Japan Could Face US$71 Billion of Stranded Coal Assets
from Cheap Renewables
It will be cheaper for Japan to build new renewables than run coal as early as 2025, calling into question the government’s pro-coal stance and its implications for economic competitiveness
NEW YORK/LONDON, October 7 – The economic viability of Japan’s coal plants could be severely undermined by low cost renewable energy, finds a new report by Carbon Tracker, University of Tokyo and CDP.
Carbon Tracker in collaboration with the University of Tokyo and CDP found Japan’s planned and existing coal capacity could become stranded due to lower utilisation rates and tariff prices caused by low-cost renewable energy.
Head of Power & Utilities at Carbon Tracker and co-author of the report, Matt Gray, said: “There’s a technology revolution coursing through the world’s power markets. This revolution is coming to Japan, which means the government urgently needs to reconsider its pro-coal stance.”
The report, titled Land of the Rising Sun and Offshore Wind, uses asset-level financial models to analyse the project and relative economics of new and existing coal plants in Japan.If the capacity factor goes below 48% or the tariff is lower than U$72/MWh, then projects could become unviable. For context, the capacity factor averaged 73%, while the tariff price (based on the Japan Electric Power Exchange) was US$87/MWh.
Based on a comparison of the levelised cost of energy (LCOE) analysis, onshore wind, offshore wind and utility-scale solar photovoltaics (PV) could be cheaper than coal by 2025, 2022 and 2023, respectively. Moreover, the long-run marginal cost (LRMC) of coal could be higher than offshore wind and solar PV by 2025 and onshore wind by 2027.
Land of the Rising Sun and Offshore Wind also explores the implications of Japan’s coal fleet being shut down in a manner consistent with the temperature goal in the Paris Agreement – a policy the Japanese government intends to meet, according to the Long-term Strategy for Decarbonization submitted to the UNFCCC in June 2019. In our below 2-degree scenario, where Japan’s coal capacity is forced to shut-down by 2030, stranded asset risk from capital investments and reduced operating cashflows could amount to $71 bn. Of this US$71bn, US$29bn could be avoided if the Japanese government immediately reconsiders the development of planned and under construction capacity.
Gray added: “Despite policy signals from the Japanese government, it is still investing heavily in coal. This capacity will become stranded, likely resulting in higher energy costs for the consumer.”
Accelerating the transition away from coal would be good for investors, consumers and the wider economy according to Land of the Rising Sun and Offshore Wind. It makes the case for cancelling planned coal, stopping new coal under construction and developing a retirement schedule for the existing fleet.
Commenting on the report, Jan Erik Saugestad, CEO Storebrand Asset Management, ($90 billion AuM) said: “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.”
Model methodologies overview
Project economics model
The project economic model analyses the financial viability of planned and under-construction coal capacity. The purpose of this analysis is to illustrate how, under different scenarios, a coal project could become unviable over its lifetime. Project finance modelling assesses the risk-reward of lending to, or investing in, a coal power project and includes a forecast of revenues, construction, operating and maintenance costs, tax, debt financing, the internal rate of return (IRR) and net present value (NPV).
Relative economics model
There are three economic inflection points that policymakers and investors need to track to provide the least-cost power and avoid stranded assets: when new renewables and gas outcompete new coal; when new renewables and gas outcompete operating existing coal; and when new firm (or dispatchable) renewables and gas outcompete operating existing coal. The relative economics model compares both the levelised cost of energy (LCOE) of new coal investments and the long run marginal cost (LRMC) of existing coal assets with the LCOE of onshore wind, offshore wind and utility-scale solar PV.
Stranded asset model
The stranded asset risk in our 2°C scenario is defined as the difference between the NPV of revenues in a BAU scenario and a scenario consistent with the temperature goal in the Paris Agreement. The retirement schedules are developed based on gross profitability, if a liberalised market; or LRMC, if a regulated market (as it is currently the case for Japan). Underlying this analysis is the logic that in the context of efforts to reduce carbon emissions and demand for coal power, the least economically efficient will be retired first.
Once embargo lifts on October 7 the report will be available for download at: www.carbontracker.org
To arrange interviews please contact: Matt Gray firstname.lastname@example.org +44 7576454155
NOTES TO EDITORS
About Carbon Tracker
Carbon Tracker is an independent financial think tank that carries out in-depth analysis on the impact of the energy transition on financial markets and the potential investment in high-cost, carbon-intensive fossil fuels. Its team of financial market, energy and legal experts apply ground-breaking research using leading industry databases to map both risk and opportunity for investors on the path to a low-carbon future. It has cemented the terms “carbon bubble”, “unburnable carbon” and “stranded assets” into the financial and environmental lexicon.
Japan Could Face US$71 Billion of Stranded Coal Assetsfrom Cheap Renewables（PDF)
Contact in Japan
CDP Worldwide Japan, japan[@]cdp.net
Yukari TAKAMURA is Professor at the Institute for Future Initiatives, the University of Tokyo, yukari.takamura [@]ifi.u-tokyo.ac.jp
Kiko Network, tokyo[@]kikonet.org
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Carbon Tracker (Link)
[Event] Symposium: Business trend toward decarbonisation – Financial Risks and Opportunities for Energy Transition (October 7, 2019) (Link)