Expanding Japan’s Coal Fleet: Financial Risk and Climate Disaster

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In the past year, Japan’s electricity demand has declined by 2.7 percent, while new solar developments have added 8,000 MW of new capacity to the system, the equivalent of 16 medium-sized coal-fired power plants.

With costs for solar power continuing to drop worldwide, Japan is likely to see continued growth in the proportion of its electricity demand supplied by solar power. In addition, Japan has the potential for 144,000 MW of onshore wind power and 608,000 MW of offshore wind power, according to a 2014 study by General Electric Co. The most recent levelized cost analysis by Lazard, the world’s leading financial advisory firm, shows the cost of onshore wind power to be US$32-US$77 per kWh, compared to US$65 for new supercritical coal power without carbon capture and storage.

Despite the growth of renewables, Japan’s power companies are planning to build 48 new coal plants with a total capacity of 23,500 MW, according to Kiko Network’s Japan Coal Plant Tracker. Based on the International Energy Agency’s cost estimates for coal plant construction in Japan, these proposed plants represent US$59 billion in capital investment. Decision makers responsible for these investments should recognize them as highly risky expenditures, for two reasons. First, the growth of ever-cheaper renewable alternatives and the decline of demand due to increased efficiency presents the likelihood that new coal capacity will see a low rate of utilization. Second, growing global pressure to reduce carbon emissions may force the early retirement of highly polluting facilities such as coal plants. Both developments raise the risk that owners and investors will be left with “stranded assets,” i.e. expensive but unusable capital investments placing a drag on balance sheets.

Japan’s move to expand its coal fleet runs counter to trends in other developed economies. Both Europe and North America are experiencing a rapid shrinkage in coal-fired capacity, with retirements of older coal plants exceeding new construction. From 2003 to 2015, retirements in the EU and U.S. exceeded new coal plant capacity by 36,000 MW, the equivalent of 72 medium-sized coal plants, according to Boom and Bust 2016: Tracking the Global Coal Pipeline. Given that trend in other developed economies, Japan’s push to expand its coal fleet appears misguided.

Recent research by Climate Action Tracker indicates that decarbonization of the global power sector must take place quickly if global warming is to be held below 2°C. By 2030, electricity production from coal must decline by approximately 2/3 from current levels. Such a reduction cannot occur if new coal-fired capacity continues to be built. Instead, the transition to renewable power must be accelerated, and existing coal-fired plants must be placed on a retirement schedule. Failure by the global community to achieve rapid decarbonization threatens human survival itself. According to an April 27, 2016, letter by James Hansen, former director of climate research at NASA, “continued high fossil fuel emissions will lock in sea level rise of at least 6-9 meters,” causing the loss of all coastal cities. Although these impacts may not begin for several decades, “delayed response of the ponderous climate system spells danger … we can pass a point of no return, where it becomes impossible to avoid future Antarctic ice sheet disintegration and loss of coastal cities.”

Given the stakes, it is essential for Japan to do its part to achieve the carbon reductions necessary to prevent climate disaster.

Author: Ted Nace, Director of CoalSwarm

Image credit: Chris Lewis on Flickr