Smart countries adapt to finance industry’s exodus from coal

IEEFA, 25th July 2019: The departure of private capital from coal power in the past two years risks becoming a stampede to the exit

Dharma Djojonegoro, deputy CEO of Indonesia’s PT Adaro Power, told an industry gathering in Indonesia last month that funding coal power plants has become “very challenging”.

“About 85% of the market now don’t want to finance coal power plants,” he said.

The impact of this seismic shift in the global financial market has extended beyond companies such as Adaro, to become a major factor reshaping national energy policies.

The departure of private capital from the coal industry in the past two years now risks becoming a stampede to the exit.

About 85% of the market now don’t want to finance coal power plants

AGILE COMPANIES AND COUNTRIES ARE SEIZING NEW OPPORTUNITIES and gaining a significant competitive advantage over those ploughing ahead with business as usual.

Analysis by the Institute for Energy Economics and Financial Analysis (IIEFA) shows that over 100 globally significant financial institutions have implemented lending, investment and/or insurance restrictions on coal power.

In April, Singaporean banks OCBC, DBS Group Holdings and the United Overseas Bank (UOB) largely shut their loan books to new coal projects.

Japanese giants Mitsubishi UFG and SMBC quickly followed suit, releasing policies which, despite loopholes, signalled clear intent to move away from thermal coal.

The drivers range from increased community resistance, to concern over stranded asset risk as the cost of renewable energy declines by more than 10% annually.

RENEWABLES ARE NOW CHEAPER THAN COAL POWER IN MASSIVE MARKETS like India and the U.S. China is set to reach grid parity by next year, achieving a staggering 21GW renewables tender last month, with zero subsidies.

The number of renewable energy projects has far exceeded expectations

The thermal coal industry is now on life-support, in the untenable position of being reliant on public finance subsidies – largely from China, South Korea and Japan – for almost every single coal plant to reach the financial investment decision (FID) required for construction to begin.

While coal advocates point to the healthy-looking power plant pipeline, this is deeply misleading.

According to the International Energy Agency (IEA)’s World Energy Investment 2019 report, “in 2018, coal-fired power final investment decisions declined by 30% to 22 gigawatts (GW), their lowest level this century”.

The largest fall in such decisions was in China, but levels in Southeast Asia were at their lowest level in 14 years, it noted.

SOUTHEAST ASIA HAS LONG BEEN VIEWED AS THE FINAL HOPE FOR THE COAL INDUSTRY – and it’s there where the effects of the financial shift can be most acutely witnessed.

Vietnam’s revised Power Development Plan released in June 2019 revealed 15 of the 16 Build-Operate-Transfer thermal power plants, which largely rely on foreign capital, have been delayed. The plan highlights that many of them will never be built, given increased local government opposition and difficulties in procuring finance.

Instead, Vietnam is planning a rapid pivot to diversify its electricity grid into increasingly lower cost domestic renewable energy projects, balanced by expanded international grid connectivity, gas-peaking power plants and hydroelectricity.

Meanwhile, the number of renewable energy projects has far exceeded expectations. Global solar installations exceeded 100GW for the first time in 2018, double the IEA’s estimate made just two years earlier.

Such has been the scale of the shifting financial landscape that smart governments in Southeast Asia are modernising power plans to attract foreign investment. With the coal funding tap closing as institutions restrict lending, major markets are re-orienting plans to focus on zero-emissions, deflationary, domestic, clean sustainable energy.

We are within touching distance of the last ever coal-fired power station being built

In January this year, Thailand’s National Energy Policy Council (NEPC) approved a new power plan culling 6GW of delayed coal plants, to be replaced by an eye-catching 2.7GW of floating solar, alongside ground-mounted and rooftop solar projects.

And according to Bloomberg, as part of a drive to attract $59bn in foreign investment, Taiwan has ended plans for coal power and quadrupled its renewable energy ambitions, aiming to build around 27GW by 2025.

The India Central Electricity Authority’s 2030 plan is for 523GW of zero-subsidy renewables backed by 34GW/136GWh of batteries.

THE RACE FOR MUCH-NEEDED FOREIGN INVESTMENT IS ON, and those countries slowest to adapt are being left behind, twiddling their thumbs while the pipeline of coal projects sits in the shop window, growing staler by the day.

As this coal plant closure trend gathers pace, we are within touching distance of the last ever coal-fired power station being built.

The consequences of this will inevitably reverberate through coal export suppliers such as Australia, Indonesia and South Africa. These countries face an industry entering its twilight years. Ignoring this reality will only increase the shock.

When it comes to the energy sector, the financial industry’s path is set. For the countries and companies that fail to recognise the impending death of coal, the road ahead will be rocky indeed.

Tim Buckley (tbuckley@ieefa.org) is director of energy finance studies at IEEFA Australasia.

This commentary first appeared in Thomson Reuters Foundation News on 24 July 2019.