The chart that shows why the market for new coal generators is dead

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Bloomberg’s Michael Liebreich points to the killer graph that makes new investment in coal generators almost impossible.

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It has been common knowledge for some time that new coal power plants have become ‘uninvestable’, given that new solar and wind projects are clearly the cheapest source of new bulk electricity generation capacity.

But a new survey of investors has highlighted just how far behind wind and solar the case for coal has fallen, to the point where investors are refusing to finance new replacement projects unless they can secure a near four-fold increase in “hurdle rates”.

Investors were surveyed in research published by the Oxford Institute for Energy Studies, on what level of investment return investors would need to be comfortable committing finance to different types of electricity generation projects.

The survey found investors require substantially higher minimum internal rates of return, which the authors refer to as the ‘hurdle rate‘, from a new coal-fired power station than it does for wind, solar and gas projects.

Source: Oxford Institute for Energy Studies

This ‘hurdle rate’ requires coal-fired generators to operate at a substantially higher level of profitability for investors to feel comfortable committing their money to a coal project.

New wind and solar projects have the lowest hurdle rates (around 10-11 per cent), while gas projects need around 15 per cent. New coal projects have a staggeringly high ‘hurdle’ to overcome, and would need to produce annual investment returns of around 40 per cent to overcome the level of risk investors attribute to such projects.

This is reflective of how investors view the comparative risks of each type of energy technology, with the cost competitiveness of wind and solar making such projects an attractive option, while rising costs and the prospect of stronger restrictions on greenhouse gas emissions makes coal power stations a riskier choice.

With investors requiring a rate of return of around 40 per cent, it effectively makes new coal-fired generators uninvestable, as even the best performing coal projects cannot achieve that level of profitability.

“The leading reason for higher hurdle rates in long cycle oil and coal projects is the growing concern of investors surrounding energy transition. In turn, this is requiring companies to justify new capital investments to the market,” the report authors said.

“Regarding coal, the situation is even worse when it comes to risk perception. Several investors in our survey said no return would be sufficient to make them comfortable investing in coal projects, given long-run fears over climate change legislation.”

While the chart presents the results of a survey of European investors, experience has shown that the Australian market is exhibiting a similar response; there is considerable demand for investment opportunities in wind and solar projects, while proponents of coal-fired projects have found it necessary to seek out the support of the Federal government to underwrite the projects.

It also highlights that the cost of energy is just one consideration for investors, who also factor in climate change legislation at some point in the future to restrict emissions.

The chart was cited by Bloomberg New Energy Finance founder and CEO of Liebreich Associates, Michael Liebreich, during a presentation to an event in Sydney co-hosted by the Clean Energy Council and the Carbon Market Institute.

“If you want an investor to put money into a new coal project, this is based on a survey of investors just asking ‘what payback time would you need in order to be interested?’ We’re talking about very high cost of capital, now, for coal,” Liebreich said.

Liebreich highlighted that even for existing coal generators, the cost of capital is also very high, generally making an operating coal power station a more riskier investment option.

“You can see that for a completed project, if you want an investor to buy a coal asset, whether it’s generating or mining, the equity cost of capital is now around 16 per cent,” Liebreich said.

Source: Oxford Institute for Energy Studies

Liebreich pointed to the growing number of international development banks that are refusing to provide finance to new coal projects.

This includes the European Investment Bank that announced last week it would begin to phase out the financing of fossil fuel projects. The bank has committed to aligning its investment portfolio with the goals of the Paris Agreement and the investments needed to limit global warming to well below 2 degrees.

That announcement follows a decision of the African Development Bank not to provide finance to a proposed new coal -fired power station in Kenya, also stating that it has no plans to provide finance to any new coal-fired power stations.

Andy Vesey, the former CEO of AGL Energy, which owns some of Australia’s largest coal-fired generators, made a similar arguement back in 2017, saying at the time that it was unlikely that any private investor would invest in a new coal-fired generator in Australia.

Despite this, federal resources minister Matt Canavan continues to pressure prime minister Scott Morrison to revive plans to use taxpayer funds to underpin carbon capture and storage projects, seen as a pathway to supporting a new coal-fired generator in Queensland.

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