Managing the Coal Capital Transition
What is the Coal Capital Transition?
Coal was the preeminent fuel for grid-based electricity generation around the world for the better part of a century, but coal-fired power generation is now in structural decline. While economic trends are slowing the growth of coal capacity and leading to a significant amount of uncompetitive coal-fired capacity to shutter, these trends alone will not be sufficient to reduce global greenhouse gas emissions consistent with the Paris Agreement objective of holding warming well below 2 Cº.
With this transition, however, workers and communities are experiencing layoffs and the owners of coal-fired power plants are bracing themselves for hundreds of billions in write-offs. The early retirement of hundreds of billion dollars of capital stock globally is a structural shift with enormous implications for stakeholders.
Why Manage the Coal Capital Transition?
Significant early and additional retirement of existing coal capacity is necessary to meet climate objectives. The early retirement of coal due to economic and policy factors holds the potential to create hundreds of billions of dollars of stranded value globally.
While some advocates and policymakers have chosen to focus their attention on smoothing the adjustment costs associated with layoffs, there is a strong rationale for also focusing on write-offs because the early retirement of coal plants across the world has enormous financial implications for stakeholders: coal plant asset owners, who stand to bear the burden of capital losses associated with premature closure of coal-fired generating assets, fueling their opposition to climate policy; environmental advocates, who seek to accelerate coal phase-out in line with the objectives of the Paris Climate Agreement; and policymakers, who must balance the environmental necessity of accelerated coal plant retirement with thoughtful, managed allocation of the associated capital losses.
Why It Matters
Identifying solutions that manage the transition of capital away from coal and ease potential losses could mitigate political opposition from owners.
By managing the coal capital transition, pragmatic collaboration among asset owners, environmental advocates, and policymakers can be mutually beneficial.
Collaborative rather than adversarial approaches can yield better outcomes for all three of these stakeholder groups. For asset owners, proactive planning for the end of the coal era can preserve shareholder value and avoid financial shocks to equity and debt holders alike. For policymakers, there is an opportunity to understand and implement a new toolkit to spur faster energy transition through dialogue rather than adversarial approaches. And environmental advocates can advance their objective of accelerating the clean energy transition and avoid costly and lengthy conflicts with incumbents.
What We're Doing
RMI has created the first global survey of approaches that can help ease capital destruction for asset owners and their shareholders while offering policymakers a clearer path toward transitioning the power sector onto a well below 2Cº pathway.
Photo courtesy Al Braden for the Sierra Club. Sandow Coal Plant in Rockdale, Texas, which closed in 2018.
Managing the Coal Capital Transition, 2018