At least in Germany.
In October 2019, Infrastructure Ideas flagged a coming decommissioning wave for coal plants, and projected a future where coal-fired power plants are paid not to generate electricity, but to stop doing so. In January, that future arrived. As reported by the New York Times and others (How Hard Is It to Quit Coal? For Germany, 18 Years and $44 Billion), Germany approved on January 29 a plan to pay coal workers, companies, and producing states $44 Billion to close producing plants before the end of their technical life. Producing companies will receive $4.8 billion over the course of the next 15 years in compensation for shuttering their coal-burning plants, some of which will be replaced by natural gas-burning generators. The plan foresees taking 19 coal-burning power plants offline in the coming decade, beginning with the dirtiest plants later this year.
This plan goes far beyond the one floated in Germany in the Fall of 2019 to use auctions to fix costs for early coal plant retirements. That plan had some attractive features, including the use of market mechanisms to reduce the cost of the program, but was judged to still leave too large a residual problem. In other words, Germany concluded that a voluntary program would leave too many coal-fired plants still operating, and they were willing to pay the cost of a mandatory one. That same dynamic is likely to play out at the larger global scale: market-based incentives, such as Germany’s reverse auctions, may well be a useful tool to begin the process of early coal-plant retirements; but mandatory, and negotiated, closures will be necessary – and probably on a much-larger scale than voluntary closures.
What can we learn from Germany’s experiment?
1. There is a lot of pressure from climate and environmental groups to take action against coal-fired electricity generation. Germany arguably has one of the largest concentrations of such groups, and it is not surprising that the first concrete plan should be found here. But that pressure can be expected to intensify and broaden geographically. German pressure was fueled in part by signs that the country was falling well short of its announced emission reduction targets (see McKinsey’s analysis on this topic). The same signs are apparent in much of the world.
2. Voluntary plans – the centerpiece of global climate negotiations to date, including the Paris Agreement – only take you so far. Mandatory plans for energy transition are needed to create impacts in line with climate objectives.
3. A forum that allows multiple voices to be heard – in this case the “German Coal Commission,” which worked for two years on crafting and negotiating an outcome that could be as widely supported as possible – plays a major role in crafting any “mandatory” agreement.
4. The technical costs involved with fast-tracking coal plant shutdowns are high, but not nearly as high as the costs of adjustment for workers and regions that have come to depend on coal for their livelihoods. In the case of Germany, a whopping 90% of the $44 billion plan is headed elsewhere than the generation companies who will be shuttering their plants.
5. The bill is high for putting in place a mandatory plan in a fair and consensual way. The German plan puts a price tag of around $1B per GW of coal-fired power retired.
6. For all its ambition and its hard-won consensus, the German plan may still wind up reopened. There are provisions for periodic domestic review of the plan and its execution. And there may well be international calls for speeding up the timetable, if global emission and warming projections worsen – which we believe they will. Either of these two could lead to higher costs than now contemplated for the plan.
Today Germany, tomorrow the world?
Aside from the German plan, there was related news in January that the European Union aims to create a €100 billion fund to aid the transition of Eastern European countries to cleaner fuels. This was a centerpiece of the much-discussed “European Green Deal.” The EU’s “Platform for Coal Regions in Transition” works similarly to the German Coal Commission, as a forum for working out details of transition and compensation for affected parties, to be embedded in a “Just Transition Mechanism”.
The details of the proposed EU plan illustrate an important additional lesson beyond that of Germany. Finding the money to finance this type of climate change-driven transition will be enormously complicated. While the overall envelope for funding envisaged is roughly in line with that of the German plan – about $1B per Gigawatt of generation capacity to be retired – the funding mechanics are very different. Whereas the $44B German plan simply call for payments from the state budget, the €100B EU plan calls for only €7.5 of direct EU funding, to be leveraged by loans (some from the EIB), national budgets, and funds from yet-to-be-found investors. The basic principle of leverage is generally a good one – an early US state plan for retiring coal capacity, in Colorado, aims to manage associated costs by de-facto borrowing from ratepayers — but in this case sounds highly aspirational, and conveys a sense of considerable fragility in the future implementation of the EU plan. Just yesterday, the EU admitted it would take a “herculean effort” to make the plan work.
South Africa has also floated a “green plan” to shut down coal-generating capacity – if other countries will pay it to do so, as previously flagged by Infrastructure Ideas. However, the Government backed away from this idea in the October 2019 release of its next electricity “integrated resource plan,” keeping earlier blueprints for continued adding of coal-fired generation capacity. The dropping – for now – of the idea to sell Eskom’s loss-making coal fleet to “climate investors” has been ascribed to the inability to find a domestic political consensus, with Eskom’s unions reportedly leading the opposition. The plan now on the table leaves unaddressed the issue of Eskom’s near-bankrupt financial state and some $30B in debts, and so shares a high degree of aspirational thinking with the EU’s plan for Eastern Europe.
The pressure underlying these first “pay for coal” plans is going to increase, and increase rapidly. Coal-fired power generation continues to be the single largest emitter of greenhouse gases, accounting for 30% of all energy-related carbon dioxide emissions. In all climate models, phasing out coal from the electricity sector is the single most important step to get in line with holding global warming to 1.5 or even 2 degrees, and as time passes it is increasingly clear that canceling potential new coal plants will not be enough. The late 2019 report from Climate Analytics shows a need to go from current global coal-fired generation of 9,200 Terrawatt-hours all the way down to 2,000 TWH by 2030 – equivalent to decommissioning about 1,600 GW of generation capacity. Applying the cost of the German plan, $1B/GW, would imply costs on the order of $1.6 trillion to shut down this much global capacity.
We would expect such plans for fast-tracking of coal plant retirements – now that at least Germany there is a tangible model — to become the centerpiece of climate change discussions at the next COP summit, and to rapidly rise to the top of the agenda for multilaterals such as the World Bank. The experience of Germany, the EU, and South Africa points to a number of things we can expect for these discussions:
1. Forums that include bottom-up elements, and not just top-down planning, will be essential to the crafting of workable plans.
2. The bulk of any financing associated with these plans will be not for technical closing costs, but for worker and regional adjustment plans.
3. The financing amounts involved will be enormous. The $44B price tag for Germany’s plan is roughly equal to 4-5 years total generation sector investment, while the broad global estimated $1.6T price tag would be around 3 times annual global power generation investment.
4. Financing mechanics will be very complicated and contentious to devise. Germany’s financing approach – we’ll pay for it out of our own budget – is likely to be rare, if not unique. We can expect many false starts, and far more dead-end ideas than ones that get a serious hearing. Cross-regional and cross-country aspects will increase complexities (who will want to pay to retire China’s coal plants?). It may be a very long time before a workable solution for most, if not all, of the targeted retirement amounts is found – if it is found. The passage of time in finding viable financing mechanisms will mean emissions staying well-above aspirational climate targets, and in turn lead to a feedback loop where political pressure continues to build.
5. Financing for this energy transition ultimately will involve massive amounts of public financing, and that will mean a lot less public money available to invest in other infrastructure. Decommissioning coal-fired plants will become a massive competitor for infrastructure-related financing in the coming two decades.
Money for coal. It’s coming, and it won’t be easy. Stay tuned.