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About Carbon Tracker About Carbon Tracker The Carbon Tracker Initiative is a team of financial specialists making climate risk real in today’s capital markets. Our research to date on unburnable carbon and stranded assets has started a new debate on how to align the financial system in the transition to a low carbon economy. www.carbontracker.org | [email protected] About this report The principal authors of the report were Matt Gray, Durand D’souza and Sriya Sundaresan, who were supported by Nicolás González Jiménez. The data and analytics from this note are drawn from Carbon Tracker’s Global Coal Power Economics Model, a techno-economic simulation model which covers ~95% of global operating capacity and ~90% of capacity under-construction. This model was developed by the Power & Utilities team from 2016 to 2019 and provides current and forward-looking estimates of the short and long run marginal cost, operating cashflow, competitiveness relative to the LCOE of renewables, phase-out year and stranded asset risk in a below 2°C scenario. More information on this data and analytics is available at Carbon Tracker’s coal economics portal. The report was reviewed by Mark Fulton, Kingsmill Bond and Robert Schuwerk. Readers are encouraged to reproduce material from Carbon Tracker reports for their own publications, as long as they are not being sold commercially. As copyright holder, Carbon Tracker requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on the Carbon Tracker website. © Carbon Tracker 2019. About the Power & Utilities Team Matt Gray – Head of Power & Utilities ([email protected]) Matt leads Carbon Tracker’s Power & Utilities team. Matt was previously an analyst at Jefferies, an American investment bank, where he was the head of European carbon and power research. More recently, Matt was a consultant analyst at the IEA and has also worked on emissions trading at Credit Suisse and energy efficiency at the UK’s DECC. He has a BAppSci from the University of Otago and a MSc from the University of Manchester where he was awarded a Rotary Foundation ambassadorial scholarship. Sriya Sundaresan – Senior Analyst ([email protected]) Sriya is a senior analyst in the Power & Utilities team at Carbon Tracker. Prior to joining Carbon Tracker, Sriya worked for four years in Morgan Stanley’s Commodities division in New York, in a group that financed and developed solar projects in the United States and the Caribbean. She also spent two years in environmental consulting in Washington, D.C. Sriya received her MBA, with a concentration in Change Management, from London Business School and a BA in Environmental Science from Columbia University. Durand D’souza – Data Scientist ([email protected]) Durand is a data scientist in the Power & Utilities team. Prior to joining Carbon Tracker, he was a freelance data journalist producing interactive visual stories, wining an Information Is Beautiful award along the way. He also worked on a PhD in computational stellar astrophysics at the Max Planck Institute for Astrophysics in Germany. He is interested in how machine learning can be used for social good and to bring about a just transition. Durand holds a MPhys in Physics from the University of Leeds. Stefan Lavelle – Junior Data Scientist ([email protected]) Stefan works in the Power & Utilities team as a data scientist. He was previously an economist at the Home Office where he specialised in designing reverse auctions. More recently, he worked as a data scientist in private equity where he built predictive models for the gaming industry. He is passionate about leveraging data to improve societal welfare and is excited to apply this enthusiasm at Carbon Tracker. Stefan is a retired boxer and house music enthusiast. He also has a BA in economics from the University of Cambridge. Isabella Soldner-Rembold – Junior Data Scientist ([email protected]) Isabella is a data scientist in the Power & Utilities team. Before joining Carbon Tracker, she did a PhD in astrophysics on the modelling of elliptical galaxies at the Max Planck Institute for Extraterrestrial Physics in Munich, Germany. Previous to that she obtained a BSc in physics from Imperial College London and an MSc in astrophysics from University College London. Aurore Le Galiot – Associate ([email protected]) Aurore joined Carbon Tracker in early 2018 as an Associate. Prior to joining Carbon Tracker, Aurore completed two internships at HSBC Paris, focusing on business analysis and development. Aurore holds a BSc in International Management and Chinese language from SOAS University and continued further studies at Beijing Normal University and Shanghai University of Finance and Economics, learning Mandarin and focusing on the political and economic context in China. Magali Joseph – Analyst ([email protected]) Magali is an analyst in the Power & Utilities team. Prior to joining Carbon Tracker, she worked as a market analyst for the French utility ENGIE, focusing on long-term resource planning and power price forecasting. More recently, she worked for Energy Exemplar, a power modelling software company, helping clients use the product and implement their models. She holds a BBA from HEC Montreal and a Master of Economics from Uppsala University. Richard Folland – Government Affairs Adviser ([email protected]) Richard has been an Adviser to Carbon Tracker since 2014, advising on the organisation’s interactions with governments and multilateral institutions, especially where it concerns the intersection between climate and finance issues. Richard has worked on climate and energy policy for nearly 15 years. A long-time British diplomat, he headed UK international policy at the Foreign Office from 2004-2007. He has since then been JPMorgan’s European Climate Change and Energy Policy Adviser. Table of Contents Executive Summary ...................................................................................... 1 Apocoalypse Now ........................................................................................ 3 Domestic policies, international markets ....................................................... 7 Realising the coal to clean mega trend: closing coal is cheap and can be a win-win ............................................................................................................. 9 Conclusion ................................................................................................ 14 Power & Utilities Team Executive Summary In this note, we explain the financial implications of recent changes to EU coal power economics. In doing so, we argue EU policymakers and investors need to prepare for no hard coal or lignite generation by 2030. Data-driven solutions are offered to ensure an orderly and just transition. 1.1 Apocoalypse Now: 79% of EU coal generators are running at a loss and could lose €6.57 bn in 2019 Coal is under severe economic pressure across the EU. Based on Carbon Tracker modelling, we estimate that 84% of lignite and 76% of hard coal generators are currently operating at a loss and could lose €3.54bn and €3.03bn, respectively, in 2019. Moreover, Carbon Tracker modelling found: § The most exposed member states are Germany, Spain and Czech Republic whose coal generators could lose €1.97bn, €992mn and €899mn, respectively, in 2019. § The most exposed utilities are RWE, EPH and PPC who could haemorrhage €975mn, €613mn and €596mn, respectively, in 2019. These losses are material for coal heavy utilities. For example, RWE’s losses for 2019 alone represent 6% of its market capitalisation. § Per Making it Mainstream, those EU utilities who are covered by CA100+ and have loss-making coal generation (i.e. ENEL, EDF, CEZ, ENGIE, Fortum, Iberdrola and RWE) are also misaligned with the temperature goal in the Paris Agreement. § Those remaining assets that are cashflow positive are hard coal and lignite units in Poland, Italy, Czech Republic and Slovenia that benefit from relatively high power prices, as well as a small amount of capacity in Germany and Netherlands that have higher unit efficiencies. Polish generators will also benefit from generous capacity market payments from next year onwards, which could see the percentage of profitable units increase from ~50% to ~80%. Owing to relentless competition from ever lower cost wind, solar, batteries and demand response coupled with a preponderance of inexpensive gas, these losses could be sustained for the foreseeable future. Without being heavily subsidised, we foresee no coal power generation by 2030. If EU governments chose to support coal over the long-term (i.e. post-2030) it could create intractable problems, as they will be forced to choose between destroying shareholder value, depleting fiscal resources or undermining economic competitiveness. Moreover, market conditions are shining a spotlight on the legality of closure payments. The outcome of this legal quagmire could have significant valuation implications for coal-heavy utilities. 1.2 Realising the coal to clean mega trend: closing coal quickly can be cheap and a win-win As governments and investors transition from ambition to implementation, they are going to have to focus on win-win solutions. Without win-win solutions for key stakeholders (consumers, investors, workers and local communities), coal phase-out policies risk becoming delayed and disorderly. In this regard, Carbon Tracker outlines three analytical solutions:
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