Silver Linings

Silver Linings: the COVID-19 crisis and infrastructure
May 2020

The COVID-19 epidemic has transformed pretty much all aspects of life over the past three months. Our previous Infrastructure Ideas column, written in the early days of the pandemic, outlined some of the possible effects of COVID-19 on the world of infrastructure. As is the case in so many areas, the implications were depressing. It is also apparent that positive news are in great need – and not based on distorted data and magical thinking, as can be seen coming from some quarters. Today’s column looks then at some silver linings for infrastructure in the pandemic era – and there are some!

We’ll start with the two most obvious “winners” from the crisis: logistics, and emissions reductions.

1) New and expanded logistics opportunities. As can be readily seen on any highway or city street, the amount of goods being delivered to homes through (generally) online orders has skyrocketed in 2020. The world’s biggest retailer, Walmart, has reported a 74% increase in e-commerce sales for the last quarter. Volumes have grown so sharply that even logistics giants are having difficulties keeping up: FedEx has asked several of its major store clients to slow or limit home delivery sales in order for FedEx to be able to manage shipping logistics. Amazon, possibly the biggest winner of all, announced back in March that it would be hiring for as many as 100,000 new positions, mainly in warehouse handling, and reported a 26% increase in quarterly sales – an impressive feat for a company with already over $200 billion annual revenue. And providers of logistics software and supporting services are also thriving.

The jump in demand for infrastructure logistics driven by e-commerce and home delivery services is broad-based and likely to remain with us. As Coronavirus infections continue to spread into new areas, demand is growing in virtually all geographies. An example is the three-year old Colombian company Liftit, recipient of an investment from the IFC. Liftit provides a technological platform that connects truck drivers with companies that need cargo delivered (similar to a ride-hailing app), and has already expanded beyond Colombia. The matching of large customers with truck fleets is a crucial link in the supply chains, especially in regions where the majority of drivers are independents (See more on Liftit here). In Pakistan, a similar app-based service connecting people and goods via motorbikes in major cities, Bykea, is getting a far-higher profile through the delivery of food parcels for thousands of people during the crisis. Bykea uses smartphones, a call center comprised mostly of women working from home, and a network of 30,000 motorbike driver-partners. In Africa, the use of drones for logistics has gotten a major COVID-related boost from the demand for transporting test samples to labs. US startup Zipline has launched operations for its pilotless flying vehicles in Ghana and Rwanda, also using them to ship protective equipment, vaccines, drugs and other supplies. These kind of advances, combined with changes in consumer demand (buyers who discover convenience which they had not tested previously, and/or those who remain wary of crowded retail shopping situations in the future for health reasons), will continue to fuel logistics growth well into the future. And an analysis by the Brookings Institute (Could COVID-19 help logistics?) shows some of the labor-related benefits of logistics jobs indicates that these jobs often carry good training opportunities with transferrable skillsets, and potentially higher pay relative to low formal educational barriers to entry.

2) Emissions reductions. An international study of global carbon emissions found that daily emissions declined 17% between January and early April, over 1,000 metric tons compared to average levels in 2019, and could decline anywhere between 4.4% to 8% by end 2020. That would mark the largest annual decrease in carbon emissions since WW II. Carbon reductions are primarily driven by fewer people driving — surface transport activity levels dropped 50% by the end of April. This was equal to (50%) the fall in the amount of gasoline supplied in the US—a close measurement of direct consumption— over the two-week period ending April 3.  With all those cars now sequestered in garages, air quality around the world has gone through the roof. As reported in Wired, researchers at Columbia University calculated that carbon monoxide emissions in New York City, mostly coming from vehicles, fell by 50% in March. Another positive side effect of this is on public health: research from the Harvard School of Public Health has shown that air pollution is associated with higher Covid-19 death rates, even small increases in long-term exposure to fine particulate matter leads to significantly higher mortality. Chances are not great that emissions will stay on this path post-crisis, but for now this piece of news is good for the climate.

3) Acceleration of the energy transition. Aside from the two obvious winners above, there are other interesting trends flowing more under the radar. One is on energy transition. While it is likely that energy use will rebound sharply after the pandemic, its carbon intensity should be lower. Of particular interest is that while the coronavirus lockdown will cause the biggest drop in energy demand in history, it looks like renewables will manage to increase output through the crisis. The International Energy Agency (IEA) says that demand is likely to fall 6% in 2020, with rich countries showing a steeper decline, the U.S. falling 9% and the European Union losing 11%. Global oil demand is poised to slump by about 9%, coal demand is falling about 8%, and natural gas about 5%. Yet the IEA expects production of wind and solar to grow in 2020. In the first week of April, it was widely reported that wind and solar had produced more electricity in the US than coal did for two months in a row, for the first time on record. A Wood Mackenzie analyst, Matthew Preston, notes that coal is now more expensive in most of the US than natural gas, wind or solar energy: “Just about everything that can go wrong, has gone wrong for the coal industry.” More banks, including HSBC in April, have announced the cessation of coal financing; HSBC’s announcement closed previous loopholes for coal plants in Bangladesh, Indonesia and Vietnam, and included a Vietnamese project for which it was the global coordinator. HSBC had reportedly financed $8 billion of new coal plants over the past three years. While oil and gas prices have fallen sharply in 2020 to date, there are signs of supply reductions and cost increases on the post-crisis horizon. Moody’s had announced already in late 2019 that 91% of all US third-quarter defaulted corporate debt was due to oil and gas companies. As wind and solar prices continue to fall (see below), coal’s lack of competitiveness will grow, while gas will also have an increasingly harder time competing on costs against renewables. Expect that projections for renewables’ share of the energy mix in future years begin to tick up.

4) Technology continues to move forward. The single brightest development in infrastructure for the past decade has been that energy has been getting cheaper around the world, driven initially by the increased supply of natural gas enabled by new imaging and drilling technology, and in more recent years by the continued technology-led plunge in wind and solar costs. While these gains have fallen out of the headlines during the COVID-19 pandemic, they have been continuing.

In late April, yet another global record-low solar price was achieved. And it was achieved for the world’s largest solar project. Abu Dhabi announced that the winning bid for its Al Dhafra project – which at 2 Gigawatts will be the largest single-site solar energy project in the world – came in at a stunning 1.35 US cents per kilowatt-hour. A consortium of EDF and JinkoSolar was the winner. This breaks the previous record of 1.6 cents/Kwh from January in Qatar, and 1.7 cents/Kwh from November 2019 in Dubai. An even larger project, on multiple sites within one solar park, Bhadla solar power park in Rajasthan, India, became fully operational in March. The park has 2.25 GW of now operating solar capacity. The solar park saw multiple record-low tariffs (down to US 3.8 cents/Kwh) during some highly competitive auctions. More and more wind and solar capacity is also being developed in “hybrid” projects including battery storage. According to the US Energy Information Administration there are already 4.6 GW of wind, gas, oil and photovoltaic power plants co-located with batteries in the U.S., with another 14.7 GW in the immediate development pipeline and 69 GW in the longer-term interconnection queues of regional power markets. In the interconnection queues, a quarter of all proposed solar projects are combined with batteries, and in bellwether California, almost two-thirds of solar projects are proposed as hybrids. Power-purchase agreement prices for hybrid power plants are continuing to plummet, with declining costs for wind, solar and batteries as these technologies mature. And on the newer-technology end, in early May Minnesota utility Great River Energy confirmed it will deploy a one MW battery with 150 hours capacity – completed unprecedented for the energy industry. The battery, an “aqueous air” battery system from Form Energy, is due online late 2023, and increases contracted battery storage records by more than 20 times. This is the first announced deal that will take the technology out of the lab and deploy it in a full-scale power plant context. In conjunction with this, Great River Energy, the second-largest power supplier in Minnesota, announced plans to phase out coal power. The arrival of long-duration storage will be another major turning point for energy systems worldwide.

5) And some miscellany. While not rising to the level of the previous four positives for infrastructure, there are a handful of other interesting developments for infrastructure investors and users to keep an eye on during the pandemic. One is around highly depressed air travel: while airlines seem to be doing a reasonably good job keeping flying as virus-free as possible, conditions at airports have potential travelers very concerned about returning to flying. This may well lead to a push for building new airport terminals of very different designs than current terminals; “Future-proofing” has become an “in” term for airport designers, with both health screening facilities and more spaces to enable social distancing than today’s terminals, which often seek to maximize density. This may entail terminals built with steel instead of concrete to increase flexibility, as well as very different uses of space. Investors may see an unexpected area to put capital into infrastructure here. A second area is expanded broadband access. As more schools across more jurisdictions try to implement distance learning, the importance of accessible internet where it is today not available has shot up the list of political priorities. Close to 200 countries have announced or implemented school closures in 2020, with the majority seeking to implement online courses, and quality of internet access has become a major issue. We can expect this area to draw on a far greater portion of public infrastructure spending – possibly as Public-Private Partnerships – as a result of the crisis. A third and related area stems from the exponential increase in online courses driven by the crisis and school closures. This, combined with improved rural broadband access, could become a major factor in expanded technical training in developing countries. Lack of trained staff is a significant bottleneck for rail, logistics, and other infrastructure services in many countries. Fourth, bicycle-sharing and e-bike programs look like they may gain from the crisis. While initially bike-sharing plunged from concerns over potential virus spread, they have strongly rebounded in many places. Bicycle ridership has soared generally, as public transit is viewed as a source of virus exposure risk and some cities close streets to cars to enable more socially-distanced walking (and biking), and sterilizing equipment has emerged as easier for shared bicycles than for shared cars. Miami is one place that has also launched expanded e-bike delivery services during the pandemic. And fifth, the virus may stimulate greater attention to urban sanitation generally, as urban areas have been disproportionately affected by COVID-19. Perhaps we may at long last see an uptick in public infrastructure spending in sanitation, or greater willingness to consider Public-Private-Partnerships in the area.

These are trying times for everyone, including in infrastructure. But at least there are silver linings. We all need positives some of the time. And at some stage, the crisis will be over!

Money for Coal

March 2020

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.

coal-exit-path-capacity-closures-felixmatthes1

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.

Infrastructure in 2020: Ten Predictions

Infrastructure in 2020: ten predictions
January 2020

1. Wind and solar keep growing.

Growth in global renewable energy investment in 2018 and 2019 has been akin to the Sherlock Holmes tale of the curious incident of the dog that didn’t bark – there hasn’t been any. After a down year in 2018, global renewable energy investment stayed essentially flat at $282B in 2019, according to Bloomberg New Energy Finance (though still more than double BNEF’s estimate of investment in fossil fuel-based generation). Look for numbers to head back up in 2020, on the back of renewables’ cost advantages. In the US, the EIA forecast last week that wind and solar will make up three-quarters of new capacity additions in 2020, breaking previous records of annual capacity additions. The big variable for the coming year will be the largest renewable market in the world, China. The missing global renewable growth would have been there in 2018 and 2019 were it not for declines in China, whose $83B 2019 investment level was down for a second straight year, primarily in solar which is down 2/3 since its 2017 peak. As China transitions away from its Feed-in-Tariff mechanism for domestic solar generation towards competitive auctions, Infrastructure Ideas expects prices for new capacity to tumble, as they have everywhere else that auctions have taken hold, and growth in solar installations to resume in response. For Emerging Markets other than China and India, wind and solar investment rose 22% to a record $47.5 billion. In 2020, look for $300B in investment, a record 200 GW in new wind and solar capacity, and renewables as a share of net new generating capacity added worldwide to cross 70% for this first time.

2. Offshore wind is the new big thing

It looked like a curiosity for many years, but offshore wind is now breaking into the mainstream of electricity generation. Only five years ago, offered prices for offshore tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources. But larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down. In September 2019, the UK saw bids for offshore generation at under $0.05/KwH, and now offshore is able to compete without subsidies in many markets. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion. Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. Look for many offshore wind headlines in 2020.

3. Challenges mount for power grids and utilities

Grid operators will continue to see a ramp-up of challenges associated with the energy transition in 2020. In developed markets, these challenges include continued switching to lower-cost generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles. The average EV traveling 100 miles uses as much power as the average US home does daily. California projects that EV’s will use over 5% of the state’s generation capacity by 2030. In developing markets with technically weaker grids, dealing with intermittency will be a bigger challenge, as well as integrating distributed generation and storage. Emerging Market cities may also create new demands as they start adopting electric buses in large volumes, the way we’ve seen in China. Large EV bus fleets will put significant pressure on charging infrastructure resources, while also offering potential storage solutions for urban utilities, especially as Vehicle-to-grid technology, or V2G, becomes more available. Look in 2020 for larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.

4. Non-lithium batteries get serious

As recently headlined in the Economist, Generating clean power is now relatively straightforward. Storing it is far trickier. Total investment in storage in 2019 came to around $5B, 99% in lithium-ion batteries. While this has been a major success, grids will need complements to lithium-ion technology soon. Though the cost of lithium-ion batteries is falling quickly, longer-term storage is likely beyond its practical capacity. Capacity to keep growing with solar and wind is also a question: the Institute for Sustainable Futures states that a world run fully on renewables would require 280% of the world’s lithium reserves, while concerns over sustainable sourcing of cobalt remain. Companies focused on longer-duration storage alternatives saw a major influx of investment in 2019, led by Energy Vault $110 million funding round, the single largest equity investment in a stationary storage company, according to Wood Mackenzie. Highview Power signed the first liquid air storage offtake deal, for 50MW in Vermont in December 2019. While 2020 project announcements with non-lithium batteries will remain small, look for them to make big headlines. And look for them to spread faster into smaller, low-income developing countries. The economics are more favorable in remote or island grids, where imported diesel creates a much-easier benchmark for storage to beat on price. Canada’s e-Zn targets remote communities that stand to benefit by offsetting diesel generator usage. NantEnergy, using zinc-air batteries has installed some 3,000 microgrids.

5. Green House Gas emissions: alarm keeps climbing, but no global agreements yet

One of our safest predictions. New studies and projections will continue to show climate change having a larger impact sooner than their predecessors. And politics, centered but not limited to the US, will again prevent significant concerted action to reduce emissions. The 2019 Madrid Summit was a glaring display of the stand-off. The only possible change for even 2021 here is the November election in the US.

6. Emissions-free city zones multiply

Though no global climate agreements are on the horizon, there is much climate policy activity at the local and national level: one big example is emissions-free city zones. This month, Barcelona opened southern Europe’s biggest low-emissions zone, covering the entire metropolitan area. Petrol-driven cars bought before 2000 and diesels older than 2006 are banned and face fines of up to €500 each time they enter the zone, which is monitored by 150 cameras. The new Spanish government is said to be planning low emission zones for all towns with over 50,000 residents. Whether driven by national or municipal authorities, we can expect to see such initiatives multiply rapidly, driven both by concerns over global climate inaction and over local air quality. Such zones now create opportunities for carmakers, though one can also expect to see EVs increasingly favored by such mandates, tilting the new opportunities towards EVs – and providers of EV infrastructure.

7. Unilateral “100% renewables” commitments multiply

Between frustration at the lack of global progress on reducing emissions, and the prospect of increasingly cost-competitive renewables and storage resources, a growing number of US states and utilities are setting targets for reliance on 100% clean energy. Thirteen US states, along with Puerto Rico and the District of Columbia, have now set 100% clean energy targets. Another four large states have announced plans to do so. Half-a-dozen large private-sector utilities have also committed to 100% clean energy targets, including famously coal-intensive Duke Energy. These mandates will continue to open new opportunities for renewable energy and storage providers, and importantly will likely offer less price-sensitive demand for longer-duration storage providers. The mandates will also start to impinge increasingly on natural gas demand for generation, and risk beginning to strand fossil-fuel generation capacity ahead of technical end-of-life timetables.

8. Financing premiums appear for climate risks

A big piece of news in the finance world last week was Blackrock’s announcement it would put in place a coal-exclusion policy. But even with Blackrock’s heft — it is the world’s largest investor in coal – this by itself is not a huge game-changer: not much new coal is going up in Blackrock’s geographies. Expect the bigger news in 2020 for infrastructure financing to instead be the appearance of the higher financial costs related to climate risks. In many ways it is shocking this has not happened yet, though a good piece of reporting from the New York Times last September pointed a finger at a big reason for the US. The Times reported that US banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government. Regulations governing Fannie Mae and Freddie Mac do not let them factor the added risk from natural disasters into their pricing, which means banks can offload mortgages in vulnerable areas without financial penalty. That cannot last without soon bankrupting the two biggest pieces of the US mortgage system (although it would be consistent for the Trump administration to prefer that option). The broader insurance industry is also suffering. According to Swiss Re, 2017 and 2018 were for insurers the most-expensive two-year period of natural catastrophes on record, most of them related to global warming. 2018’s most expensive insurance payout anywhere in the world was for the California Camp Fire. Fortune noted that new research shows that the wildfires of 2017 and 2018 alone wiped out a full quarter-century of the insurance industry’s profits. Unlike Fannie Mae and Freddie Mac, private insurance companies can react, and they will have to charge more to stay afloat. Expect 2020 to be the year that insurance prices begin to factor in climate-related catastrophe risks in a big way, and for that to begin flowing through to financing costs.

9. Delivery vehicles become the new EV focus

Electric car and bus sales volumes continue to grow, but expect electric vans to get a lot of the attention in 2020. Already in September 2019, Amazon placed a massive order for over 100,000 electric delivery vans – worth about $6B. The continued rocketing growth of the e-commerce delivery business, and the frequent use of diesel vehicles for delivery, make for an attractive and fast-growing market for electric vans. As noted by Wired, urban deliveries don’t require all that much range. Routes are predictable and plannable, and because the vehicles return at the end of every shift to a depot, recharging them is a breeze. Add the concerns of many cities about transport emissions, as noted above, and the attraction of the new market segment is easy to see. Now 2020 has started with a $110 million investment for Arrival, a UK start-up making electric delivery vans, from the combination of Hyundai and Kia. Arrival promises that its vehicles will be cheaper than their traditional, diesel-powered competitors, even without further declines in battery prices. Interestingly Arrival’s business model will also facilitate more rapid expansion to Emerging Markets than for makers of other EVs. Rather than building a huge new production plant, Arrival will work from “microfactories” that make only 10,000 or so vehicles a year, but sit closer to where their customers are, and making geographic expansion simple. Look for major changes in the logistics business in emerging country cities to flow from this soon.

10. More alarms over hacking of infrastructure

Many new opportunities are opening for infrastructure investment. Yet risks are growing as well. The hacking of Ukrainian energy company Burisma late in 2019 by the Russian military was clearly politically motivated. Hacking capabilities continue to grow far faster than defenses. Look for more widely-publicized attacks on infrastructure assets in 2020.

 

 

Airports, Ports and Climate Change (II)

Airports, Ports, and Climate Change (part 2)
December 2019

NavClimateLogoHiResSquare-320x245_c

This is the second in a two-part Infrastructure Ideas series on the effects of climate change on infrastructure transport facilities, following part 1 on airports. This post will survey climate change impacts on ports around the world.

Over 3700 maritime ports and their supply chains enable global and local commerce, helping the over 90% of the world’s freight that moves by sea. Ships make on average some 3 million landings a year at ports around the world. One study found that ports and ships account for as much as one-quarter of the GDP of the United States, contributing over $5 trillion to the US economy alone. All of these ports are, by definition (leaving out “dry ports” which have their own importance in logistics chains) located by water. As climate change accelerates, and waters rise, all of these ports will be affected by a range of consequences, some of them expensive.

The EU’s Joint Research Center projects that by 2030 64% of all seaports are expected to be inundated by sea level rise, due to the combined effects of tides, waves, and storm surges. The number of ports that face the risk of inundation in 2080 is expected to increase further by 80% to 2080. While various climate change projections may have considerable uncertainty, depending on the combination of how much higher carbon dioxide atmospheric concentrations get (uncertain because possible future emission trajectories are all over the place) and of feedback loops (on which key pieces of the science remain untested), two things are very clear: (1) sea levels will rise, and (2) they will rise more in some places than others. In Europe, it is forecast that the North Sea (where 15% of total world cargo is handled), the Western part of the Baltic Sea, and parts of the British and French Atlantic coasts will see double the sea level rise of most of the rest Europe’s coastline. In the Black Sea and the Mediterranean, impacts from extreme high sea level are expected to be significantly milder, but also to occur more frequently. One analysis projects that once-in-a-century “extreme sea levels” will on average occur approximately every 11 years by 2050, and every 3 and 1 year by 2100 under more extreme warming scenarios. The analysis adds that “some regions are projected to experience an even higher increase in the frequency of occurrence of extreme events, most notably along the Mediterranean and the Black Sea, where the present day 100-year ESL is projected to occur several times a year.”

One might superficially think that rising water levels would, for seaports, be a matter of indifference, or even a plus. As opposed to airports, where airplanes affected by inundation become useless, ports are home to ships which float on top of the water – no matter how high the water is. Dredging might become less of a concern in some ports, and other ports may become less dependent on high tides for larger cargo ships to enter. But while it is no doubt true that climate change impacts will be more severe for airports than for ports, they will not be absent for port owners and operators. A 2011 case study published by the International Finance Corporation, on a port in Colombia, summarized well the issues, of which the two biggest are the storage and movement of goods, and multimodal connectivity inland from the port. Ships can keep floating as the waters rise, but containers of goods cannot. Spoilage risk can be expected to affect revenues in particular for ports handling grains and other perishables. The fairly small number of transshipment ports may not worry too much about inland connectivity, but the large majority of operators will be need to be concerned about impacts of high waters on infrastructure which they do not control – roads, and sometimes rail lines – in and out of the port to other parts of their region. A review of risks to Long Beach Port, one of the busiest in the world, notes that “in the next few decades, access roads could be covered in water; rail lines, either from heat or from ocean water inundation, would be unusable; electrified infrastructure such as cranes could stop working. The piers themselves, particularly older piers in the center of the sprawling 3,000-acre Long Beach complex, would be swallowed by sea and flood water, leaving them inaccessible to trains and trucks”. As the Colombia study also notes in passing, ports in developing and emerging markets may often also have unpaved areas which can be damaged more severely by inundations.

In this context, many ports face both pressure to participate in mitigation/ decarbonization efforts, and pressure to think ahead about adaptation. On mitigation, ome larger ports have had the luxury of trying to get on the front foot in the public debate. Seven ports — Hamburg, Barcelona, Antwerp, Los Angeles, Long Beach, Vancouver and Rotterdam – announced in September 2018 the creation of a “World Ports Climate Action Program,” aimed at working together to find ways to reduce CO2 emissions from maritime transport. Their program has five action areas:

1. Increase efficiency of supply chains using digital tools.
2. Advance policy approaches aimed at reducing emissions within larger geographical areas.
3. Accelerate development of in-port renewable power-to-ship solutions.
4. Accelerate the development of commercially viable sustainable low-carbon fuels for maritime transport and infrastructure for electrification of ship propulsion systems.
5. Accelerate efforts to fully decarbonize cargo-handling facilities in ports.

The Port of Oslo last month announced a 17-point climate-action plan, with the goal of becoming the world’s first zero-emissions port. The port produces 55,000 metric tons of greenhouse-gas emissions a year. By 2030, the port aims to make an 85% reduction in its emissions of carbon dioxide, sulphur oxide, nitrogen oxide, and particulate matter. The plan includes refitting ferry boats, implementing a low-carbon contracting process, and installing shore power, which would allow boats to cut their engines and plug into the grid when docked. Shore power can also power equipment like cranes, which normally run on diesel. Oslo incentivizes replacement of diesel with lower port fees and electricity costs to reward compliant ships, and by revising contracting processes to command terminal builders and shipping companies to obey low-emission rules. Rotterdam, which is Europe’s biggest port, is using zero-emission port equipment, while two months ago the Port of Los Angeles unveiled two new battery-electric top loaders.

Oslo’s plan is also of specific interest in that Oslo is a major port for ferries running across the Baltic straights; these ferries are estimated to be responsible for half the port’s emissions, a function of their frequency. Oslo has awarded a contract to Norled to electrify existing passenger ships; Norled delivered the first electric refit in September, and the ship now has the equivalent of 20 Tesla batteries on board. In a further sign of growing interest toward electrification among the industry, last month Washington State Ferries, which runs the second-largest ferry system in the world, announced it is switching from diesel to batteries. Washington State Ferries carry 25 million people a year across Puget Sound, and its annual fuel consumption is on par with that of a midsize airline, making it the state’s biggest diesel polluter. The ferry operator’s electrification program will start with the three most polluting vessels, which consume 5 million gallons of fuel a year between them; switching the three ships to fully electric operations would cut emissions by an estimated 48,000 metric tons of CO2 a year, the equivalent of taking 10,000 cars off the road. This will also require a major quayside electrification effort. Canada’s British Columbia Ferry Services, another major operator, moved to LNG some time ago and is now eyeing electrification of its fleet. This August also saw the launch of the world’s largest all-electric ferry to date, a 200-passenger, 30-car carrying vessel in Denmark, while in July the U.K. government announced that all new ships would have to be equipped with zero-emission technology.

On adaptation, almost all ports will need to take some sort of action to deal with rising waters, and more frequent extreme weather events bringing flooding. Key areas will be in protecting goods being stored and moved within ports, and inland transport connections. So far, the approach being taken by most ports is the obvious one – trying to keep water out of where it’s not wanted, and European ports are in the forefront. Rotterdam, Amsterdam and London are known to be protected against a 1 in 1000-year event, or at least what has been thought of as 1 in 1000-year events. Rotterdam’s measures are of the highest level globally, consisting of two of the largest storm surge barriers in the world. London’s flood barrier is also among the biggest in the world. These kinds of defenses do not come cheap. According to a recent study by consultancy Asia Research and Engagement (ARE), upgrading some of the 50 largest ports in the Asia-Pacific region to help cope with the effects of climate chance could cost up to $49 billion.

Future port adaptation measures are likely to be far more extensive than those implemented to date, and to require more varied technical approaches. Chances are pretty good, as estimates of how much and how soon sea levels will rise keep getting ratcheted up, that current forecast numbers for seawall-type protections will escalate quickly – as in the example of San Francisco’s barrier, whose projected cost jumped in a few years from $50m to over $500m. Chances are also pretty good that other complementary solutions will be needed, along the lines of major drainage improvements and ways to elevate storage facilities. Unless some radical positive change takes place, rising sea levels are likely to inexorably make seawalls regularly obsolete unless they too keep getting (expensively) raised, and solutions that focus more on the parts of ports that have to keep dry make be most cost-effective. Finally, chances are pretty good that new kinds of private-public partnerships for adaptation will be needed. Inland connecting infrastructure is more often owned by local governments that port operations are, and those governments struggle more than port operators to find revenues with which to fund raising and hardening that connecting infrastructure. Ports may find they need to help governments put in place the improvements to connecting infrastructure, without which ports will find their revenue streams drying up – all puns intended.

Airports, Ports, and Climate Change (part I)

Airports, Ports, and Climate Change (part 1)
December 2019

Last month, Denmark announced that Kangerlussuaq Airport — Greenland’s main airport — is set to end civilian flights within five years due to the melting of permafrost cracking its runway. Infrastructure investors take note – this is the first airport worldwide to close due to climate change, but unlikely to be the last. A new greenfield facility will have to be built to accommodate future flights.

A year earlier, Osaka’s Kansai International Airport was largely closed for 17 days, when waves and winds from Typhoon Jebi breached a seawall. In June 2017, American Airlines cancelled 40 flights out of Phoenix, Arizona, as extreme heat made it too difficult for smaller jets to takeoff from the airport.

Welcome to the future of airports.

Climate change is arriving, faster and worse than most projections estimated. For airport operators and investors, this will entail more of the type of consequences already being seen in Greenland, Japan, and Arizona. The current Infrastructure Ideas issue will outline some of these consequences, while the subsequent issue will examine the future of ports in a time of climate adaptation.

Emissions Mitigation. The world’s airlines are expected to fly over 4.5 billion passengers in 2019 (yes, almost a flight for every person on the planet), up by a billion since 2015. This high growth is driving very large capital investment plans for airports, as well as rising emissions. The aviation industry is estimated to be responsible for more than 850 million tons of CO2 emissions annually, about 3% of all global emissions. Emissions from jets are thought to have more harmful effects than many other sources of emissions, as they get released higher up in the atmosphere. Given air traffic projections, emissions from aviation are projected to triple by 2050. This has led in the past few years to increasing concerns, in the context of increasingly dire warnings from the scientific community about the pace and severity of climate change. Already in 2016 the International Civil Aviation Organization, ICAO, agreed to cap carbon emissions from international flights, starting in 2021 – an agreement which may prove difficult to implement if passenger growth continues as projected. Some airlines are also trying to get on the front foot: United Airlines announced a goal to cut its greenhouse gas emissions 50% by 2050. How this will be done, and whether it will be enough to offset the onset of major regulatory limits, remains to be seen. As start-up technology companies explore the launch of “air taxi” services, domestic flight emissions may also see accelerated growth. Industry players should expect that there is likely to be increased conflict between political emission reduction objectives on the one hand and unabated passenger growth on the other. Therefore investors in the sector may do well to factor the risk of political action either taxing flights and/or limiting flights, and therefore reducing the overall needs for capital investment in airport expansions. Arguments can also be seen already that controlling the expansion of airports themselves is an important tool to curbing airline emissions (see Curbed, Want to Get People to Fly Less? Stop Funding Airport Expansions).

Airports themselves emit a tiny fraction of the GHGs that airlines do – at least directly. Their own operations are far less likely to face political pressure of the type that airlines will. Nonetheless a climate neutral accreditation exists and has enrolled many facilities, whose efforts focus on meeting energy needs through renewables and improved efficiency, on the use of hybrid or electric vehicles, and on public/group transit facilitation for employees. Potential emission reductions of this type may be largest in airports located in lower-income countries, which often see a combination of less-modern/ less-efficient operational equipment and older less-fuel efficient aircraft. Jomo Kenyatta International Airport in Nairobi, for example, has achieved major GHG reductions by purchasing power units for parked aircraft which run on electricity, rather than diesel as the older units had. This is good — yet the indirect emissions related to airports are significant, and may prove to be more of a political target in the future. Indirect emissions would be mainly two elements: how many flights airport capacity allows, and transport emissions from people getting to and parking at an airport. As noted above, activism is beginning to target the issue of airport capacity expansions as a means of curbing airline emissions. It is likely that in the near future, the efficiency of passengers reaching an airport starts attracting attention, with arguments for parking expansions to be replaced by public transit, for example. At one level further removed, one can also anticipate growing pressure for investment in passenger rail services, coupled with increased taxation of short-haul flights, to attempt to shift traffic from air to rail for short-distance travel (as most fuel is burned on take-off and landing, making short flights more carbon-intensive flights). The bigger climate change worry for airports, however, is likely to be adaptation.

Adaptation needs: water. Water has gone from a friend of airports to a foe. In many cities, airports were built near seacoasts to minimize disturbances to humans or avoid natural obstacles like mountains. Now that water is rising, and airports are some of the most vulnerable infrastructure to sea level rise. In the USA, 13 of the country’s 47 largest airports have at least one runway that is vulnerable to storm surge, including the giant facilities in New York, Miami and San Francisco. Globally fifteen of the 50 busiest airports sit less than 30 feet above sea level, while the OECD identified 64 airports as likely to be affected by the predicted rise in sea levels. Complete disappearance of facilities may be remote (for the extreme risk, see our previous Lessons from the Venice Floods), but higher water levels will exacerbate the effects of storms, making airport flooding far more common and damaging. And though damage will be more extensive and long-lasting for coastal airports, inland airports will not be exempt from water-related adaptation issues. More intense rain events, another predicted effect of climate change, will cause more frequent and damaging river flooding, as the US Midwest has been experiencing. Inland airports are also frequently sited near rivers, for the same reasons that their coastal counterparts are frequently sited along the shore, increasing their vulnerability to flooding.

The obvious approach to adaptation for airports is to try to keep the water out. San Francisco is Exhibit A for this approach, having announced plans for a $587 million seawall to protect its airport. When the project was first tabled, in 2012, it was designed for an 11-inch sea level rise, with an estimated cost of $50 million. Seven years later, with climate projections getting worse, the revised plan now calls for planning on a 36-inch rise and has increased the estimated cost by 1,000%. Across the bay, Oakland plans a $46 million project to fortify and raise by 2 feet the 4.5-mile dike which protects it. In Hong Kong, plans for the $18 billion third airport runway were revised to include a 21-foot high seawall. Norway, whose state-run airport operator Avinor has called almost half its airports “quite exposed” to potential sea level rise, has decided to build all future runways at least 23 feet above sea level (For more, see this month’s article in Wired, How Airports are Protecting Themselves Against Rising Seas). Moving the water that does arrive is also critical: airport drainage systems will need significant fortifying to move greater and faster-arriving amounts of water. At some stage, however, airports will face the same dilemma that coastal cities and seaside home-owners increasingly face (see previous column, Capital Punishment): keep investing in barriers to the sea, or move. When city leaders opt to move, as in the case of Jakarta, it will be difficult for its airport to remain viable.

Adaptation needs: Heat. After water, the next biggest issue for airports will be extreme heat. The curbing of takeoffs due to 120-degree heat in Phoenix garnered many headlines (see the New York Times, Too Hot to Fly? Climate Change May Take a Toll on Air Travel). Hotter air means thinner air, impacting the ability of planes with smaller engines to generate enough lift to get airborne. Extreme heat requires longer distances to take off and/or reducing aircraft weight (with fewer passengers or cargo). Airports in locations where high temperatures already occur frequently, and with short runways that limit planes’ ability pick up speed, will be especially affected. One of Air India’s general managers, Captain Rajeev Bajpai, notes that extreme heat is already an aviation problem in countries like Kuwait, where planes can be grounded on summer days because their electronics automatically shut down. Hotter temperatures may cause tarmac to melt, or as in the case of Kangerlussuaq, may cause the ground under the tarmac to melt. While the impact of these issues may not rise to that caused by rising seas, takeoff and weight restrictions, and more frequent tarmac repairs, all add up to substantial costs for airport operators – as well as disruptions to passenger and cargo transport. Higher cooling costs will be another obvious effect.

There will be other climate adaptation needs. ICAO notes that high wind, heavy precipitation and even lightning strike events that threaten facilities, and aircraft are growing more frequent. But dealing with water and heat will be the big two for airports.

Financing Implications. Adapting to climate change will require greater capital spending from airports, accompanied by greater uncertainty and low likelihood of associated revenue gains. The airport industry is already today a major infrastructure investor. According to Reuters, $260 billion in airport infrastructure projects are under construction worldwide. Those are big numbers, and climate adaptation needs will add more, as we can see from the costs of just the San Francisco and Hong Kong plans. The handful of 30-million passenger per year airports will most easily finance and absorb these capital costs. Issues are likely, however, to arise for the larger number of mid-size airports around the world. The problem they will face is that the capital costs for keeping water out are related more to geography than the volume of an airport’s operations, and mid-size airports may face similar adaptation-related capital costs to those of larger airports, but without the same revenue base over which to amortize them. It will be an expensive asymmetry for many airports. The second financial implication of adaptation, greater uncertainty, is also illustrated by the case of San Francisco – where in seven years the projected capital needed to hold off rising waters rose by a factor of ten as projected sea rise levels kept changing. “It’s going to be an evolving battle,” as says Patti Clark, a former airport manager who now teaches at Embry-Riddle College of Aeronautics. Capital expenditures needed for continued operations in 2050 may well look very different in 2030 than it does in 2020. These kind of investments also have the disadvantage they will not in themselves produce incremental revenues – they will just try to keep the ship afloat, so to speak.

Harvey Houston Airport flooding

Houston Airport after Hurricane Harvey

 

Lessons from the Venice Floods

Lessons from the Venice Flood
November 2019

venice-floods-2164704

Venice is famous for its “high waters,” or Aqua Alta. The city has also been famously sinking in the past few decades. But even by its wet standards, early November has been remarkable – very unfortunately remarkable. On November 6, Venice saw its highest floodwaters since 1966: about six feet over normal high tide. Famous monuments such as La Fenice and St Mark’s were partly under water; the Aqua Alta bookstore, loved by tourists and Venetians for its habit of using bathtubs, plastic bins and even a gondola to display – and keep dry – part of its book collections, couldn’t stay above water. At the worst of it, water rose 10 inches in the span of 20 minutes. Even Venice’s one vineyard, home of the unique Doroma grape, was under threat. Then over the following week the floods returned… three times. It was the worst week of flooding in Venice since 1872, and at its peak floodwaters were the second highest ever recorded in the city. Thousand-year old St Mark’s has been previously flooded… five times. As this is written, the city remains flooded.

Unusual for sure. Notable for the fame of Venice and its monuments, visited by millions of tourists, for sure. A lesson in that more and worse flooding is coming to many famous waterside cities, as discussed in Infrastructure Ideas’ recent post on Jakarta (see Capital Punishment), again for sure. And also a lesson in what flooded Venice says about infrastructure and adaptation to climate change.

Increased flooding is already with us in many places (inland as well coastal, as reviewed in our earlier column “Floods and Infrastructure Investment”), and billions of dollars are already being spent trying to adapt. Many more billions are on the drawing board of infrastructure planners: this summer Wired reported the projected cost of protecting (just) US cities from sea level rise at over $400 Billion. Globally cost estimates are approaching the trillions of dollars.

A few things are already apparent from the billions being spent to attempt to stave off flooding. One lesson: flood barriers can be expensive – very, very expensive. New York City’s rebuilding of the Rockway Boardwalk after Hurricane Sandy cost $70 million per mile, and that was just for repairs. The Thames Barrier, in place since the 1980s to keep London dry, cost about $2 billion in today’s dollars to install. Venice – for here the story takes its major, intriguing, lesson-filled turn – yes, Venice, has spent billions to date on one of the biggest flood barriers in the world, “an underwater fortress of steel,” as the Washington Post called it. As reported by City Lab

What makes this round of destruction especially frustrating is that Venice’s massive flood defense system is almost complete. Costing almost $6.5 billion and under construction since 2003, the Venice Lagoon’s vast MOSE flood barrier is due to come into service in summer 2021. A string of 78 raiseable barriers threaded across the lagoon to block tidal surge, the MOSE project represent Venice’s moon-shot bid for survival in a warmed world.

Flood barriers are expensive. Venice’s experience also illustrates a second lesson for cities contemplating this kind of infrastructure investment: like other very large infrastructure construction projects, they take a long time to complete, and completion schedules only change in one direction. Venice’s barrier has been under construction 16 years: the original completion date was 2011, eight years ago. Had it been in schedule, Venice’s libraries, frescoes and squares would probably not be underwater today. When it will be available for use is unclear, and projected final costs reach as high $9 billion.

A third lesson is that, like with other major infrastructure construction, large amounts of funding may not wind up going where they are supposed to go. Venice’s previous mayor was arrested in 2014 and accused (never convicted) of siphoning off large amounts of money intended for the construction. A few months ago, before the floods, there were reports that sub-standard materials had been procured, and that repairs would be needed before the barrier was even used (a similar issue is currently plaguing the effort to extend the Washington DC Metrorail to Dulles Airport).

It would be good if the bad news ended there. But it doesn’t. The severity of this month’s flooding in Venice raises a fundamental question. After the billions, when the barrier is finally complete, how long will it last? A couple of decades?

Infrastructure planners and policy-makers in cities worldwide will be looking at many more billions of dollars in infrastructure spending to adapt to climate change-induced coastal flooding. Venice’s lessons indicate this infrastructure will require finding a lot of capital – some cities will find it, others will need to turn to national governments or the private sector, in public-private partnerships — to find the money. The lessons also indicate that planning, and construction, need to start sooner rather than later. Floods driven by sea-level rise and extreme weather events are rapidly increasing in frequency and severity, and every new projection shows problems coming sooner than the previous projections. Venice shows that flood barriers are not easy or quick to put in place. Venice also shows that spending controls and corruption prevention efforts will be important – with a lot of money comes a lot of temptation.

There are, of course, alternatives. Many cities are discovering the importance of smaller-budget “green infrastructure” efforts as part of their adaptation plans. Expanding rather than shrinking planted, permeable surfaces, preserving wetlands and other natural water catchment areas, green roofs and many other approaches can help reduce the incidence and impact of flooding. These approaches have the advantage of reducing the need for multi-billion dollar, probably delayed and more expensive than planned, possibly of rapid obsolescence, highly-engineered infrastructure investments. To a point. This would not have been likely to affect Venice’s situation much, though for certain cities the impact might be large.

And then there is moving. Indonesia is taking that route with Jakarta (sort of). Even culturally and historically important buildings sometime get moved. I once saw the Piva Monastery, in Montenegro: a 16th century church with remarkable frescoes, it was originally built in the valley of the Piva River, then relocated – stone by stone – in the 1970s during the construction of a reservoir for a hydroelectric complex. Adapting to flooding, in this case, intentional.

Blue Coal ?

Blue Coal?
October 2019

In the first two parts of this series, Infrastructure Ideas reviewed prospects for the coal industry, and forecast that the decommissioning of coal-fired generating plants would become a major destination of infrastructure (and climate-related) investment before long. In this third and last piece of the series, we focus on some possible unexpected political fallout from coal’s situation.

The central development to consider, in understanding how the sunset of coal is likely to affect politics, is its lack of economic competitiveness. In past decades, with coal cheaper s a source of electricity than other alternatives, the logic to politics was to be anti-government: the biggest threat to coal economics, and to coal jobs, was seen as government regulations. Not surprisingly, the stronger climate and pollution concerns became, the more strident the anti-government intervention politics of coal became. But economics are a wholly different threat. Coal-fired generation in the US is shrinking rapidly. In Europe, a recent report claims 4 out of every 5 coal-fired plants is losing money (Apocalypse Now, by Carbon Tracker). With the change in economics, the politics will change too. In the US, the beginning of this change became visible in the first two years of the Trump administration, with the odd couple of a conservative White House – elsewhere completely focused on dismantling government regulations — advocating in this case for government intervention, in the form of price supports for coal-fired electricity. Again not surprisingly, this strange strategy was dead on arrival – it went against the grain of both strong economic trends and the rest of the Republican agenda.

As coal becomes both uneconomic and a growing target for climate change concerns, we are likely to see political realignment. Coal will receive public funding, as in the US the current Republican administration has sought. But it will receive it for different reasons, and driven by different politics. What we will increasingly see is a drive for the use of public funding not to keep coal going, but to shut it down. And, crucially for the politics, for using the public funding also to help adjustment of the workforce in the coal industry. For Democrats, using public funds to intervene in the economy has long been a staple of policy, and now counteracting climate change is as well. With the likely acceleration of public concerns over climate change (see part I of this series), decommissioning coal is also likely to become a top policy priority for Democrats. Which implies that both owners of coal plants, and workers in the industry – now facing large-scale closures and loss of jobs — will in the future look for support not to their traditional republican allies but to democrats. Money makes for strange bedfellows…

One of the western US states with many coal plants both coming to the end of their life and/or becoming uneconomic is Colorado, and the state has shown one replicable way forward in managing associated tensions that could work for other coal-intensive locations (see Colorado May Have a Winning Formula on Early Coal Plant Retirements). While coal has been a key source of both energy and employment for decades, Colorado has been seeing wind power purchase contracts coming in at extraordinarily low levels, between $0.015-0.025 per kilowatt-hour, and even bids to provide a combination of solar power plus storage at under 4 cents/Kwh – almost half the cost of what electricity from new coal-fired plants would be. Colorado’s new plan is to use securitization from ratepayer-backed bonds to pay out decommissioning plants, and then to reserve some of the bond income for helping workers in affected areas. The bonds pay out the equity base of old plants from the utilities. While this piece of the mechanism has been tested before, the important complementary part of Colorado’s approach is the creation of something called the “Colorado Energy Impact Assistance Authority,” which will focus on helping workers displaced by the decommissioning.

Another example of changing political discussions around coal can be found in Arizona. There one of the largest coal-fired plants in the US, the Navajo Generating Station, is closing due to the loss of customers. Utilities in the region have shifted to wind and solar to save money. A bill introduced last month in the US House of Representatives (see the IEEFA’s Bill to Spark Federal Post-Coal Reinvestment in Arizona Tribal Communities Is a Good Beginning) calls for federal economic development and revenue replacement in the wake of the collapse of the coal industry in northern Arizona. The bill would fund large-scale clean-up and remediation around both the plant and its associated mine, Kayenta, continuing employment for many of the current workers (the power plant and mine are by a wide margin the largest employers of Navajo, with about 750 workers between them). It would also retool the existing transmission infrastructure towards solar power generation. Funding would go to tribal and local governments to compensate for losses due to decommissioning under a schedule that would replace 80 % of lost revenue initially, reducing by 10% annually. The IEEFA review of the bill notes it “could very well serve as a template for broader bipartisan legislation supporting federal reinvestment in coalfield communities nationally, including in Kentucky and West Virginia and the Powder River Basin of Montana and Wyoming, regions that are taking disproportionately heavy casualties as power-generation demand for coal recedes and local coal-based economies adjust to new market realities.”

Of particular note is that the Arizona bill was introduced by congressman Tom O’Halleran – who began his career as a Republican, and switched to the Democratic party.

It is way too early to tell whether either the Colorado or Arizona approaches will be a model for other regions. But what is clear is that the issues the two states are addressing are going to become very widespread – and faster than most people realize. It is also clear that similar approaches – with public intervention to accelerate and smooth the transition away from coal – will be the only alternative to bankruptcy for plant owners and unmitigated layoffs for workers. And it is clear that the amount of public resources needed to help both owners and workers will be very large. Not something a party bent on shrinking government is likely to manage. Look for coal country to start turning… Blue.

The Coming Decommissioning Wave

The Coming Decommissioning Wave
October 2019

Our previous Infrastructure Ideas column (What Next for Coal?) outlined the (declining) state of the coal-fired electricity generation business. Driven until now by the age of plants and weakening economics, this decline is about to be sharply accelerated by climate concerns. An important consequence of this acceleration will be the impact and costs of decommissioning old – and not so old – generation facilities. The funds required for this decommissioning will be in the hundreds of billions of dollars. Decommissioning, in fact, will likely become one of the largest areas of infrastructure-related financing in the coming decades! Why is this going to happen, and how will it work? Read on…

Power plants close all the time. Since 2000, over 3,000 generating units have closed just in the United States. Historically these closures have been primarily end-of-technical-life retirements, with the post WWII building boom and average expected plant life of around 40 years. More are scheduled to close in coming years: another 6,000 plants in the US have been in production over 40 years, representing about 1/3 of national generating capacity.

What has begun to change is the rationale for closing generating plants. Already, economics – as opposed to just end-of-technical-life – has become a major factor in closing facilities. This is a predictable outcome of a sector which has gone from essentially stable to highly dynamic – driven by technology change (see Not Your Father’s Infrastructure). As prices of electricity from newly-built plants continue to plummet, the higher costs of power from older generating plants are becoming much more visible and problematic for buyers and policy-makers.

The first group of generating facilities to feel this economic pressure has been, interestingly, wind farms. The early generation of wind farms, often built to meet local environmental concerns and with output priced at a premium in most electricity markets, are now vastly more expensive than the newly-built wind farms (or solar). As they come to the end of their initial sales contracts, keeping these wind farms in service is economically unattractive. The first of these farms were coming on stream in the late 1990s, often with 15- or 20-years Power Purchase Agreements and typically being paid on the basis of pre-set Feed-in-Tariffs; they are now coming to the end of those contracts. 2015 was the first year that saw considerable wind farm retirements in the US, with an average plant life of 15 – as opposed to 40 – years. Germany, a country which was an early leader in pushing a “green energy” agenda, has a large-scale version of this issue. 20-year FITs will expire beginning in 2020 for over 20,000 onshore wind turbines, with a collective capacity of 2.4 gigawatts. Owners face decisions of whether to retire the wind farms or repower them (another potential option involves corporate PPAs, along the lines of the recent contract signed between Statkraft and Daimler, whereby Daimler will buy – for a 3 to 5-year period – power from wind farms whose guaranteed FIT contracts are expiring). Elsewhere, repowering of wind turbines has become a major business. Repowering began as replacement of old turbines with taller, and more efficient machines on existing sites; today operators switch even newer machines for larger and upgraded turbines or replacing other components. This makes sense where acquisition of land for new sites may be difficult, and where revenues are contingent on being able to compete with new lower-cost alternatives. In 2018 over a gigawatt of wind capacity was repowered in the US, and an estimated half gigawatt was repowered in Europe. The economic pressure to replace early-generation and more expensive renewables with new and cheaper plants extends well beyond Western Europe and 20-year old wind farms. FITs, the preferred first generation of purchase contracts for wind farms and some solar, have come to be seen as highly unfavorable to buyers, as costs of new equipment kept falling. Spain in the early 2010s, Portugal and several Eastern European countries either forced retroactive changes to purchase contracts or terminated them prematurely, trying to reduce the fiscal costs of expensive early renewable contracts. Yet even with competitive auctions replacing FITs, there remain economically-based risks to contracts. In India, the new state government in Andhra Pradesh has sought to terminate purchase contracts for solar power which are less than five years old. As prices for new solar and wind capacity, and for associated storage, continue to fall, this pressure will be more widespread.

The bigger losers from the economic pressure to switch power supplies, however, are clearly producers of thermal power. In the few places which still reply on oil to fire generation plants, the cost differential between existing supply and new alternatives is massive. In Kenya, the Government has announced its intention to shut several expensive oil-fired plants, starting with long-established and pioneering IPPs such as Iberafrica, Tsavo and Kipevu-diesel. With Senegal and other relatively small markets demonstrating that the option of below 5 cent/kilowatt-hour solar is a reality practically everywhere, we should expect a wave of closures of older oil-fired plants – whose costs run upwards of 15 cents/KwH. Globally, though, oil-fired plants make up a tiny part of electricity capacity. The biggest losers are rather in coal.

Many coal-fired plants have been closing for end-of-life technical reasons. From 2000 to 2015, over 50 gigawatts of coal-fired capacity was closed just in the US, with average closed plant life of over 50 years. More recently, coal – long seen as the cheapest form of electricity supply – has also begun to be supplanted on economic grounds. In the US natural gas-fired plants have come to be widely preferred. Endesa, in Spain, announced two weeks ago that it would shut down 7.5 gigawatts of coal power; the main reason cited was declining competitiveness, noting that its sales of coal power had declined 50% in the previous year. These are large amounts: Endesa has flagged a write-down of over $1 billion related to the retirements. Yet these amounts are still ripples compared with the coming wave.

What will drive a major acceleration of coal-fired plant closures is the continued worsening of economics, and a third factor, coming on top of technical retirements and economic pressures. This third factor is climate concerns. On economics, as discussed in our previous post, various analyses in the US show that costs of electricity could be reduced by closing between 1/3 and 2/3 of the existing coal fleet today, with that share rising to 85% by 2025 and 96% (about 250 gigawatts) by 2030. Regardless of how precisely accurate these estimates are, it is fairly clear that an amount of coal-fired capacity far larger than that retired since 2000 is or is about to become uneconomic compared to alternatives. Coal is not getting cheaper, but wind and solar, and storage, continue to get much cheaper. The big killer, though, we expect will be climate concerns.

The latest IPCC report, along with several others issued in conjunction with last month’s Climate Week, is fueling more concerns about the pace and likely extent of climate change. New data on the pace of climate change and GHG emissions levels is alarming. Every new analysis shows climate change is proceeding faster than previously expected, and pathways to lower-impact carbon concentration and temperature change require larger shifts than in previous analyses. The International Energy Association’s latest annual review found that as a result of higher energy consumption, 2018 global energy-related CO2 emissions increased to 33.1 Gigatons of CO2, rather than decreasing as they had from 2014 to 2016. The IEA also found that climate change is already causing a negative feedback loop in emissions: they estimated that weather conditions were responsible for almost 1/5th of the increase in global energy demand, as average winter and summer temperatures in some regions approached or exceeded historical records – driving up demand for heating and cooling alike, while lower-carbon options did not scale fast enough to meet the rise in demand. Another report coordinated by the World Meteorological Organization, says current plans would lead to a rise in average global temperatures of between 2.9C and 3.4C by 2100, more than double the level targeted in the Paris agreements. The trend seems clear, and before long public concerns will drive much more aggressive public policies.

Coal-fired power generation continues to be the single largest emitter, accounting for 30% of all energy-related carbon dioxide emissions. In all analyses, phasing out coal from the electricity sector is the single most important step to get in line with 1.5°C, and recommendations are getting steadily more strident and draconian. Canceling potential new coal plants will clearly not be enough. Another report from last month, this one by Climate Analytics states that although the new coal pipeline shrunk by 75% since the adoption of the Paris Agreement, to get on a 1.5°C pathway will require shutting down coal plants before the end of their technical lifetime. The report’s models show 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 1.6 Terrawatts (1,600 Gigawatts) of generation capacity. Still another report modeled the need for emissions from coal power to peak in 2020 and fall to zero by 2040 if the world is to meet the Paris goals. Shutting down so much coal-fired generation capacity is a tall order. Yet the political pressure in this direction is building. Several countries in Europe have announced coal phase-out plans: France for 2022; Italy, the U.K. and Ireland for 2025; Denmark, Spain, the Netherlands, Portugal and Finland for 2030, and Germany for 2038. Even coal-rich South Africa is studying a plan involving substantial closures.

This potential decommissioning wave would be very expensive. Closing a coal-fired plant is a high cost exercise. The write-down associated with Endesa’s closures in Spain, noted above, comes to about $200/ KW of capacity. Resources for the Future in 2017 issued a detailed analysis of decommissioning costs for power stations in the US, coming up with a range of observed costs for coal of $21 to $460/KW of capacity, and a mean cost of $117, and estimated future decommissioning costs of between $50-150/ KW. These estimates are slightly lower than the costs indicated by Endesa, but are in the same ballpark, and we can get a rough idea of aggregate costs by applying a midpoint (say $100/KW) to the global coal fleet. This gives us the following projections:

• For retiring 250 gigawatt of coal generation capacity in the US, an implied a cost of $25 billion.
• For retiring 1,600 gigawatt of coal generation capacity around the world, an implied cost of $160 billion.

These costs are large… but are only a part of the picture. The analysis here includes the engineering specific costs, essentially technical and environmental costs associated with shutting down a plant, and cleaning up its site. It does not include other important costs associated with decommissioning, namely labor force and community adjustment costs, and – most critically for newer facilities – foregone revenue and breakage costs. For worker retraining and support, and adjustment funding for affected communities and regions, there are no clear estimates available. Germany’s decommissioning roadmap calls for about $40B in support to affected regions over 20 years, so we can see that the numbers – assuming governments aim to help – are not small. That $40B is greater than the estimated technical costs of retiring the entire US coal fleet. For a ballpark estimate, we could then say:

• For retiring 1,600 gigawatt of coal generation capacity around the world, an implied cost – including community/regional adjustment support — of $300 billion or more.

This still leaves the cost of foregone revenues for those who built and own the plants. In markets where many of the plants are approaching technical end-of-life, these costs may be low. Same in merchant markets where coal is losing customers on the basis of economics, and renewables and/or gas-fired plants are reaching significant scale. But in Asia, where the average age of the coal-fired fleet is closer to 10 years rather than 40, this is going to be a significant factor. If one assumes each megawatt of coal generation capacity has cost about $1M, and has associated equity of around $250,000 and debt of around $750,000, we can do a back-of-the envelope estimate of breakage costs for some 800 GW of “younger” Asian coal plants:

• At an annual rate of return target of 7.5%, with 30 years yet to go, potential future flows to equity over 30 more years would amount to about… $500 billion.
• Assuming average initial debt maturities of about 15 years, so that 2/3 of debt would already be repaid, this would leave outstanding principal debt in the range of … $200 billion

Obviously there are multiple assumptions embedded throughout these estimates. What they serve to show, however, is that the costs associated decommissioning the existing global coal fleet over the next two decades – assuming public opinion and politics coalesce around the issue, which we expect to happen – are very high. As in close to $1 trillion. Not to mention another trillion or so to build substitute renewable energy generation capacity. Annual investment today for comparison, around the world, in renewable energy? Less than $300 billion.

There are a few ideas already, at a local level, about how decommissioning costs might be funded. Germany’s roadmap includes reverse auctions for closure subsidies, where those bidding for the lowest amount of support would get funding. Eventually, plants not winning support at these auctions would be forced to close without state subsidies. Costs of legal challenges have not yet been considered. South Africa’s potential roadmap envisages donor and financial institution support to create a fund, managed by Eskom, to finance adjustment in coal-heavy parts of the country, support workers, and help balance Eskom’s finances during the transition away from coal. Colorado has a plan whereby securitization from ratepayer-backed bonds would pay out plants, and some of the bond income would go for helping workers in affected areas.

However these ideas play out, one thing is highly likely: decommissioning coal-fired plants will become a massive competitor for infrastructure-related financing in the coming two decades. The public portion of these costs – whether through a Global Fund, country-or regional specific vehicles, or just government spending – are very likely to exceed cumulative subsidies offered to renewable energy projects in their early years. A lot of funding, and a lot of creativity, will be absorbed here.

What Next for Coal?

What next for coal?
October 2019

On November 9, 2016, many coal companies threw a party. As a candidate, Donald Trump repeatedly told cheering crowds he would “stop the war on coal,” bring back coal mining jobs and revitalize communities in the Midwest and Appalachia that depended on coal mines. Shares of mining and associated equipment and transport companies soared overnight. The late Chris Cline, once described as the “last coal tycoon,” was so pleased that he immediately contributed a million dollars to the inaugural celebration for Trump.

The party’s over.

Production of coal in the US in 2019 is forecast to be the lowest in 40 years, and has fallen 30% since 2010. Bankruptcies of previously celebrating companies are coming almost monthly. In May of this year, Cloud Peak Energy — one of the largest US coal miners, declared bankruptcy; its mines shipped 50 million tons of coal in 2018. In the recently concluded bankruptcy auction, lenders to Cloud Peak will get $16m in cash… for their over $300m in outstanding debts. In July, another large producer, Blackjewel, also filed. Large mines in the Powder River Basin and the Eastern US were closed. Two more large producers, Arch Coal and Peabody Energy, agreed in June to consolidate their seven mines as a strategy to remain in business. All of this 2019 activity comes on the heel of the October 2018 bankruptcy filing of Westmoreland Coal, the largest independent coal producer in the US: there being no bidders at auction, creditors holding $1.4 billion in claims have been left to try operate the company’s assets themselves to try and recover some cash.

The problem for the mines is the departure of customers, especially in the power industry. In the same US where Trump pledged to bring back coal, no one is investing either in coal-fired plants or coal mines. But plenty of these are closing, accounting for almost half of all coal-fired power plant closures worldwide. And as reported in September by Energy and Environment News, the size of the closed electricity plants is increasing (And Now the Really Big Coal Plants Begin to Close). Navajo Generating Station, which closed the first of three of its units in late September, will be one of the largest carbon emitters to ever close in American history. It will join the Bruce Mansfield plant in Pennsylvania and the Paradise plant in Kentucky as plants that have emitted over 100 million tons of carbon dioxide since 2010 and that will have shut down. Multi-state western utility PacifiCorp announced last week that it would close large power-fired plants in Montana, Colorado and Wyoming – in one case two decades ahead of schedule. In the Southeast US, the picture is the same as in the West: a report this week from IEEFA (Coal-Fired Generation in Freefall across Southeast US) notes a net decline of 48 since 2008 in the number of coal-fired generating plants in the region, with the share of coal generation dropping from 48% to 28% during that period.

The White House narrative on coal was, and continues to be, about regulation. But what happened to coal was not regulation – it was technology. First came the new technologies for drilling for natural gas (commonly lumped under “fracking,” but in practice a much broader set of technology breakthroughs, especially related to imaging of underground deposits), which increasingly made new coal-fired electricity generation uncompetitive with gas-fired electricity. Natural gas plants could also be turned on and off far faster than coal-fired electricity generators, meaning that gas rather than coal was in demand to act as “peak capacity,” when hourly demand from consumers would be above average and need to be closely matched by production. Then came the technology breakthroughs that drove down wind and solar generation costs, enabling electricity from new wind and solar plants to come in at costs less than half that from new coal plants. With new technology also sending energy storage costs plummeting, it will only get worse for coal.

Outside the US, the story for coal is similar: many country-level variants, especially in Asia, but the direction is the same. A report from Global Energy Monitor noted that the number of coal plants on which construction has begun each year has fallen by 84% since 2015, and 39% just in 2018, while the number of completed plants has dropped by more than half since 2015. Infrastructure Ideas’ series on the energy transition in Asia outlined how key policy choices under consideration may affect demand in many of the handful of countries where possible new coal generation is concentrated, namely India, Indonesia, Bangladesh and Pakistan. A study by Carbon Tracker estimated that nearly half of China’s existing coal power fleet is losing money, and that it will become more expensive to operate coal in China than to build new renewables by 2021. A report issued in March by Energy Innovation and Vibrant Clean Energy claimed that replacing 74% of US coal plants with wind and solar power would immediately reduce power costs, at times cutting the cost almost in half. According to the analysis, by 2025, over 85% of coal plants could be at risk of cheaper replacement by renewables. Carbon Tracker came up with similar in a November global analysis of 6,685 coal plants. This found that it is today cheaper to build new renewable generation than to run 35% of coal-fired plants worldwide. By 2030, that increases dramatically, with renewables beating out 96% of today’s existing and planned coal-fired generation. Exceptions remain only in markets with extremely low fuel costs, where coal is cheap and plentiful, or with uncertain policies for renewables, like Russia.

For coal-based power companies, there is no longer much of a future in planning and building new plants. Revenues are declining as a number of existing plants are retired as they reach end-of-life, as we keep seeing in the US. With prices of electricity from natural gas-fired plants remaining low, and prices from new wind and solar plants continuing to fall, more existing coal-fired plants are becoming economically uncompetitive, and either running at low capacity or also being closed, though their technical end-of-life may still be several years away. So the future looks increasingly unprofitable.

There may, however, be an unexpected silver lining. Coal-based power producers may well have another big potential revenue stream out there. Just not the one anyone has been foreseeing, or one that has been there before. That potential source of new revenue? Getting paid to take plants offline. Sound odd? Indeed. There are, however, two big building blocks towards this possible future.

1) There’s a lot of coal left to retire, even with fairly high current retirement levels. China has more than 1 million Megawatts, or 1,000 Gigawatts, of capacity operating or under construction, while the US has over 250 Gigawatts left and the EU has over 150 GWs. And key policy choices in some Asian countries may lead to yet more build-out for a time.

2) Political pressure for action is going to get very high. New data on the pace of climate change and GHG emissions levels is unidirectionally alarming. Every new review of climate change finds it to be proceeding faster than previously expected, and emissions levels remain well-above scenarios for lower levels of temperature rise. With every passing year, potential mitigation plans will become more and more aggressive, calling for faster and deeper cuts in emissions.

Faster and deeper cuts in global GHG emissions are highly unlikely to be achievable without early retirement of the large existing coal-fired fleet. And changing economics do not always translate rapidly into retirement of existing producers. Which makes it likely that at some point, in the not too distant future, closing existing plants faster than they would close on their own will become a top public policy priority. Closing existing plants might be done by political fiat, or, it could be done by paying coal-fired plants to go away. It may well prove that paying them could be a faster way to achieve closure, avoiding drawn-out litigation around contractual rights.

For coal executives, the best hope for offset continued revenue decreases may well be to hope for the creation of a publicly-funded “close coal plants now” funds. It does sound odd, but it may well be their best bet. And in the US, which political party is most likely to favor using increased public funding to achieve a policy objective? It’s not the current occupants of the White House.

Difficult to conceive, but it may come to be: coal executives for… Democrats?

Infrastructure Ideas will explore these plant retirement issues in its next two posts of this series: The Coming Decommissioning Wave, and Blue Coal?

Capital Punishment

Capital Punishment (or, so long, Jakarta)
September 2019

During the last week of August, President Joko Widodo announced that Indonesia would develop a new capital city in Borneo, and move government offices there from Jakarta, Indonesia’s historic capital. The combination of Jakarta’s own sinking – as it pumps so much water from its underground aquifer that part of the city is subsiding a foot a year – and a rising Java Sea, has spelled the end for one of Asia’s largest cities (Jakarta is sinking so fast, it may wind up underwater). This big decision will have immense repercussions – and Indonesia may well prove to be a trendsetter.

Who’s Next?
Jakarta may be the first capital to be relocated as a consequence of climate change, but it will have company soon. For those looking at Jakarta as an aberration, let’s look at two things. First, nearly two-thirds of the world’s major cities are on a coast: Shanghai, Hong Kong, Mumbai, Shenzen, Singapore, Stockholm, Barcelona, New York, Los Angeles, Miami, Montevideo, Dar Es Salaam, Capetown, Algiers, and a list way too long to continue. Second, expectations for sea level rise. For those who don’t look at this issue often, well, fasten your seat belts. At the time of the Paris Climate Summit in 2015, expectations for sea level rise to 2100 tended to see 3 feet as a maximum, with rise in subsequent centuries depending on emissions. By the end of 2017, two years later, 3 feet was beginning to be seen as a minimum sea level rise for the century, rather than a maximum. NOAA (the National Oceanic and Atmospheric Administration), supposedly an authority, projects 8 feet. Maximum potential sea level rise by 2100 in some studies, in the lifetime of most of today’s younger generation? 20 feet.

Twenty feet higher shorelines sound far more threatening than three feet. Which will be right? Well, unfortunately, it’s very hard to tell. And the projections are changing rapidly. Part of the answer depends on GHG emission scenarios in the future. But a very big part of the answer depends on how fast ice melts where it locks up water in glaciers. A key problem in looking ahead, as well-framed by David Wallace-Wells in his excellent book, The Uninhabitable Earth, is that the break-up of ice represents an entirely new physics, never observed in human history and still poorly understood. When we look at what is actually happening with ice melt, it paints a grim picture. A new study in 2018 found that the melt rate of the great Antarctic ice sheet tripled from 1992 to 2017, a pace which makes 20 feet by century-end is no longer out of the question. The Greenland ice sheet alone is losing almost a billion tons of ice every day. And in 2017 it was discovered that two glaciers of the East Antarctic sheet were losing 18 billion tons of ice a year; if/when both go, scientists expect 16 feet just from the two glaciers. Sound bad? Projections are getting worse, quickly. Melt of the two Antarctic ice sheets – parts of which are visibly melting far faster than had been anticipated only a few years ago — could raise sea level by 200 feet. And as science journalist Peter Brannen noted, the last time the earth was 4 degrees warmer, sea level was 260 feet higher.

How threatening all this is also depends on expectations of time. 2100 sounds very far away, even though a substantial portion of people alive today will be alive then. Sea level rise, in most people’s understanding, will be very slow, and there will have been plenty of time to “solve” the problem. However… The other piece we’re learning about in terms of ice melt is, well, it can happen not so slowly. As noted by Bill McKibben in his latest book, Falter, in the distant past, sea levels often rose and fell with breathtaking speed. 14,000 years ago, at the end of the Ice Age, huge amounts of ice thawed, raising the sea level by sixty feet, with 13 feet perhaps having come in a single century. Last month, Scientific American highlighted a study which articulated the direction in which projections are clearly heading:

Scientists have been underestimating the pace of climate change. It was reported recently that in the one place where it was carefully measured, the underwater melting that is driving disintegration of ice sheets and glaciers is occurring far faster than predicted by theory—as much as two orders of magnitude faster—throwing current model projections of sea level rise further in doubt. When new observations of the climate system have provided more or better data, or permitted us to reevaluate old ones, the findings for ice extent, sea level rise and ocean temperature have generally been worse than earlier prevailing views.

For those who have lived or traveled in the American northwest, the recent understanding of the glacial floods which shaped the basin of the Columbia River has some sobering resonance. Geologists now understand that the mechanics of that ice melt, when the glaciers of then Lake Missoula were thawing, were such that melt built-up behind a wall of ice, and when that plug let go, water rushed out of the melted glacier down the valley in a wall estimated to be… 2,000 feet high – enough water fast enough to have emptied the equivalent of Lake Michigan in two days.

So, if you worry about 4-8 feet rise in sea levels, things could be a lot worse! And even 4-8 feet, while it may be very aggressive compared to other projections, means that as much as 5% of the world’s population will be flooded every single year.

The move
What is Indonesia doing, then? How will the change of location of the capital work? Much remains unclear, but announced plans call for construction of the first phase of the new city to begin in 2021 and to be finished by 2024. The entire city, targeted for completion in 2045, will occupy about 495,000 acres of land, twice the size of New York City. The proposed location in Borneo is near the relatively underdeveloped cities of Balikpapan and Samarinda. President Widodo noted that moving the country’s capital will be a mammoth and expensive undertaking. Estimated cost, according to the planning agency: US$34 billion. Chances of that being the final cost? Very low.

To fund this move, the Government has flagged some interesting ideas. Which, somewhat strangely, rely heavily on leaving Jakarta itself (the city, not the “capital”) where it is and selling land there to the private sector. This envisions a national capital move somewhat like those to Brasilia, or Abuja, where “just government” moves. A Finance Ministry official said the leasing of government-owned land and properties in Jakarta to private companies could help it raise 1/3 of the amount needed to develop the new capital site. On top of that private companies could be given a property such as a ministerial building in Jakarta in exchange for building a similar facility in the new capital, and government-owned land and properties in Jakarta could be sold to private companies. In fact, the Government has announced that it will spend more (!) money “rejuvenating” Jakarta than it plans to spend on the new capital. This includes US$22 billion for the development of public transport such as the extension of the Jakarta mass rapid transit and light rail transit network, $6B for delivering clean water to all city residents, and $5B for flood mitigation.

Homeowners across the world affected by rising seas, or at this stage just by increased flooding from extreme weather events, have been faced by the “stay or move” dilemma driving Indonesia’s move of its capital. Most respond to this choice with “stay”, at least initially, and many residents of Jakarta are in that camp. It is very expensive for homeowners to respond with a “stay and move” approach, as Indonesia has for now announced. Chances are pretty good that it will prove too expensive for Indonesia. And, given how projections for sea level rise are getting worse, the appearance of there being a choice may be illusory. We’d give pretty strong odds that not much will be happening in Jakarta by the end of the century (one model shows 95% of north Jakarta underwater by 2050). Yet this same dilemma is coming soon to a city near you. A late 2018 report stated Los Angeles would need to spend at least $6B to avoid slipping into the sea. Last month Wired reported the cost of protecting US cities from sea level rise at over $400 Billion. Even in the wealthy USA, it’s not clear where this kind of money might come from. Voters of high-income San Francisco approved a $425 million climate change protection bond — to pay for only 1/4 of the costs of fortifying a seawall. China may find the money to fortify Shanghai and Shenzen, and Singapore may also figure it out. But for capitals of low-to-mid income Emerging Markets, like Indonesia, where the money comes from will be a huge issue — soon. And without money to fund the “stay” option, or with “stay” being perhaps at best a delay in the inevitable “move,” chances are pretty good that a much higher percentage of affected low-to-mid income than OECD country capitals will move – or drown…

Infrastructure implications
The infrastructure implications of moving a capital city are, of course, major. It’s not just people who need to be moved, but power plants, ports and airports, which are also affected by sea level rise. Then new roads, water and sanitation fixed infrastructure will be needed wherever the new capital is located. Each part of that infrastructure is likely be somewhat different. Thermal power plants, often located near demand center capital cities, may have somewhat lower moving costs – the assets can be moved and used in a new location, or it may in any case be cheaper to replace them with lower-cost renewables, depending on the situation. Ports may stay put, as they’re by definition a coastal asset, so costs will relate more to raising of facilities, and so be lower than greenfield assets. Airports likely will need to be rebuilt as greenfield near the new capital, so will have the same higher price tag as roads, water and sanitation. To some extent, urban transport infrastructure in a newly designed city may benefit from new mobility technologies which have arisen in the last few years — though it is unclear whether benefits would be mostly from increased access and user convenience, or also in terms of lower capital costs. Water and sanitation will probably be more expensive than earlier investments, as both coastal and inland cities are likely to need flood management investments from more intense rainfall events. But even without numbers, or more precision, one can tell that moving a capital is going to be an expensive proposition.

Adaptation to climate change will have very large implications for infrastructure. Many more coastal cities will be faced with the kind of decision Jakarta has made. If they “stay,” there will be significant new infrastructure to protect themselves against sea level rise, and spending to protect (or in some cases “move”) existing infrastructure. And as seas continue to rise, the decision points and spending needs will keep recurring. If they “move,” then like “new Jakarta,” there will be massive spending for infrastructure in their new location. Some cities may, of course, do nothing. In which case, future refugee movements may well dwarf those which are already stirring politics in so many countries.