Moving Away from Coal into a Clean Future for Southeast Asia
By Nancy Nguyen and Peter du Pont
Source: Wikipedia Commons
Recent news around the world has caught our attention: that we are closer than ever to a reality where using coal for power production is nearing an end. According to the International Energy Agency (IEA), global demand for coal dropped 4% in 2020, the first reduction since World War II. Coal consumption will rebound briefly in 2021, as some countries are beginning to recover from the economic downturn of the COVID-19 pandemic. However, IEA predicts that the downward trend in coal consumption will then continue through 2025[1]. Lately, more and more governments and financial institutions have announced plans to cease funding new coal-fired power plants. We decided to take a quick look at what we see happening with coal phase-out and put it into perspective.
First, as Figure 1 shows, the main source of global coal consumption is China. While coal use in China has leveled off at around 2,000 MTE/year over the past 7-8 years, IEA’s data does show a recent uptick. By comparison, coal use in other advanced economies has been falling dramatically—and levels of coal consumption in 2021 are approximately half of what they were in the early 2000s. Meanwhile, coal consumption in “Other” countries, which includes the low and middle-income countries of the world, has been steadily rising—doubling over the 20-year period from 2000 to 2020 to about 1,000 Mtoe/year, but still half the level of the rising coal consumption of China.
Figure 1. Coal Consumption by Region, 2020 to 2021
Source: IEA (2021)
Pausing or Limiting Coal in Southeast and South Asia
There is a raft of commitments to reduce or phase out coal use in Asia. For example:
In February 2021, Bangladesh announced plans to pause nine coal-fired power plant projects with a combined capacity of 7,461 MW; and the government is considering the possibility of canceling more[2].
Pakistan is saddled with debt in its power sector and has temporarily shelved action on new coal power plants.
The Philippines established a coal moratorium in October 2020 and is no longer accepting proposals for new coal-fired power plants[3].
In February 2021, the Government of Vietnam presented a proposal to reduce the share of coal-fired power capacity in the national energy mix from 34% in 2020 to 27% in 2030 and there would be no new coal plants after 2025[4].
Despite these promising trends, and the clear threat of stranded assets that utilities and independent power producers (IPPs) face in commissioning and building new coal-fired power plants, there is still a lack of urgency among many investors in Southeast Asia about the risks associated with climate change. Research we carried out over the past couple of years with the Stockholm Environment Institute found a significant gap between the need to integrate climate risks within investor decision-making and the way these risks are currently being addressed in the Southeast Asia power sector[5].
ODA Financing for Coal
Japan and Korea, two of the top providers of low-cost debt financing for coal-fired power plants, have divested their portfolio of new coal projects and have outlined their pathway to net-zero emissions by 2050. The Japanese trading house Mitsubishi Corp. recently decided to withdraw from a USD2 billion coal power plant project in Vietnam[6]. Last year, the company announced its aim to halve its outstanding coal energy project investments by 2031 and completely phase out lending for coal-fired thermal power generation by fiscal 2040[7]. The Japanese government at the same time unveiled its plan to stop supporting exports of coal-fired power plant infrastructure. Prime Minister Yoshihide Suga promised to reduce Japan’s reliance on coal-fired energy and gradually shift the country toward carbon neutrality[8]. Similarly, South Korean President Moon Jae-in, in his address to a two-day virtual climate summit convened by U.S. President Joe Biden in April 2021, pledged to stop funding coal-powered plants overseas and plans on setting a more ambitious schedule of phasing out coal at home[9]. Earlier this month in May 2021, the Asian Development Bank (ADB) released a draft energy policy that outlined ADB’s plan to end all financing for coal mining and power plants and to ban support for oil and gas production.
Trends around Coal Financing in Australia
Much further to the south lies Australia, the world’s second-largest exporter of thermal coal. The country is witnessing a significant shift in banking sector attitudes toward thermal coal projects in their lending portfolios. Australia's four largest banks have committed to tightening lending criteria for the thermal coal industry. ANZ, for example, plans to only lend to renewable projects and low-carbon, natural gas projects by 2030, and the bank will urge customers that have more than 50 percent of their revenues from thermal coal to develop strategies to diversify their asset portfolios[10]. There is also a steadily growing trend towards shareholder activism that is putting pressure on Australian companies involved in coal mining and export[11].
Trends in Europe
Beyond Asia and the Pacific, an increasing number of European governments and banks have also pledged to stop coal financing. Germany has passed legislation to end coal-fired power generation by 2038 and has agreed on a shutdown schedule as well as the principle of providing compensation payments for existing lignite power plants. French bank BNP Paribas aims to completely phase out supply chain financing for thermal coal by 2040. The U.K.'s Standard Chartered and HSBC[12], as well as Switzerland’s second-largest bank, Credit Suisse[13], have decided to cease all funding for the development of new coal-fired power plants or new greenfield thermal coal mines.
These new developments around the world to scale back financing for coal use are certainly encouraging and hopeful in terms of the speed of our global transition to clean energy. Questions that are often raised in our conversations with clients include (1) isn’t renewable energy too expensive and anyway, can the power grid even run without the baseload power produced by coal-fired power plants? and (2) will investors lose money by divesting their portfolios away from investing in coal-fired power plants into other assets? Growing evidence provides clear positive answers to both questions.
The Downward Cost Trajectory of Renewable Energy is Accelerating
Over and above the negative environmental impacts, in terms of economic competitiveness the writing is unequivocally on the wall for the global coal industry. Renewable energy has become more cost-effective over the last 10 years, with the costs of solar power and batteries falling by 85 percent and wind power by nearly 50 percent[14]. According to the U.S. Energy Information Administration (EIA), the estimated cost of building a new coal plant is USD3,500 per kW, approximately USD1,600 per kW for wind, and USD2,900 per kW for all types of solar photovoltaic (PV) power plants[15]. In 2019, electricity generated from renewable sources in the U.S. exceeded coal for the first time in 130 years[16]. A new report from Energy Innovation: Policy and Technology LLC suggests that roughly 80 percent of coal power plants in the US will retire or become non-cost-competitive with solar and wind energy by 2025[17]. And meanwhile, in 2019 the power grid in the UK operated non-stop for more than 60 days without using any electricity generated from coal for the first time in 138 years[18]. Rapid advances in storage technologies to deal with intermittency are seeing increasing and effective penetration of renewables into national grids[19], making the arguments of coal proponents about the need for baseload energy supply as obsolete as their technologies.
The Irreversible Momentum Toward Coal Divestment
Many investors such as the Rockefeller Brothers Fund and Grantham have found that coal divestment does not affect their long-term financial returns[20]. Even BlackRock—the world's largest asset manager, with USD8.67 trillion in assets under management as of January 2021, and known for its long shareholder track record of voting against climate action—recently conducted three studies related to coal divestment: (1) a survey of asset owners that divested and those that did not divest; (2) an analysis of the types of financial, environmental and climate risks faced by fossil fuel companies and standards for readiness to address the transition; and (3) an assessment of divestment options and portfolio performance. Their findings show that the portfolios “experienced no negative financial impacts from divesting from fossil fuels” and that divested portfolios “outperformed their benchmarks.”[21]
Starting in 2020, BlackRock began divesting its USD1.8 trillion of actively managed funds from any companies with more than 25 percent of their revenue from thermal coal[22]. BlackRock Chairman and CEO Larry Fink, in his annual letter to CEOs announced the fund’s objective to align its portfolio with the Paris Climate Agreement including “exiting investments that present a high sustainability-related risk, such as thermal coal producers” and “launching new investment products that screen fossil fuels”[23].
Take-away Thoughts
The transition away from the financing of coal-fired power is already well advanced in the U.S. and in Europe, and it will inevitably take root in Asia within the next 5-10 years. But we cannot afford to wait that long. The urgency of the climate crisis dictates that we cannot have an extended phase-out period. It is clear now, today, that even in Asia, the coal industry is a “dead man walking”, with little upside for any new coal investments that would be initiated beyond the next five years. However, to stop new coal-fired power projects and phase out thousands of existing coal power plants in Asia will require a concerted effort from governments, donors, civil society, academics, think tanks, the private sector, and financial institutions. This broad coalition to phase out coal development will need to be accompanied by an equally vigorous effort to demonstrate, invest, scale up and replicate innovative approaches and business models based on clean energy, storage options, decentralized energy, grid modernization, and increased resilience of the power grid. Our mission at Asia Clean Energy Partners is to work in partnership with key stakeholders to speed this transition and ensure that Asia’s future energy needs are met by clean, renewable sources, making the use of fossil fuels for power production an obsolete remnant of a polluting past.
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Nancy Nguyen is Consulting Manager and Peter du Pont is Managing Partner with Asia Clean Energy Partners.
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