Early retirement of coalfired generation in the transition to lowcarbon electricity systems

CĂ©line Guivarch and Christina Hood, Climate Change Unit

Scenarios for decarbonisation of the power sector often involve early retirement of fossil-fuelled electricity generating plants, particularly coal-fired plants that have the highest carbon dioxide (CO2) emission rates. Including early retirement in the transition raises a number of questions such as who should bear the costs of any stranded assets, and whether additional policies are needed to provide greater certainty about retirement and minimise system-wide costs. If early retirement is deemed unfeasible, even tighter restrictions on new plants may be required to ensure that 28 the emissions reduction from these plants is sufficient to compensate for the higher emissions from existing plants that may remain in operation.

Long-lived capital in power generation

Coal-fired electricity generation contributes a large - and growing - share of global CO2 emissions. It is responsible for 73% of CO2 from global power generation and 30% of total global CO2 emissions from energy. Since 1990, emissions from coal-fired power plants have been growing quickly: at 3.2% annually compared to overall global emissions growth of 1.9%. In this period, the growth in installed coal capacity has been concentrated in non-OECD countries, where capacity has grown by 6.2% per year. In 2008, there were 1 514 gigawatts (GW) of installed coal-fired power plant capacity globally (32% of 2008 total generating capacity), producing 8 273 terawatt hours (TWh) of electricity (41% of total production) and emitting 4.93 gigatonnes (Gt) of CO2.

The long technical lifetimes of coal-fired plants raises the question of what level of future emissions is already locked in (Davis, Caldeira and Matthews, 2010), and whether the challenge of rapid decarbonisation will require early plant retirement. This paper explores these questions and related policy implications.

Is early retirement a critical element in climate policy scenarios?

Several modelling scenarios include significant early retirement of coal-fired power plants as one of the elements in delivering a climate change mitigation objective. For instance, the World Energy Outlook 2010 (WEO 2010) projects in its 450 Scenario that some 300 GW (or around one-third) of coal plants built between now and 2035 will be retired before the end of their technical lifetime. Around 100 GW will be retired before achieving a commercial return on the capital invested, representing a net loss of around USD 70 billion or 28% of the investment cost (IEA, 2010) (Figure 1).

Early retirement to support climate change mitigation

The early retirement of a power plant refers to its closure before the end of its technical lifetime, which is often assumed to be 40years for a coal-fired plant, although upgrades can allow plants to continue for much longer. This closure can be triggered either by regulation or by economics - i.e. when the electricity market price is consistently below the plant's short-run marginal cost, the plant cannot cover its operating costs.

Depending on electricity demand, early retirement may create the need for additional investment in new capacity. In this case, to trigger early retirement through economics, the carbon price has to be such that the short-run marginal costs of an existing coal-fired plant become higher than the long-run marginal costs (including capital costs) of a new lower-carbon plant. This implies that quite high carbon prices may be needed to displace existing capacity before the end of its technical life.

Shortening the period of operation leaves the plant owner with "stranded costs" (if the closure occurs before the capital investment costs have been fully recovered) or with a reduction of expected benefits. These factors change the fundamental economics of the project and basis for the original investment decision, which may prompt owners to seek compensation for their losses. If governments were to consider such compensation appropriate, early retirement as an option for transition in the power sector could be substantially more costly.

Figure 1

Global installed coal-fired generation capacity to 2035 in the 450 Scenario relative to the Current Policies Scenario from WEO 2010

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