'Zombie' assets in the fossil fuel pipeline

What happens if coal plants or offshore oil platforms are built, but never used? Jennifer Johnson looks at a new type of stranded asset risk.

Coal was not consigned to history at the recent COP26 conference in Glasgow, much to the chagrin of environmental campaigners. At the last minute – as negotiations on a new climate deal were drawing to a close – representatives from China and India lobbied to weaken promises on the most polluting fossil fuel.

As a result, signatories to the global pact have now vowed to ‘phase down’ coal use, rather than phase it out entirely. The change was further supported by South Africa, Nigeria and Iran.

‘China and India will have to explain themselves and what they did to the most climate-vulnerable countries in the world,’ said the COP26 President, Alok Sharma, of the successful lobbying effort. Though the human health impacts of coal combustion are well documented in both countries, their politicians have long argued that coal power is necessary to build a thriving, modern economy.

‘How can anyone expect that developing countries can make promises about phasing out coal and fossil fuel subsidies when developing countries have still to deal with their development agendas and poverty eradication,’ India’s Environment Minister, Bhupender Yadav, asked conference attendees.

In countries with fast-growing populations, like China and India, it’s true that unmet energy demand could hinder economic growth. But is coal truly the most cost-effective way to bring power to the people? An increasing body of research suggests that it may be financially risky to tie plans for universal energy access to coal expansion.

Zombie plants

Analysis published in September by the think tank Ember and the NGO Climate Risk Horizons showed that 27 GW of prepermit and permitted new coal power plant proposals are now superfluous to India’s requirements. If built, the facilities could end up as ‘zombie’ plants – assets that would be neither dead (shuttered) nor alive (operational).

Instead of pursuing new coal projects, Ember argues that policymakers should install a ‘more flexible, cheaper option’ in the form of renewables and battery storage capacity. The surplus coal plants would require $33bn in investment – committing consumers to expensive tariffs and jeopardising renewable energy targets by adding to the system’s overcapacity.

‘The 27 GW of new coal being proposed… represents a significant threat to the Indian economy, not just in terms of misallocation of scarce capital, but also due to the lock in effect of expensive electricity and ancillary impacts on the renewable energy industry,’ explained Ashish Fernandes, CEO of Climate Risk Horizons. ‘This must be avoided especially as the Indian financial sector is yet to recover from the non-performing asset crisis created by excessive coal construction in the last decade.’

Save by switching

In China, the world’s largest consumer of coal, the economic outlook for new coal plants is very much the same. In fact, research by the think tank TransitionZero claims China can save up to $1.6tn over 20 years by switching from coal to renewables. This is purely because renewables are now so much cheaper to operate than coal-fired power stations.

TransitionZero has also reported that it is now cheaper to build new renewable energy capacity than continue to operate coal plants in the vast majority of cases worldwide. In 2020, 22% of operating coal capacity globally may have cost more to operate than building new wind or solar facilities. This year’s global energy crisis has intensified this dynamic to the extent that 64% of coal capacity could cost more to operate than new renewables in 2021.

These conclusions are broadly consistent with those of other organisations. For instance, analysis from the financial research group Carbon Tracker found that new renewables beat 77% of operating coal units on cost today. It predicts this figure will rise to 98% by 2026 and 99% by 2030 ‘based on current pollution regulations and climate policies’ when comparing the levelised cost of new renewables to the long-run marginal cost of existing coal units.

Carbon lock-in

The problem of stranded assets is not unique to the coal sector – it’s just most visible there (for the time being). Cheap renewables and climate targets are also a threat to the economic viability of some oil and gas projects, Scotland’s proposed Cambo oil field among them.

According to Carbon Tracker’s modelling, Cambo has a breakeven oil price significantly higher than the marginal oil price under the IEA’s Sustainable Development Scenario (which assumes warming will reach 1.65°C). Put another way, the organisation says the project is only financially viable if the world fails to limit global temperature rise to well below 2°C.

‘The world has a great many existing oil projects that are lower cost and lower risk than Cambo and that are ahead in the financial pecking order,’ said Carbon Tracker founder Mark Campanale. ‘The IEA has said that no new oil, coal or gas is needed in a 1.5°C scenario and Cambo is blatantly one of those projects.’

Whether financial arguments will ultimately steer governments away from their fossil fuel commitments remains to be seen. The threat of undead assets might be scary in principle – but some policymakers seem determined to stand their ground.

Some 27 GW of pre-permit and permitted new coal power plant proposals are now superfluous to India’s requirements. Photo: Shutterstock