The short-run operating cost of a coal unit and include: fuel, carbon (where applicable) and variable operations and maintenance (O&M) cost. Fuel costs include the cost of buying, transporting and preparing the coal. There are different types of coal which vary in cost depending on the energy content. The transportation costs depend on whether the coal is imported from the seaborne market or purchased domestically from a nearby mine. Variable O&M costs vary with the use of the unit.
We define profitability as gross revenues minus the long-run operating costs. Long-run operating costs include short-run operating costs minus fixed O&M and any capital additions from meeting environmental regulations. Fixed O&M costs do not vary with the use of the unit and can include costs associated with maintaining the performance of the unit due to age and use, as well as installing and operating control technologies to meet regulations.
When a coal unit is no longer able to earn an economic return due to policy or market drivers, it is a stranded asset. We define stranded asset risk as the difference of cashflows between a business-as-usual scenario and one that aligns a coal phase-out in a manner consistent with the temperature goal in the Paris Agreement. Profitable units that would close sooner than intended have positive stranded asset risk, reflecting revenue that they forgo. Conversely, unprofitable units save money by closing prematurely, and therefore have negative stranded asset risk.
There are three economic inflection points that policymakers and investors need to track: when new renewables outcompete new coal; when new renewables outcompete operating existing coal; and when new dispatchable renewables outcompete operating existing coal. Regarding the first inflection point, by 2025 at the latest, renewables will beat coal in all markets. The second inflection point is shown here.
In western economies, such as the EU and the US, coal units are older on average, and there is almost no capacity under construction. The age of a coal unit is important to assess their efficiency which declines over time, as well as understanding re-investment decisions for life-extension or pollution control upgrades. In emerging economies there is a significant amount of capacity under construction, and while these units are more efficient, they will have a significant amount of capital to payback in a short space of time.
We take the International Energy Agency’s Beyond 2°C Scenario (B2DS) from Energy Technology Perspectives 2017. This scenario gives regional pathways for coal capacity that is compatible with the temperature goal in the Paris Agreement. By comparing current generation with the pathway limits for each region and phasing out the highest cost or least profitable units each year, taking in to account already announced closure decisions, we find the ‘below 2°C phase-out year’ for each unit.