States and beyond, RMI’s Global Climate Finance Program launches a first-of-its-kind survey demonstrating how collaboration among coal asset owners, policymakers, and environmental advocates can manage this transition more quickly while minimizing financial losses.
New York, NY – September 6, 2018— Coal-fired power generation is in structural decline, driven both by regulatory pressure to curb pollution and by stiff market competition from cheap renewables and natural gas. More than half of European coal plants are cashflow-negative; in liberalized U.S. markets, utilities that own coal assets have lost approximately half of their market capitalization. In India, two-thirds of coal plants are more expensive than new renewables. However, significant additional retirement of existing coal capacity is still necessary to meet the the Paris Agreement objective of holding warming well below 2 Cº to avert the worst of climate change impacts. The early retirement of hundreds of billions of dollars of capital stock locked up in uneconomic coal plants globally is a structural shift with enormous — and divergent — implications for stakeholders.
Although the debate is frequently framed as a war to defeat or sustain it, the adversarial approach has not helped coal asset owners nor policymakers to advance their objectives.
The Coal Capital Transition Initiative at Rocky Mountain Institute is charting a new approach based on the premise that while faster retirement of coal is both desirable and to some extent inevitable, the loss of financial value associated with stranded assets should be mitigated to ensure that all stakeholders are on board with the direction of the energy transition.
RMI’s new report, Managing the Coal Capital Transition, is based on interviews with nearly 50 stakeholders representing utilities, non-governmental organizations, and policymakers around the world seeking to identify strategies for managing this challenge.
“This is the first global survey of approaches that can help ease capital destruction for asset owners and their shareholders while offering policymakers a clearer path towards accelerating the energy transition,” said Paul Bodnar, Managing Director at Rocky Mountain Institute.
To date, the threat of financial losses from the early retirement of coal plants has helped fuel the opposition to climate policies that might achieve this goal. As a result, the energy transition is happening in fits and starts. In order to break out of the entrenched positions that are slowing the energy transition, the report asserts that policymakers must put forth solutions that recognize and equitably manage losses in order to gain support from asset owners as well as environmental advocates.
Managing the Coal Capital Transition uncovers ten different approaches used worldwide by asset owners and regulators to achieve early retirement of coal while minimizing capital destruction. In Colorado, a regulated market, Xcel Energy has won approval to accelerate the depreciation schedules of two existing coal plants to reduce write-offs, in exchange for closing the plants and replacing the capacity with renewables and gas. In China, authorities mandated the closure of small, inefficient coal plants but allowed owners to offset their losses by replacing retired units with new, more efficient and environmentally compliant plants of equal and aggregate capacity, and granted 5-years’ worth of tradable generation rights for owners unable to replace their retired capacity. These are just two examples from a new emerging playbook that relies on dialogue and collaboration between regulators and capital asset owners.
“A better understanding of an asset owner’s legitimate day-to-day business perspective can allow policymakers and advocates to better appreciate how coal plant owners assess their plants’ current and future financial performance,” said James Mitchell, Manager at Rocky Mountain Institute. “This will help position them less as adversaries than as partners working towards a solutions with mutual benefit.”
With a comprehensive menu of policy options and illustrative case studies detailed in the report, policymakers facing the challenges of phasing out coal-fired power generation now have a resource that allows them to craft thoughtful policy best suited to their constituents, market reality, and unique needs. Equally importantly, it allows them to work in collaboration with, rather than in opposition to, those most affected by coal phaseout. The report also includes case studies that highlight how these approaches have been introduced across the world, including Canada, Chile, China, the United Kingdom, and the United States.
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Notes to Editors
About Rocky Mountain Institute
Rocky Mountain Institute (RMI)—an independent nonprofit founded in 1982—transforms global energy use to create a clean, prosperous, and secure low-carbon future. It engages businesses, communities, institutions, and entrepreneurs to accelerate the adoption of market-based solutions that cost-effectively shift from fossil fuels to efficiency and renewables. RMI has offices in Basalt and Boulder, Colorado; New York City; Washington, D.C.; and Beijing.