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UK major parties vow to shut down coal, Australia should follow

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Today’s announcement from the United Kingdom that the British Prime Minister – with agreement from other major parties – has agreed to phase out all ‘unabated coal fired generation’ is further evidence that developed countries are increasingly recognising the need to transition electricity markets from coal.

This is another warning to investors on the increasing financial risks of stranded assets. Coal mining and the associated infrastructure assets are at risk, as are the Governments who continue to peg their economies on the hopes of continued growth in the coal industry.

“Continuing an economic strategy that rests on coal investments for growth is putting the Australian economy at increased risk as it fails to facilitate the inevitable transition our energy market.

This announcement from the UK today is yet further evidence that seaborne thermal coal has firmly entering a structural, rather than cyclical decline.

The Climate Coalition pledge, signed by the 3 major UK party leaders, succinctly signals the UK’s intent to act on climate change ahead of the Paris COP meeting.

There are 3 key pledges:

  1. A strong legally binding pledge to limit the global temperature rise to below 2C.
  2. Agreement on carbon budgets accordingly under Climate Act.
  3. Acceleration of the transition to a competitive, energy efficient low carbon economy and to end the use of unabated coal for power generation.

It is concerning to see governments like Australia’s argue that developing countries like India need and must use coal fired generation when developed countries like the UK are turning their back on it. Coal has entirely failed to alleviate energy poverty in India over the last five decades.

Last year, IEEFA released a report which raised serious questions about the financial viability of Australian export coal.

The report found that imported coal would need to be priced at double the current wholesale price of electricity in India, which categorically discredits the argument that increasing India’s reliance on imported coal might alleviate energy poverty.

The good news is that energy efficiency and renewables are increasingly affordable and effective: wind, solar and hydro can be built faster and cheaper, building domestic infrastructure investment and jobs in addition to acting as a deflationary driver in the economy.

A key difference between coal fired power generation and renewable energy is the issue of inflation: fossil fuels are inflationary while renewables are deflationary,” Mr Buckley said.

Another, as we can see from the boom and bust cycle of the oil price, is that renewable technologies provide great electricity sector security through diversity and reduce unwanted volatility in the market.

The UK’s political leaders have seen the writing on the wall and are moving ahead of the inevitable carbon bubble and stranded asset crunch. This is increasly being accepted by key global financial analysts including Goldman Sachs, Macquarie Group, Deutsche Bank. Bernstein and Citigroup,” said Mr Buckley.

Coal is the most carbon-intensive of fossil fuels. In the power sector, coal accounts for 73% of emissions but only 41% of generated electricity.

There are also a host of other major negative externalities of coal. For example – health damage from air pollution (of which coal is major source) averaged 4% of GDP in the 15 largest C02 emitters in 2010: China 10-13% GDP; Russia 8%; India 5.5-7.5%; and Germany around 5%.

The outlook for coal globally is rapidly changing. The World Bank, the EBRD and the European Investment Bank, have also pledged to limit or cease funding for most coal-fired power generation projects,” said Buckley.

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research.

 

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  • juxx0r

    “A key difference between coal fired power generation and renewable energy is the issue of inflation: fossil fuels are inflationary while renewables are deflationary,”

    That right there is why so many are against renewables.

  • JFSmith99

    ‘Interesting’ argument I see here in comments, now used to defend the fossil fuel companies and try to stop action on global warming.

    Apparently we need higher inflation? Seriously?

    • Professor Ray Wills

      Deflation – the arch nemesis of the economist. We need a different way to measure a successful economy that doesn’t entail growth and consumption.

      • JFSmith99

        Very right. With that in mind, have you read The Spirit Level? Provides some good ideas for alternative pathways I think.

        http://en.wikipedia.org/wiki/The_Spirit_Level:_Why_More_Equal_Societies_Almost_Always_Do_Better

      • john

        Ray as you know the present western economy is built on about 2.2 to 2.7 inflation per year.
        This ensures that those who come after are not such a huge burden on the present taxpayer.
        A simple example a debt of x amount after y years is easily managed.
        I totally agree that RE is deflationary and is a huge hurdle for the present economic model to come to grips with.
        Considering our whole economy is built on carbon as its lifeblood, we have a big problem.
        Solutions.
        1 Perhaps we could move to a method of ensuring that stationary inflation can be managed.
        2. Perhaps we should not rely on inflation to reduce the real cost of historical debt.
        3. Perhaps we should ensure we work as a society that looks after all equitably.
        Results.
        1. In the short term painful transition.
        2. This will cause some loss of value to some countries and societies.
        3. A society in which 10% have 95% of the wealth is not sustainable
        Outcomes.
        1. After transition ones outlook on life is equitable to ones input.
        2. Real value of contribution to society will be rewarded.
        3. Disruption of few owning all and more equitable outcomes.
        Note:- I think it is less than 10% who have the real wealth.
        However the basic argument holds regardless of the percentage.

        • JohnOz

          Renewable energy deflationary – Yes.

          This means that the marginal cost of additional units of renewable energy will become progressively cheaper (massive supply, 6 billion years development time, no fuel costs). If we can’t work out an economic model to take advantage of these benefits we are in trouble.

  • wideEyedPupil

    Tim, unabated coal burning seems to be code for CCS coal plants. Be they retrofits or new coal. We know on price it can’t be done but the UK govt just dropped 1.2 billion pounds on CCS research. Also they will be looking to justify their fracking industry as “low-carbon economy” of gas. Despite the fact that much evidence suggests that burning gas is as bad or worse than burning coal many international organisations still refuse to adjust their assumptions about gas being much better and even (hilariously) “low-carbon”.

    Obviously any progress towards below zero emissions is a great thing but I’m wondering just how much fine print the conservatives have all over this announcement.

  • Joe

    Tim, I’m not sure it’s your remit as you’re not the site editor but I would argue that the headline is deliberately misleading. Unfortunately, as the article makes clear, we aren’t shutting down ‘coal’, merely ‘unabated coal’. I’m sure all involved know the difference here. Whilst the headline becomes less clickable with the word ‘unabated’ in there I would argue that this information is key. Interesting also to note that when I searched for this story via google UK to find the info from a UK news outlet there was absolutely nothing apart from this Reuters article. Read into that what you will. Cheers, Joe http://www.reuters.com/article/2015/02/14/britain-politics-climatechange-idUSL5N0VN4KC20150214

    • You’re precisely right Tim. Today it seems everyone from the BBC, The Guardian, and Chris Littlecott from E3G were all pulling the same stunt and omitting the references to unabated coal which you rightly point out means that UK Gov plan to keep abated coal or #CCS. Most concerning is the support from WWF and Friends of the Earth for CO2 pipelines to the North Sea to support industrial #CCS

  • Raahul Kumar

    Excellent news. I hope Bharat will follow these moves, since right now we are supposed to be embarking on a large build of coal fired power stations. It won’t happen, because protests, Public Interest Litigation and the sheer raw corruption and inefficiency of Coal India guarantee it can never ever happen.

    But we should instead divert the money to building more thorium, solar and hydro. It’s long past time to close down the existing coal plants, not just not build more new ones. And international precedent would help make that a conversation that happens here as well.