Three quarters of Australia’s coal plants will close by 2035, even as governments step in with new subsidies

Every state in Australia that still hosts coal fired power plants has stepped in at some point in the last year or two to extend the life of some of its generators, but a new analysis from Bloomberg NEF suggests that 75 of current capacity will be closed by 2035, and 90 per cent by 2040.

Australia currently has 22.5 gigawatts of coal fired capacity in the grid, but much of it is old, inflexible and operating at low capacity factors. Even the cost of buying and burning coal in existing plants is greater than the full cost of building and operating new wind and solar farms, the BNEF analysis says.

Governments have stepped in to extend the life of coal generators because of the slower than expected rollout of transmission lines, delays in wind farm approvals and uncertainty over policy.

Queensland has been most significant, with the LNP government ripping up Labor’s state renewable energy targets and vowing to burn coal for power until the early 2050s.

But Victoria – and more recently NSW and Western Australia – have also announced deals to keep generators online, ostensibly to ensure new wind, solar and storage capacity is built before they close.

“The coal fleet still forms the bedrock of the power system, but these assets are aging, inefficient by modern standards and a major source of carbon emissions,” the BNEF report says.

“Over the next 10 years, BNEF expects 16.9GW, or 75 per cent, of coal capacity will retire,” it writes in the new analysis. By 2040, the only remaining capacity will be 852 MW in Queensland, which could continue until 2050, even though the market operator has expressed its doubts about the reliability of such plants.

The BNEF report cites the well-known issues facing coal: They are old, cannot compete with renewables, are being sidelined by rooftop solar, are inflexible and struggle to follow load, will be too expensive to maintain, and face high prices for coal, and in some cases difficulty even sourcing the fossil fuel.

The coal industry remains heavily subsidised – despite claims by the fossil fuel industry that it is not. The Queensland government has pledged $1.6 billion to maintain its fleet, but is expected to have to pay a lot more.

In NSW, coal generators had a cap placed on the coal they needed to ensure their profitability, and the state agreed to offer up to $450 million over two years act as a backstop for the first extension of the Eraring coal plant. That money has not been drawn down, but it eliminated the downside to its decision to extend its life.

The Victoria government has made two undisclosed deals with the owners of coal generators to keep them online, and in Western Australia a bankrupted coal mine is to be further supported by the state government, despite promises that it would not extend the funding that has already cost it more than $300 million.

But these measures will likely only extend the life of these generators to the end of this decade, not beyond.

And BNEF says there is zero chance of any new coal fired generators, because of the reputation and market risks, and because of the high financing costs that BNEF says puts the levelised cost of new coal generation at $297/MWh, without counting for the price, or cost, of carbon emissions.

“(That is) far higher than new wind or solar projects, which have a base case LCOE of A$115/MWh and A$68/MWh, respectively,” it says.

“Renewables provide very low marginal cost energy, squeezing (existing) coal’s run hours and its realized (production- weighted average) power prices,” it says.

“Driven by cost reductions, new- build solar and wind are already competitive, on an LCOE basis, with the short-run marginal costs of some expensive existing coal plants.”

To make matters worse for coal generation (and for nuclear if that was ever considered) the rapid rise of renewable energy, particularly rooftop PV, is reshaping Australia’s power markets.

This is delivering a double-whammy to coal. Capacity factors are decreasing (see graph above) as more low-marginal cost renewables displace coal, increasing coal plants’ breakeven prices and in some cases putting them above average power prices.

This volatility, in turn, is forcing coal plants to quickly ramp up or down to meet morning and evening price peaks, which may increase costs associated with wear and tear. “The ability to capture evening peak prices may eventually determine which plants retire early and which survive,” it says.

There are some reasons why coal plants will stay online for longer than most people would like, or even consider necessary.

One of these is FOMO, or the fear of missing out on windfall gains. As one big generator exits the market, that has often led to an increase in wholesale prices. Coal generator owners do not want to be the ones that missed out.

The other is the value of essential system services, such as system strength, which is cited as the main reason for the latest extension to Eraring, which also happens to emerge amid an intense debate about whether Australia should continue its reliance on “spinning machines” and expensive syncons, or turn to grid forming inverters.

That issue should be resolved, in favour of grid forming inverters, by the time the next big coal closure is mooted.

BNEF also cites the slower than expected built out of renewables, which if it continues will make it difficult for more coal closures, at least at the scale assumed by federal government policies, and the impact of state governments policy changes, such as in Queensland, which has turned its transition plans on its head.

“Coal plants must operate profitably most of the year to recoup their fixed and maintenance costs,” the report says.

“This is becoming more difficult for Queensland’s coal fleet as growing wind and solar generation lowers power prices when producing in abundance (usually around midday), reducing the number of profitable hours for coal.

“Maintaining the coal fleet won’t come cheap – casting doubt over the economic rationale for extending the lives of these assets. The government has allocated A$1.6 billion into keeping up state- owned coal, hydro and gas assets over just the next five years through its Electricity Maintenance Guarantee.

“The funding will help financially prop up state-owned coal plants faced with growing competition from low-cost renewables, especially rooftop solar.”

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