New report finds Japan could face US$71 billion of stranded coal assets without policy reform
Today Carbon Tracker’s power and utilities team released their latest report, Land of the Rising Sun and Offshore Wind, co-authored with the University of Tokyo Institute for Future Initiatives and CDP. Initial coverage from Reuters.
In this report, we combine our analytical capability and framework with the policy expertise of Professor Yukari Takamura from the University of Tokyo Institute for Future Initiatives. For the first time, we have developed individual project finance models of every planned coal power project in Japan, as well as levelised cost of electricity (LCOE) estimates of offshore wind, onshore wind and utility-scale solar PV.
The report has three findings.
- New coal build highly vulnerable to changing market conditions. Planned coal capacity in Japan could become unviable if the capacity factor goes below 48%, the total fuel price exceeds $104/t, the electricity price falls under $72/MWh, or carbon price increases above $25/tCO2. For context: in 2018, the capacity factor averaged 73%, the total fuel price averaged $105/t, the electricity price (based on the Japan Electric Power Exchange) averaged $87/MWh and the carbon price was $2.68/tCO2.
- Offshore wind could make existing coal economically obsolete as early as 2025. Independent of an additional carbon price or more stringent air pollution regulations, offshore wind in Japan could cost less than new coal by 2022. Crucially, by 2025 it could be cheaper to build offshore wind than run coal plants in Japan, calling into question not only new coal investments, but the long-term viability of the operating fleet.
- Without policy reform, the Japanese consumer could pay for $71bn of stranded coal assets through higher electricity prices. Japan’s planned and operating coal capacity is partially protected by regulations that give coal generators an unfair advantage in the marketplace. In our below 2°C scenario, stranded asset risk from capital investments and reduced operating cashflows could amount to $71bn. Without policy reform, we believe the Japanese government will be forced to bail-out coal generators via discriminatory policies, resulting in higher electricity prices for consumers.
The report offers three high-level policy recommendations for the Japanese government.
- Immediately reconsider new build coal to avoid stranded assets. We estimate the government could avoid $29bn of stranded assets if the development of planned and under construction capacity is cancelled. This policy intervention would send a clear investment signal to investors and improve Japan’s international reputation on climate.
- Phase-out coal by 2030 to align with the Paris Agreement. Japan should develop a retirement schedule for the existing fleet that is consistent with the temperature goal in the Paris Agreement. Regardless of boiler efficiency, this means virtually no coal generation without carbon capture from 2030 onwards.
- Accelerate renewable energy through non-discriminatory regulations. Without reforms to further liberalise the power market, the Japanese government risks missing the economic opportunity associated with renewable energy and locking-in high cost power. In doing so, the government could further compromise energy security, public debt and economic competitiveness.
In response to the report’s findings, investors and industry said the following.
Jan Erik Saugestad, CEO, Storebrand Asset Management:
“The future cannot be based on our ability to pull salvation out of the apocalypse hat at the last minute, to carbon capture our way out of this. Coal is not clean and will burn your assets, burdening your company with toxic debt. Solar, wind, power distribution and storage are already better investments. We therefore urge other large investors to take the warnings from Carbon Tracker seriously and get out of coal.”
Sebastian Hald Buhl, Asia Pacific Government Affairs Manager, Ørsted:
“Ørsted – Denmark’s largest energy company – has gone from being a traditional fossil fuel based energy company to being the world leader in offshore wind energy. While our share of green energy production was 17% in 2006 it stands at over 75% today and will be 99% in 2025. This transformation has been possible due to the increasing scale and rapid technological improvements which have seen the costs of offshore wind drop dramatically. In many places renewables such as offshore wind are today the most cost effective way of generating power. Given the importance of decarbonising our societies we welcome Carbon Tracker’s analysis that warns of the long-term economic outlook for coal and hope that this robust analysis will echo in boardrooms around the world.”
This week the power and utilities team is travelling to Japan to meet with government officials and institutional investors. We still have some availability. To organise a meeting or interview, please get in touch.