Closing Australia’s most polluting power stations would dramatically reduce emissions and accelerate the transition to a lower emissions intensive economy; Besides, the capacity is not even needed today. Australian Ethical’s International Share’s Portfolio Manager, Nathan Lim, explains.

It is clear to us that global energy policy continues to shift towards supporting a lower emissions intensive economy. This policy shift is most pronounced in the power generation sector where it can be stated categorically that the majority of advanced nations are seeking to reduce the carbon intensity of their energy sector. Admittedly, some nations are more advanced or ambitious than others, but the direction is the same. One way to accelerate emissions reduction is to close brown coal power stations because they are the largest and dirtiest.

Why we need to accelerate the transition to a lower emissions intensive economy

350.org prepared the chart below and utilised data from the Intergovernmental Panel on Climate Change’s Fifth Assessment Report. It shows how many years we have remaining to limit future temperature rises if we maintain our current emissions path. A 2⁰C rise is considered the maximum allowable warning to avoid dangerous climate change. In this context, there is an urgent need to cut emissions intensity today.

As was most recently demonstrated in South Australia, switching from coal-fired generation to a combination of natural gas and renewable energy is possible today with no impact on reliability (see our previous article here).

Switching to natural gas affords a temporary reprieve from the carbon countdown as this form of power generation still emits carbon but at a substantially lower level than brown coal. This time could then be used to deploy more renewable energy and gives energy storage technology time to become more affordable.

But the pricing signal is confused

Power prices in many developed markets have been persistently weak. One of the contributing factors has been the growth in renewable energy which has had the perverse impact of artificially lowering wholesale electricity prices.

This is the result of its incompatibility with how conventional wholesale electricity markets work (see our previous article on this here) and its contribution to excess generation capacity. It should be emphasised that the dominance of cheap coal-fired generation is also a large factor in the low electricity price because it does not properly account for the carbon pollution it emits into our air. Said differently, coal-fired generation is cheap and by extension so is wholesale electricity because the true cost of carbon pollution has not been properly accounted for.

Low electricity prices create a negative feedback loop. As long as coal is the cheapest form of power generation, there is no financial incentive to use lower emissions technologies.

Coal-fired closures are a direct solution

The most elegant way to fix the false price signal given by coal-fired generation is to institute a carbon price via a tax or trading system. However, we recognise that this is politically too toxic to contemplate right now. If one of the purposes of a carbon price is to make coal-fired generation less attractive economically then the next best thing is to encourage closure of the power station directly. This is precisely what Canada and the US have done/are doing. In Canada, all existing coal power stations have a 50-year mandated life meaning the country will see a natural decline in the number of coal-fired power stations in the future.

The regulation also specifies that new coal-fired power stations will need some form of carbon capture to meet emission limits. Likewise in the US, it has been proposed that all new and existing non-natural gas-fired power stations must emit less than 1,100 lbs of CO 2 per megawatt hour. For coal-fired facilities, this again will only be possible with some form of carbon capture. These onerous restrictions are projected to lead to substantial coal power station closures throughout North America regardless of the technological availability of carbon capture.

In Australia, closing coal-fired power stations will also have the benefit of reducing the massive overcapacity we currently have in this market. The Australian Energy Market Operator (AEMO) has estimated that there is up to nine gigawatts of excess capacity in a market with approximately 50 gigawatts of total capacity. 90% of this oversupply is concentrated in New South Wales, Victoria and Queensland.

All this excess capacity weights against prices as there is simply too much supply of electricity. To this end, Victoria’s 6.6 gigawatt fleet of brown coal generators look like prime candidates for closure.

Take advantage of the current situation

Given the enormous oversupply in the market, Australia could use this opportunity to forcibly close excess generation by imposing an emissions threshold on existing generation. In the first instance, we would not need to target all coal generation just the most polluting ones. Victoria’s fleet of brown coal generators are collectively the highest source of carbon emission per unit of electricity produced in the country.

We estimate they produce approximately 68 million tonnes of CO 2 per year which is approximately 12% of Australia’s total emissions. Given the enormous oversupply of electricity in the market, why not take brown coal out of our system today?

Our carbon budget is rapidly depleting and it will take decisive action by all countries in the very near term to get ahead of the climate challenge. Brown coal is one of the most polluting forms of power generation and it is technologically obsolete. Its use persists only because we have been unable to effectively price the pollution it creates.

In Australia, we have nearly a decade of excess capacity as estimated by the AEMO such that we could rapidly take out generation capacity and not impact reliability. By targeting brown coal we could radically slash our national emissions, rebalance the electricity market for the betterment of all participants, maintain high system reliability and end up with dramatically cleaner air.

We should not miss this opportunity to make a meaningful contribution towards the fight against climate change especially when we are cutting something we hardly need.

Nathan Lim is a portfolio manager with Australian Ethical Investment.