Changing market dynamics and policy have put coal-fired power generators at a cost disadvantage — three-quarters of new wind farms and solar plants now have lower generation costs than fossil-fuel power stations.[1] Furthermore, at COP28, almost 200 nations agreed on a roadmap to shift away from fossil fuels by tripling renewable-energy capacity and doubling the rate of energy-efficiency improvements by 2030,[2] while more than 20 countries pledged to triple global nuclear capacity by 2050 vs. 2020.[3] Global coal use may have peaked in 2023[4] and is projected to gradually decline in the coming years.[5]
In this blog post, we assess where the impact of these shifting dynamics may be felt the most, what this could mean for utilities companies and why active engagement strategies may be the way forward for investors.
Largest impact in APAC
Utilities based in Asia-Pacific (APAC) could be hardest hit amid a risk of stranded assets and higher cost of capital. This is because many APAC-based electricity producers continue to invest in new coal-fired power plants even though most of their peers elsewhere have focused on shifting away from coal. Within APAC-listed power generators in our coverage, GD Power Development Co. Ltd., Tenaga Nasional Berhad (Tenaga), China Resources Power Holdings Co. Ltd. (CR Power) and Adani Power Ltd. stand out as utilities with both a significant (>40%) share of coal in their power mix and aggressive growth (>45%) in their coal-fired power capacity since 2017.
APAC utilities: Growth in coal-power capacity vs. coal share in current power mix
As a result of its focus on coal, the APAC region accounted for 78% of operational and 96% of planned coal-fired electricity-generation capacity globally.[6] Based on our previous study, these APAC-based coal-power plants, if not phased out, could add approximately 215 gigatons of carbon emissions from 2024 to 2050, which is more than 40% of the remaining global carbon budget under a 1.5-degree pathway.[7] That said, a rapid coal phaseout would present practical challenges for APAC countries and utilities that still heavily depend on coal-fired power generation for both employment opportunities and a relatively cheap and reliable source of energy.
An orderly (i.e., managed) phaseout of coal power through early retirements, a commitment to no new coal development (excluding projects under construction) and an accelerated deployment of renewables may therefore help utilities reduce asset-stranding risk while achieving a more gradual (less disorderly) transition in a just and equitable manner for the affected employees, communities and consumers (also known as “just transition”).
Investor action can make an impact
This provides an opening for investor-led climate-related engagement strategies, such as the Asian Utilities Engagement Program by the Asia Investor Group on Climate Change (AIGCC), which represents 19 investors that collectively manage more than USD 12 trillion in assets. Following engagement by the AIGCC, Tenaga and Persero committed to retire some of their coal plants early,[8] while CLP Holdings Ltd.-owned EnergyAustralia recently announced an AUD 5 billion action plan for climate transition that involves early coal-power retirement as well as expanding renewables and energy-storage capacity.[9]
Among the major APAC-listed coal-fired power generators, NTPC Ltd. and Adani Power in India, China’s CR Power and China Huadian Corp. and Persero in the Philippines are the utilities with the largest planned absolute coal-power capacity additions, as of Jan. 15, 2024. Among these five companies, only NTPC planned to add more renewable capacity than coal.
APAC utilities: Planned coal capacity vs. planned green capacity
Orderly coal phaseout can reduce asset-stranding risk
Our calculations suggested that for APAC countries to achieve an orderly coal phaseout in a 2-degree pathway, they would need to cancel all pre-construction and under-construction coal-power projects and reduce the power-generation output of existing coal-fired units by 13-81% annually between 2024-2050.[10] This could be done by replacing their coal plants with clean-power generation. We compared companies’ projected emissions based on their existing reduction targets with what would be implied by a 2-degree-aligned path for the coal-power generation sector in their home country, to look for gaps between what countries may be aiming for and what companies are planning to deliver.[11] Our analysis suggests that Tenaga, CLP Holdings and Korea Electric Power Corp. (KEPCO) would have the smallest gap. By contrast, AGL Energy Ltd. and most coal-power generation peers based in mainland China would have the widest gap. Our calculations assumed that utilities would achieve their emission-reduction goals, if they have any, or increase their emissions by 1% per year if they don’t have any valid decarbonization targets.[12] Engagement strategies by investors can help these utilities reduce their asset-stranding risk through an orderly coal phaseout.
Expected annual Scope 1 emissions reductions of countries vs. companies under a 2°C scenario
Promoting an orderly transition
As the world prepares to move toward a low-carbon future, asset-stranding risk for coal-power producers, especially with plans for further capacity additions, is increasing. Abrupt closures of such plants in future years may create issues related to energy security and jobs. Investors who want to promote an orderly transition can use engagement strategies to help these utilities reduce their asset-stranding risk through an orderly coal phaseout and minimize the risk in their portfolios.