Renewable Energy Institute today released “Risk Analysis of Coal-Fired Power Plant Investment in Japan: Exposure to Stranded Asset Risk in the Energy Transition Period" (the translation of the Japanese version released on 3 October 2019*).
After the Great East Japan Earthquake, many plans were announced to build new coal-fired power plants on the grounds that they were needed to compensate for capacity lost due to nuclear plants being shut down. More recently, however, many of these plans have been canceled or switched to LNG or biomass.
The background to these changes is the growing domestic and international criticism towards coal power. The main reason however, why private-sector operators are scrapping or altering their plans, is the fact that coal power plants have become unprofitable. This report makes clear that due to changes in market conditions and political environments, Japan is facing substantial risks of stranded assets.
Renewable Energy Institute hopes that this report will contribute to the future transformation of Japan's energy policy and the development of the power sector business.
* The Japanese first edition was released in September 2019.
<Table of Contents>
1. Medium/Long-Term Outlook for Electricity Supply-Demand
2. Trends in New Coal-Fired Power Plants
3. Revenue Structure of Coal-Fired Power Plants
4. Analysis for New Coal-Fired Power Profitability
(1) Profitability Simulation for New Coal-Fired Power Plant
(2) Decrease in Capacity Factor
(3) Trends in Electricity Sales Prices
(4) Coal Price Fluctuations
(5) Policy Factors (Service Life, Carbon Tax)
(6) Scenario Analysis
Key Findings1. Maximum electricity demand will decrease by 3.7% by 2028 compared to 2018, while coal power’s installed capacity will increase by 20%. The capacity factor at coal power plants will decline from 73.2% to 69.5% on average nationwide. Most of the new coal power plants assume capacity factor of 80-90%, it is possible that these assumptions will miss the mark and that business risk will be higher.
2. The internal rate of return (IRR) that is needed to execute coal power investment is 8% at minimum and is generally set at 10%. Taking investment in a new 1,300 MW Ultra-Supercritical (USC) coal power plant as the model and setting baseline case parameters, the IRR works out to be 8.7%. When market and policy trends are taken into consideration, there is little likelihood that these assumptions can be maintained as they are.
3. When capacity factor is the only baseline assumption that is changed, and it is set at the nationwide average of 69.5% in 2028, IRR declines to 6.0%. Even with the capacity factor maintained at 85%, if the electricity sales price falls to 8.0 yen/kWh, IRR declines to 3.3%. With the capacity factor at 69.5% and the electricity sales price at 8.0 yen, it is 0.9%.
4. Most recently, the LNG price has fallen and its price difference with coal has reversed; coal is even losing its competitive advantage as an inexpensive power source. If this situation continues, as the capacity factor of gas-fired thermal power rises, coal’s capacity factor will fall further.
5. There are also policy factors associated with strengthening climate change measures that have the potential to increase the business risk of coal power investment. Even assuming a capacity factor of 85%, if a carbon tax of 3,000 yen per ton of CO2 emissions is instituted, IRR will decrease to -1.5%. With the capacity factor at 69.5%, it declines further to -5.0%.
6. Future investment in coal power will carry significant business risk. Due to decreasing electricity demand, falling renewable energy costs, declining capacity factors, falling wholesale electricity prices, rising coal prices, stronger regulations to address climate change, new coal power projects face the significant risk that they will become stranded assets.