The Carbon Capture Business

September 2021

If you want to become the next Elon Musk, success in one infrastructure business will guarantee your untold riches: Carbon Capture.  The only catch?  Still being alive when it’s time to cash in.

At the rate efforts to stem carbon emissions are going, and observing how changed climate just from GHG emissions to date is affecting hundreds of millions across the globe, many parts of planet earth will become more and more unpleasant to live in.  The latest IPCC report sounded its loudest alarm bells to date, and yet there are few political signs that getting gas-guzzling cars and trucks off the road, or shutting any significant fraction of the world’s coal-fired generating plants, is going to happen anytime soon.  In the best of political will and consensus cases, we’ll still have way too much carbon in the air for the planet’s climate to be as we would want it – soon, and for centuries.

Enter Carbon Capture.

The idea of sucking some of that excess carbon out of the air — negative emissions — in order to reduce global warming has been around for a couple of decades now.  Working prototypes first started appearing around 2015, and the biggest carbon capture plant to date was turned on just this week, in Iceland.  It can actually work.  At a very small scale, and a very high cost – for now.  In today’s post, we’ll have a look at where this business is, and where it might be going.

Carbon capture comes in two basic flavors: point-specific, and general.  Publicity and early investment have been more focused on the former, notably carbon capture facilities being tied to coal-fired generation – often referred to as CCS, or Carbon Capture and Storage plants.  There are currently some 20 CCS plants in operation worldwide, with a combined capacity of about 40MT of CO2 per annum.  The first large-scale facility was installed in 2014 at the Boundary Dam coal plant in Saskatchewan.  The track record of these early efforts has been… mixed.  While technical performance has generally been in line with expectations (an efficient CCS facility should be able to remove some 90% of an associated plant’s CO2 emissions), the overall economics have been marginal.  A highly publicized effort to incorporate CCS onto coal-fired generation by Duke Energy was abandoned, and the PetraNova plant in Texas, the largest in the world when launched in 2017, was shut down earlier this year for losing money. 

PetraNova CCS facility

The International Energy Association (IEA), among others, remains bullish on CCS.  While public attention has been primarily on CCS in conjunction with power generation plants, CCS can be applied to many kinds of industrial processes with GHG emissions.  Facilities tied to plants which produce more concentrated CO2 streams – such as ethanol or natural gas – require less energy to separate out carbon for subsequent storage, and thus have significantly lower costs than those tied to power generation.  The IEA notes that after a time of declining investment pipelines, plans for more than 30 new integrated CCS facilities have been announced in the last three years, with a combined CO2 capture capacity of around 90 Mt per year.  That, however, is still less than 0.1% of estimated global CO2 emissions.  The IEA stated earlier in 2021 that carbon-neutrality by 2050 would require the capacity to remove 1 billion tons of CO2 from the atmosphere every year.  A recently issued report by the National Academies of Science puts that number 10 times higher, at 10 Gigatons per annum.

This week public attention has been on the other “flavor” of carbon capture, non-point-specific carbon capture, often referred to as Direct Air Capture (DAC).  Instead of being located alongside a specific source of emissions, DAC facilities can be sited anywhere – often near potential carbon storage sites, and extract carbon from the atmosphere itself.  According to Bloomberg New Energy Finance, the current global capacity of DAC is 6,415 tons of annual CO2 capture, to which the September 8th launch of the Orca Climeworks plant in Iceland will add another 4,000 tons: a big jump, yet still a tiny fraction of the capacity of point-specific CCS technologies, which themselves are a tiny fraction of the excess CO2 in the atmosphere.

Climework’s Orca DAC plant — Iceland

There are plans for DAC capacity to get bigger, much bigger, and we’d say the force is with DAC.  There are three main players as of now – Climeworks, Carbon Engineering, and Global Thermostat.  Bloomberg NEF says their capacity will “increase 150-Fold by 2024.”   That would be the year in which Carbon Engineering plans to open a 1 million TPA facility.  While this would still lag the impact and capacity of point-specific CCS technologies, we think that DAC has a couple of decisive advantages over CCS in the medium to longer term.  The first advantage is location: a DAC plant (which essentially looks like a shipping container) can be placed anywhere, and extract CO2 that entered the atmosphere from any number of sources.  At the far larger scales on the road to removing 1 billion tons per year, or 10 times that, from the atmosphere, not being tied to power generation or other industrial processes will become a big advantage.  The second big advantage will be political attractiveness.  In the next 1-2 decades, as political pressure to take action grows in tandem with global warming and its impacts on populations everywhere, and extracting carbon from the atmosphere gets seen more and more as one essential part of the solution, DAC will be a far more attractive place to channel global investment and subsidies.  It is not that DAC doesn’t have a moral hazard problem – it’s just that DAC’s moral hazard is and looks far, far smaller than that of point-specific Carbon Capture.  Some degree of public subsidy and support has flowed to CCS – the IEA says $2.8 billion in public grants have accompanied the $15 billion in private investment in already commissioned CCS plants, and places like Wyoming and North Dakota are lobbying hard for more.  But environmental opposition to such support is already fierce – as it “rewards” large polluters directly, and scaling up such public support is going to be extremely difficult politically, if not impossible.  In contrast, DAC doesn’t reward any polluters, and its own scale won’t be significant early enough to really impact the political debates around taxing, decommissioning or prohibiting fossil fuel usage.  Yet the political demand for removing carbon from the atmosphere, just to make the problem less bad in the coming decades and beyond, will become huge – and DAC is far more likely to be the beneficiary of tax monies channeled to attacking that problem.

Issues

Several obstacles stand between today’s small-scale DAC and an eventual large-scale flood of public support and investment.  Leaving aside the combination of moral hazard and the creation of public subsidies, chief among the obstacles are (i) costs, (ii) energy intensity, and (iii) what to do about the carbon.

DAC costs and business model.  DAC is for now the most expensive of carbon capture technologies.  According to Christopher Gebald, co-founder of Climeworks, current costs run at $600-800 per ton of CO2 extracted from the atmosphere; CCS costs related to power generation might run at 10-15% of this, between $60-120 per ton, while CCS costs related to more “pure” forms of CO2 emissions such as ethanol production can be as low as $20/ton (still leaving costs related to carbon separation and storage).  Revenues are far lower, with the largest source presently from selling to oil companies for enhanced oil recovery – but even that isn’t high enough to keep some CCS plants in operation, and it is hard to envisage the petroleum industry paying much more.  Some CO2 is recycled to industrial producers which use it as feedstock.  Global Thermostat sells its DAC-derived carbon dioxide to soft-drink producers, but it is also hard to envisage a large-scale business model around this.  For now, the economics of decommissioning coal fired plants is more attractive.  The business model of DAC, however, may become more positive.  Economics of scale will be a big factor: the Orca plant in Iceland was made entirely by hand; as demand and volumes increase by orders of magnitude, it should become far cheaper to build DAC plants, as we’ve seen happen in other technologies such as battery storage.  Gebald of Climeworks projects costs at around $200-300/ton by 2030, and $100-150/ton by 2040.  Steve Oldham, CEO of Carbon Engineering, claims that his company is already capable of building plants with costs closer to $100/ton.  On the revenue side, larger, commercial-scale plants will allow DAC players to sell offsets to firms looking to reduce their emissions.  But public sector payments are still likely to be the big revenue source for DAC.  The first steps in this direction in the US were taken this Spring, with the passage of the 45Q rule, which provides a tax credit of $50/ton for captured and sequestered CO2.

Energy Intensity.  Direct Air Carbon Capture is highly energy intensive – mostly a function of the fact that CO2 is a small fraction of the air DAC absorbs, meaning that energy needs for separation of the carbon are high.  How energy intensive?  Research firm Carbon Brief claims DAC could account for as much as 25% of global energy consumption by the end of the century (direct CO2 capture machines could use a quarter of global energy in 2020).  DAC technology, however, is still far up the learning curve.  Liquid solvents for example require a far lower temperature to run separation processes, in which case waste heat – at near-zero marginal cost – could become a replacement energy source.

What to do with the carbon?  Storing the extracted carbon presents challenges.  The issue is less the existence of potential underground storage with appropriate geology (less prone to re-release of the carbon than, say, forests which might get consumed by fires), and more with the need to get the carbon from where it is extracted to where it is stored.  This is especially an issue for CCS, whose location is determined by emission sources such as power or industrial plants.  A big part of costs and land issues for CCS, if this should scale up substantially, will be pipeline networks to transport the extracted carbon.  Such pipelines exist today (piping carbon to oil fields for enhanced recovery), and studies are underway in several places for this kind of infrastructure at a larger scale.  This should be less of an issue for DAC, which can be sited closer to storage areas, requiring far less transport infrastructure and investment.  DAC is also less land-intensive than solar or wind farms, and unlikely to compete with other priority land uses, like agriculture. 

The impact that carbon capture technology will have on reducing carbon in the atmosphere, over the next two decades, is likely to be… minuscule.  Which, paradoxically, may help make it an even bigger business than it would otherwise be… maybe by 2050.  By 2050 (and certainly way before), the political pressure to remove large amounts of GHGs from the atmosphere will have become enormous – unlike the tepid interest which the idea now attracts.   By then DAC technology should have sufficiently matured to be more economic to operate, and be able to grow faster with fewer subsidies.  As heat waves, mega-fires and super-storms occur in more places and more frequently than we’d want to imagine at this point – along with whatever other climate problems may be in store as global temperatures rise – there could literally be no end to the appetite for building more and more carbon capture machines.  In the second half of this century this could be, no joke, the largest infrastructure business in the world. 

A business that won’t be mature or profitable for maybe 25 years sounds like it’s too early for a good investment.  Or maybe not.

Index to Previous Climate Adaptation Posts

German Floods and Performance Bonds

August 2021

In mid-July, some 250 people were killed in Germany and Belgium as rain-swollen rivers flooded towns over a wide area.  More than 10 inches of rain fell in 48 hours in some spots; Cologne received 6 inches in 24 hours.  It was the deadliest natural disaster to hit Germany in over 50 years.  Economic losses are estimated at over $3 billion, with the total likely to rise much higher.  Germany was not alone in experiencing extreme rainfall in July.  One Sunday, Londoners were hit with a month’s worth of rain within a few hours.  In Central China, rain amount records were set, over a million people were affected, and the subway in Zhengzhou – a city of 5 million – flooded while passengers were trapped in trains.  This a year after several million were displaced by flooding in the Yangtze River Basin.  And in the Berkshires of Massachusetts, July 2021 became the rainiest year since records were first kept – in 1891.

Floods in Germany (Reuters)

In our previous column, Infrastructure Ideas wrote about rising water levels along coasts, and the infrastructure implications of plans to build seawalls to defend many cities.  As last month has shown, once again, weather-related flood events are increasing far from the seas as well.  Floods are both damaging existing infrastructure, creating repair and restoration needs, and triggering plans for new infrastructure investments to help cities adapt to rising flood risks.

Too much water in many places, and not enough in others.  July’s extreme weather events were not limited to flooding: in the Western US, in Turkey, in Greece and in Sardinia, wildfires also set records and damaged widespread areas.  Some of these wildfires are expected to burn on into the Fall.  Much of the Western US also saw unprecedented heat waves in July, setting the stage for the fires – as did Moscow, among other places.  Last year it was Australia.  In an era of climate change, extreme weather events are becoming more common, and the IPCC — the Intergovernmental Panel on Climate Change – tells us that the frequency of these extreme events will increase as global temperatures rise.  As a headline from the New York Times says “No One is Safe.” 

From the standpoint of infrastructure, these floods, and the wildfires, share one important thing in common.  They result from extreme weather events which are unpredictable.

General trends are clear: more floods in some places, and more heat and fires in others.  Sea level rises are increasingly observable, and “predictable” in the short term.  But the timing and scale of downpours is – generally speaking – not predictable, and neither are the location or breadth of wildfires.  With Climate Change, we already observe that extreme events occur on shorter notice, with both more intensity and severity than before – and, as July has demonstrated, outside of any forecast range.

This lack of predictability, in an age of adaptation to climate change, has significant implications for infrastructure.  The big implication is that related infrastructure investments — being made with a short (or no) planning period, and subject to a large range of uncertainties as to how soon they are needed, how frequently they’ll be used, and the magnitude of the problem they seek to solve — will tend to have some of the least desirable characteristics of infrastructure projects.  Notably, these investments can expect to be characterized by (a) frequent design changes, (b) significant delay risks, and (c) large cost overruns.  Frequent design changes will almost inevitably stem from the uncertainties involved, and from the politics surrounding how best to respond.  Risks of delays and overruns go hand-in-hand with frequent design changes in all construction projects.

In normal times, public authorities asking for infrastructure projects, and lenders supporting the projects, always look to lay this kind of risk off to sponsors and construction companies.  Completion guarantees from sponsors and performance bonds from construction companies are the primary instruments to shift these risks.  A consequence of climate change, and the rapid rise in adaptation-related infrastructure investments, is that it will become more difficult for these risks to be shifted in the way public authorities and lenders typically require.  The culprit will be unpredictability.  With the higher risks of delays and overruns coming from that unpredictability, the size of adaptation-related infrastructure performance bonds will strain the balance sheets of many construction companies.  Where sponsors themselves are also construction companies, required completion guarantees will make the problem worse.  And the construction companies will note, often correctly, that weather-related sources of cost overruns – as well as overruns stemming from political disagreements on how best to respond to extreme weather events – are outside of their control, making them even more unwilling to take on these risks.  We can therefore expect to see that many infrastructure investments intended to help cities and other areas adapt to more extreme weather events – urgent investments when the need for them becomes clear – will get at best delayed and at worse stuck due to the unwillingness of parties to bear the risks stemming from higher unpredictability.

Keeping infrastructure investments flowing as the need to adapt to extreme weather events grows may therefore require something new.  For developing countries, funding for these higher risk investments may simply get swept up into their general need for additional finance related to climate change: yet one more problem to solve.  For wealthier and middle-income countries, the solution may wind up in the domain of insurance.  The likely best way to manage the risks from unpredictability will be diversification of that risk across a very large pool of geographies and projects.   One model may be the World Bank’s Disaster Risk Financing and Insurance program, developed in the mid-2010s, which was created to pool weather-related risks for low-income countries. 

Floods in Germany, fires in the Mediterranean, these are disasters whose occurrence, timing and scope are increasingly unpredictable.  Yet that such events will occur more frequently is itself predictable.  Infrastructure investments may in at least some cases mitigate the damages and deaths from further extreme weather events, and will in many cases be needed to repair damages.  These adaptation-related investments will present different problems than traditional infrastructure, due to the unpredictability of specific severe weather events.  The biggest problem is likely to revolve around Performance Bonds, and the ability of construction companies to absorb unpredictability risk.  Let’s hope insurance can provide a solution.

Index to Previous Columns on Climate Adaptation and Infrastructure

Seawalls and Emerging Markets

July 2021

Built on beautiful Biscayne Bay, money has flowed from the sea to Miami – especially to its real estate developers — for centuries.  It is starting to flow back to the sea.

Miami flooding — from the Miami Herald

Last month, the US Corps of Engineers released a draft study for how best to protect the city of Miami from rising seas and recurring flooding.  The Engineers’ recommendation: a $6 billion, 6-mile long, and up to 20-foot-high seawall.  City and state politics are now mired in a high-profile back-and-forth on whether to proceed (see “A 20-Foot Sea Wall? Miami Faces the Hard Choices of Climate Change”).  Similar plans to build large and expensive seawalls are being debated in other American cities: Houston, San Francisco, Charleston, and Honolulu for a few, with New York City looking at the most grandiose plans of all, costing well over $100 billion.  A 2019 report noted that the cost of building the seawalls under debate in the US could run to $416 billion – the same cost as the build-out of the entire national interstate highway system.  Across the Atlantic Europe already has seawalls in a number of places: Venice, London, St Petersburg, the Netherlands.  A gargantuan project – nearly 400 miles long – is under discussion to protect European coastlines along the North Sea – at a preliminary cost estimate of half a trillion dollars.  Along the Pacific Singapore and Shanghai are among (the few and wealthy) Asian cities with seawalls.

Rotterdam’s Seawall

There is still novelty around the idea.  Until the last decade, one would have been hard pressed to find “seawall” in anyone’s definition of infrastructure.  Ports have built jetties in many places to protect harbors, but these have been much smaller endeavors.  Yet the future where one can plausibly project seawalls becoming one of the 3 or 4 largest categories of infrastructure spending around the world, capturing hundreds of billions of dollars, has come quickly.  A future where seawalls will be the single largest ticket item in the budget of many coastal cities, at times dwarfing their combined spending on all other infrastructure combined.  This is another example of how disruptions have upended the once stable and fairly predictable world of infrastructure, whether disruptions from technology – such as wind turbines or batteries – or from other sources, like climate change.

Fear of rising sea levels from the melting of glaciers is galvanizing the newfound interest in seawall building.  Hundreds of millions of people live in coastal cities with low elevations and many, like those in Miami, are already seeing the increased flooding that will worsen in coming years.  As the World Economic Forum states, “Even if we collectively manage to keep global temperatures from rising to 2°C, by 2050 at least 570 million cities and some 800 million people will be exposed to rising seas and storm surges. And it is not just people and real estate that are at risk, but roads, railways, ports, underwater internet cables, farmland, sanitation and drinking water pipelines and reservoirs, and even mass transit systems.”  Estimates of the sea level rise itself, which may sound small or slow, tend to understate the problem.  Only about 1/3 of future coastal flooding risk is from rising sea levels that would permanently submerge low-lying areas, while 2/3 of the risk comes rather from the likely increase in extreme high tides, storm surges and breaking waves.  Cities are looking at a variety of ways to protect themselves, looking to better absorb and drain water faster, but attempting to keep water away is on nearly every wish list. 

New research (see “A Space Laser Shows How Catastrophic Sea Level Rise Will Be”) shows that for several of these coastal cities, the issues of rising seas and more severe storms will be made worse by yet another problem: sinking.  As populations in many of these urban areas have grown rapidly, over-extraction of ground water is causing the ground to subside.  Cities built on river deltas usually sit on several layers of clay, deposited over time as sediments by the river, with underlying aquifers.  When the aquifers get drained to provide water to the city’s population, the clay collapses into the space which had held water.  The more an urban center grows, the more people it needs to hydrate, which increases the rate and severity of subsidence.  Djakarta is the prime example of this effect, with subsidence having been a key factor in last year’s decision by the Indonesian government to move the capital to a different location (see Capital Punishment (or So Long, Djakarta ?)), but it is far from the only one.

The surge in interest in seawalls as the centerpiece of the solution for many cities will keep engineers occupied and planners preoccupied.  It is still very early days in the growth of what will likely be one of future infrastructure’s largest areas.  Today we’ll look at just a couple implications of this coming boom, especially as regards developing countries.

We’ll start with one safe assumption about this new type of infrastructure: if the seawalls get built, they’ll cost a lot more than the amounts now projected – even the $400+ billion estimated for the US.  Seawalls will fit squarely into the type of infrastructure prone to frequent and large cost overruns (think of tunneling projects, like Boston’s infamous “Big Dig,” or of large hydroelectric dams, with average overruns approaching 50%).  They will be highly politicized investments, with continued debate about every detail (whose property is disturbed, whose views are affected, which houses are outside the protection zone, what is the timeline – and especially, who pays), and debate about just how high the tidal or storm surges they’re built to prevent will be and how soon.  This means the construction of these barriers will be subject to frequent change orders, the perfect recipe for more cost overruns.  And they may become obsolete fairly quickly, depending on the pace of climate change and glacier melt in the coming decades.  It would not be a big stretch to see the US spend over $1 trillion on seawalls in the coming 20 years, nor would it be a big stretch to see global spending on such projects well over $5 trillion.  That’s a lot of infrastructure spending

A second safe assumption about seawalls?  You won’t find many in Emerging Markets any time soon. 

And that will become a big deal.

Cities in lower-income countries stand to be disproportionately affected by rising seas.  While all coastal cities will be affected by sea-level rises, some will be hit much harder than others. Asian cities will be particularly badly affected. About 4 out of every 5 people impacted by sea-level rise by 2050 will live in East or South East Asia – several hundreds of millions of people.  Africa is also highly threatened, due to rapid urbanization in coastal cities and the crowding of poor populations in informal settlements along the coast.  The list of most affected cities includes Mumbai, Kolkata, Dhaka, Guangzhou, Rangoon, Ho Chi Minh City, Manila, Dakar, Alexandria, Lagos, Abidjan, among many others.  Leaving aside China, most of these Emerging Markets cities and their national governments have one thing in common when looking at seawalls as part of their adaptation plans: a lack of capital. 

The list of Emerging Markets countries with cities affected by rising seas looks an awful lot like the list of Emerging Markets countries with large infrastructure deficits – already.  The capital requirements for building seawalls to protect their coastal cities from increased flooding will absorb a large share of their capital that is already needed for deficient infrastructure: for some smaller countries, the cost of seawalls may approach the size of their entire current infrastructure budgets.  It is no surprise, therefore, that a list of cities actively considering seawalls is 90%+ in developed markets (including China).  Djakarta – banking on financial support from the Netherlands – is the only city in a lower-income country with an advanced plan. 

While it is not surprising that attention to seawalls is almost entirely concentrated in more developed countries, the absence of such attention in Emerging Markets has some important implications worth noting.

1.         Flooding increases in coastal cities and the inability of those in low-income countries to engineer solutions (or at least what may appear to be solutions) to offset sea-level rise will lead to much larger-scale relocation of populations in the Emerging Markets than what we will see in the US, Europe and the richer Asian countries.  Some of that relocation may be organized, at least to an extent, along the model of Indonesia’s announced move of the country’s capital, and much of it is likely to be dis-organized, in the form of migration – in country where inland options may be available, and cross-border where those options are not available.  As the World Economic Forum states it, “The coming decades will be marked by the rise of ex-cities and climate migrants.”  To date much of this climate migration has been relatively “invisible,” contained within countries.  Don’t expect this to continue.  The cry we have seen in early 2021 for better equity in the distribution of COVID-19 vaccines may presage a louder cry in years to come for better equity in the building of seawalls.

2.         Given that the wealthy countries that dominate the Boards of International Financial Institutions will want to see as little large-scale cross-border migration as possible, and will have to devote plenty of capital to their own climate adaptation plans, we will undoubtedly see a big push for the IFIs to engage in helping Emerging Markets fund seawalls.  With the scale of the financing challenge, this will be the domain of the large global and regional multilateral development banks, and will stretch their balance sheets. Should a large-scale Climate Adaptation Fund emerge, as has been discussed for many years, and could safely assume that a large share of its capital would wind up going into this area.

3.         There will even greater interest in “innovative financial solutions” than there is for traditional forms of infrastructure.  Don’t be surprised to see mechanisms through which the local private sector in coastal cities (especially companies serving consumers in these cities, such as retail, telecommunications, and producers of consumer goods) “help finance” some kind of Public-Private Partnerships (it will sound better than to say they are being taxed) in order to preserve their own revenues.  And don’t be surprised to see some mechanism emerge whereby wealthy countries contribute to some kind of “Fund” to help finance seawalls in lower-income countries.  It would be the same kind of general principle which has been discussed now for decades for Climate Change adjustment funds, but would have the clear advantage, relative to current discussion, of going to concrete (pun intended) objectives.  In the US, we have seen the building of a wall to limit immigration generate considerable political momentum: one can imagine building of walls further away, with the same idea of limiting immigration in mind, will also generate plenty of political momentum in the future.

Seawalls: coming soon for infrastructure budgets – ready or not.

Index to previous Infrastructure Ideas columns about Climate Adaptation

Asia’s Energy Transformation: Vietnam

June 2021

As the climate keeps warming, many in the United States and Europe are taking a long list of actions and arguing for more.  How hot the earth gets, however, more than anyplace else, hinges on the actions taken – or not taken – in Asia.  Asia has the world’s largest population, the world’s fastest growing economy, and – for climate, more important than anything else – close to 80% of the world’s coal-fired generation.  The path Asia takes – and takes in this decade – will do more to determine the path of climate change the rest of the century.  The path Asia takes, in turn, depends on the path that its own large economies take.  Infrastructure Ideas has previously examined the dynamics of the energy transformation, especially whether countries will or will not add yet more coal-burning electricity capacity, in India, Pakistan, Bangladesh, and Indonesia.  Today we’ll look at another of the region’s critical economies: Vietnam.

Vietnam’s population of 97 million ranks 15th in the world, and its energy consumption growth of over 10% a year the last several decades has been one of the 5 highest in the world.  As population and incomes continue to rise, the demand for electricity in the country is expected to more than double by 2030.  Generation capacity is expected likewise to more than double, from the current 55 gigawatts to 130 GW, at an estimated cost of US$150 billion – and then to more than double again by 2045, to 277 GW.  Coal-fired generation is the largest source of power in Vietnam, accounting for about 53% of demand. Aside from coal, hydropower accounts for about ¼ of capacity, according to the IEA.  Natural gas makes up some 16% of demand, and non-hydro renewables about 7%.

Coal in Vietnam is not only the largest source of power in the country, it has also been the fastest growing, with capacity having increasing by nearly 15 times since 2005, to about 25 GW in 2019.  As the ability to build more large dams along the Mekong River basin has become very constrained, the government increasingly has turned to new coal plants instead of hydropower.  With the expected strong growth in future electricity demand, Vietnam’s earlier power sector plans called for building more than another 45 GW of new coal-fired generation capacity by 2030, which would nearly triple the country’s existing coal fleet.  According to Bloomberg New Energy Finance, Vietnam’s coal-fired pipeline is the 4th largest in the world today, with some 17 GW under construction and another 29 GW in advanced planning stages.  This comes to about 15% of the total planned new coal capacity worldwide, excluding China, and if built, these plants would contribute to adding annual emissions of some 500 metric tons a year of CO2.  Enough to make the world significantly hotter.

Mong Duong coal plant, Vietnam

Energy policy in Vietnam, fortunately, is in transition.  The country continues to envisage rapid further growth in electricity consumption as it develops, but where that added electricity is to come from is changing fast.  In the past two years, Vietnam has gone from almost entirely fossil-fuel and hydropower-based to a solar and wind powerhouse.  With a different sequence than most of the world, Vietnam moved first to aggressively adopt solar generation, especially rooftop solar.  From less than 2 GW of capacity in 2016, solar generation capacity now exceeds 11 GW – 5 GW of which was installed just in 2020.  Vietnam even showed the third-biggest growth in rooftop solar installations globally in 2020.  Yet the biggest energy headlines for Vietnam are now elsewhere – in offshore wind.  Onshore wind plants in Vietnam have begun to appear, but sites are constrained by the lack of available land.  The country has turned its eyes offshore, as the offshore wind sector has begun to mature worldwide (see Infrastructure IdeasOffshore Wind – the Next Big Thing).  In 2021, Vietnam is forecast to install 1 GW of wind capacity, triple its existing capacity and surpassing Thailand—at present Southeast Asia’s front-runner in installed wind capacity.  And in July 2020, the Vietnamese government approved the assessment of the area off the cape of Kê Gà in south Vietnam to build the world’s largest offshore wind farm with a capacity of 3,400 MW – larger than any existing generating facility in the country.

With – at last – renewables coming to Vietnam, the country’s planners are rethinking Vietnam’s large-scale plans for future coal-fired generation.  Several factors are coming into play: (a) the government has seen that investors and banks will finance new wind and solar generation, and that this source of power is cheaper than it had expected; (b) internal demand is geographically uneven, with both demand and growth highest in the south of the country – where offshore wind potential is the greatest; (c) the communist government is also ill-at-ease with both recent demonstrations against coal-fired power station projects, and with the risk of electricity shortages – with fossil-fueled capacity taking much longer to bring online than wind and solar; (d) sources of external capital to finance new coal plants are getting harder to come by; and (e) Vietnam itself stands to be heavily impacted by sea-level rise, with its extensive low-lying urban and agricultural areas along the Mekong Delta.

The government’s evolving thinking has begun to take shape in the draft form of “PDP-8,” its eighth multi-year Power Development Plan.  Released in February 2021, the draft calls for both wind and solar generation capacity to rise to about 20 GW each by 2030, with their share of generation jumping from about 7% today to 30% by 2045.  Coal, as a share of the country’s generation mix, is projected to be cut in half, to about 27%.    The National Steering Committee for Power Development has recommended eliminating about 15 gigawatts of planned new coal plants by 2025, according to the state-controlled news website VietnamPlus.  The draft PDP-8 proposes no new coal-fired power plants except those already under construction or planned for completion by 2025 or sooner.  This would still, however, leave almost 20 GW of new coal capacity to come online this decade.  And the battle for how to meet yet another doubling of demand in the following decade has not been joined.

PDP 8 — IHS Markit

As the planners deliberate, the environment around Vietnam keeps changing as well.  For one, financing for coal plants continues to get more complicated.  Japan has been a big financier of the sector in Vietnam, but Mitsubishi – one of Japan’s largest players in coal — announced in February it would no longer support one 2 GW and $2B flagship coal project, Vinh Tan 3.  Conversely, financiers are eager to finance renewable generation: two wind power plants, Phu Lac 2 and Loi Hai 2, just this month closed a financial package from the IFC.  For another, Vietnam has not really seen yet how cheap wind and solar power have become around the world.  A late-comer to renewables procurement, Vietnam still offers a feed-in tariff mechanism to project developers, at 8.5 cents per kilowatt-hour – more than triple what it costs to procure new wind power capacity in the United States.  As it moves this year to more efficient auction mechanisms for new capacity, and assuming it improves its PPA framework, Vietnam should start seeing renewable prices far lower than what it has been paying to date.  And thirdly, Vietnam has yet to dip its toes into energy storage.  As costs continue to plunge and availability expand, battery storage could help Vietnam meet its growing electricity demand with significantly less future expansion of new generation capacity.

Vietnam completed its five-year general elections for the National Assembly in May.  By the end of June, the government is expected to release the final version of PDP-8.  In a largely state-controlled economy such as Vietnam’s, formal government plans rule the roost, and PDP-8 will determine whether Vietnam sticks to earlier plans to move full steam ahead with building large-volume and high-emission new coal generation, or whether it will continue to cut back on new coal plans and switch even more strongly in the direction of renewable energy.  A great deal – of emissions and climate change – hinges on the decision, and on Vietnam’s continued energy transition. 

Previous Infrastructure Ideas Posts on Energy: Index

The Water Wars are Here

September 2020

As we write in mid-September, Hurricane Sally has stretches of the US Gulf Coast well under water, and Japan is still recovering from the flooding of Typhoon Haishen.  Yet while way too much water is the problem in some places, not enough water is the big problem elsewhere.  A Washington Post headline on September 15 captures the latest example: “Mexican famers occupy dam to stop water payments to the United States.”  Infrastructure Ideas believes we’ll see many more of these types of headlines, and in this issue we’ll explore some of the implications for infrastructure.

The ongoing conflict in the Mexican state of Chihuahua featured in the news is tied to a long-standing, complex arrangement.  Under a water-sharing treaty signed in 1944, Mexico and the United States annually send water for irrigation across the border in both directions – three-quarters flowing south to Mexico.  The issue which has flared up now is the different geography of water flows: Mexico’s share is sent north from the Rio Grande and Conchas rivers, mostly from Chihuahua, while the US share is sent south from the Colorado River elsewhere along the border.  Local farmers in Chihuahua have occupied the Boquilla dam, on the Conchas River, to protest the central government’s sending water across the border.  Mexico’s national guard was sent to clear out the protesters, killed one protester and failed to dislodge the farmers.  A leader of the protest said “We tried to have a dialogue, but nobody listened to us.  We are prepared to stay here and defend our rights to this water.”  A second protest broke out this past weekend at the Cuidad Juárez border bridge, demanding justice for the death at Boquilla and the cessation of water flows.

Mexican Riot Police Guard Dam in Chihuahua (Washington Post)

Leaving aside the specifics of the Chihuahua situation, one does not need to go far to observe similar protests.  Driving last week in record-breaking heat along California’s Central Valley, we could see every twenty miles or so, interspersed among the unending line of fruit orchards, signs calling for more dam-building to provide water to the Valley’s farmers. 

Published in the New York Times

In the American West, conflicts over insufficient water supplies have raged for over a century, though not coming (at least recently) to the armed conflict appearing in Chihuahua.  As Climate Change creates more drought conditions in more places, these conflicts will only grow.  While some of the coverage of the issue tends to melodramatic and/or dystopian, the science behind what will happen and where is getting much more precise.  Over 500 past and present water-related conflicts are catalogued by worldwater.org, and earlier this year a new analytical tool was launched to help predict where such conflicts might arise, and it is not too early to focus on the practical infrastructure consequences.

We see five principal implications from these growing water shortages for infrastructure:

  1. more demand for long-distance water transport
  2. lower reliability of the same, and need for investors to focus not only on support from political leaders, but also broader support from local population,
  3. more demand for local/smaller dams
  4. greater focus on efficiency of water infrastructure
  5. a push for more widespread pricing of water

Let’s look at each of these implications in turn.

More demand for long-distance water transport.  Three inter-related drivers will create growing demand for water pipelines and canals: increased Climate-Change related water-stress in many places, population growth, and continued growing urbanization.  These drivers will mean that at the same time cities demand more water for taps and showerheads while farmlands demand more water to grow the food that increased numbers of city-dwellers consume.  Local water sources, whether from rivers or underground water tables, in many areas either are failing to keep up with demand growth or diminishing altogether.  Cities have historically found it more politically expedient to address such problems first by buying needed water from elsewhere, before asking their citizens to change their ways.  In some cases that elsewhere can be a very long ways away: the longest water pipeline today is the “Great Man-Made River,” which stretches over 1,000 miles and provides water to the main cities of Libya.  It will soon have a rival for this distinction, as the “North-South Water Transfer Project” in China, under construction since 2015, aims to deliver water to China’s southern cities over close to 2,000 miles of pipelines.  The Trans-Africa Pipeline (TAP), now on the drawing board, seeks to pump water across the Sahel over an even longer 5,000 miles.  Most future pipeline projects won’t be this long, but they will still be long enough to very expensive, both in construction and operation – as moving water across long distances is highly energy-intensive (when water is not being pumped up hills, dampers have to slow the water on downhills).  Both the politics and the economics of these projects will be immensely challenging, but nonetheless we can expect to see their numbers rise.

Lower reliability of long-distance water transport arrangements.  More demand is not the same as more reliability.  The current conflict in Chihuahua perfectly illustrates the dynamics that are likely to accompany a number of water pipelines or canals.  Recipients insist on receiving their contracted allotments, climate change creates unforeseen water stresses in the area sending water out, and local populations protest decisions made by central authorities elsewhere.  For those relying on the pipelines, or in the case of private financing those investing in the projects, the lesson is to not rely solely on agreements made by central political leaders, but to understand the degree of support from the local population in the area from which the water is coming.  This political risk will layer on top of good old-fashioned construction risk, with high chances of major delays and cost overruns in these types of projects, while Global Warming will increase evaporation in many canal-based systems (between 2000 and 2014, the inflow to the Colorado River went down by nearly 20%, with 1/3 of that reduction from global warming).  Infrastructure Ideas has also written previously about the growing cyber-risks associated with some infrastructure systems, and long-distance water transport control systems could be a prime area of vulnerability.

More demand for local/smaller dams.  Where bringing water from far away is too difficult, too expensive, and/or risky, we will see demand for local authorities to create insurance in the form of more close-by reservoirs.  The current advocacy by large-scale agro-industry in California Central Valley is one of many examples.  In many cases, such projects will be politically appealing, but not always likely to solve the underlying problem – dams not receiving enough supply of water will themselves become dry, which is part of the problem at the moment in Chihuahua.  Dam-building also suffers from a high degree of construction delay and cost overrun risk, and potential co-benefits from dams which may be argued by producing clean energy are likely to bump into the increasingly unattractive cost of new hydropower generation.  Nonetheless, we expect that political appeal will see an increase in this type of infrastructure projects.

A greater focus on efficiency of water infrastructure.  Efficiency has historically been the poor stepchild of the water sector.  Up to 30-50% of water supplies are lost in pipelines, whether long-distance or simply in consumer distribution systems, due to a combination of poor management and other priorities.  Among other things, shiny new pipelines or treatment stations have always looked politically more appealing than the nitty-gritty of reducing leaks.  As more places feel the pinch on water supplies, and the difficulties of executing large construction projects such as pipelines and dams become more apparent, we can expect efficiency to climb up in priority.  There is no shortage of examples of better technology and practices from which city authorities or water management companies can choose.  Among others, miniaturized, submersible drones are likely to become in high demand as a tool for reducing the costs and improving the speed of finding and fixing leaks (see Infrastructure Ideas’ “The Drones are Here” for previous coverage).

More widespread pricing of water.  “Free water” is an idea which is politically and ethically appealing.  In low income areas, the argument for free water will remain strong.  Yet at the same time, the absence of economic incentives for avoiding the waste of water – especially for large users – has long been an impediment to water conservation and efficiency.  For the same reasons as discussed immediately above, one can expect that a greater focus on efficiency of water infrastructure will be accompanied by a push for more widespread pricing of water.  This in turn will enable more cities and regions to tap into private capital for financing a part of their growing bills for water infrastructure – if they can overcome political resistance.  As has been seen in many places, that resistance is often the fiercest coming from large users, and not from poorer segments of the population.

It would be nice to be able to give a sixth likely infrastructure implication from the growing incidence of water conflicts: greater policy coordination.  The non-existence of such coordination or cooperation in many places is a large factor the spreading geography of water shortage, the American West being one of the most prominent examples.  Unwillingness of political actors to speak with each other, or the inability to maintain such dialogue consistently, bedevils water use from the Nile to the Himalayas to Indochina.  Regrettably, with populism on the rise in so many places, trailing unilateralist tendencies in its wake, it seems hard to imagine greater policy coordination on the horizon anytime soon.  One can always hope.

Airports, Ports and Climate Change (II)

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

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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

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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.