The case for closing coal plants at scale

Pressure is building to bring coal-fired power plants worldwide into early retirement, driven mainly by economic and environmental concerns.

At least four types of business models can be applied to these closures:

Applying the best business model for a coal plant closure depends on plant age, utilization, ownership, Power Purchase Agreement (PPA) terms, politics, markets and power system conditions. In some circumstances, a hybrid model may be optimal, combining elements of any of these four models.

What’s more, pursuing programmatic coal plant closures, or closures-at-scale, presents different opportunities for each business model, with the trade-off between value creation and ease of implementation varying by the plant.

The retirement of a coal plant requires significant expenditure. Costs include:

Added to these costs, when closing multiple plants, are the substantial new investment for replacement renewable energy generation and transmission and distribution costs for its secure operation. The social costs of retraining coal mine and plant workers and ensuring a just transition for the wider community can also become a sizeable part of the overall costs and are essential for the project’s success.

Yet a larger-scale programme to accelerate the retirement of plants is more efficient than a one-off process. Further, it has the benefit of being amenable to all four business models and creates more opportunities for their deployment.

Such a system-wide planning approach is particularly suited to two of the four business models in that it can aid in identifying which sites are best positioned for repurposing and to what degree the system needs to swap coal for renewable energy. It is also an ideal approach for electrical grid flexibility needs when there is variability in power supply and demand.

The coal plant closure approach also brings efficiencies in executing these two models. A central agency can carry out feasibility studies for all of the plants following a common template rather than a one-off ad hoc approach. Addressing multiple plants at the same time can also benefit from common tendering, engineering, procurement and construction contracts and procurement of solar PV, battery storage and synchronous condensers that may be used in repurposing.

Meanwhile, a policy-based business closure model at a system-wide level establishes targets for coal plant closures (perhaps via decarbonization targets) and a timeframe. It then allocates funds for plant owners to put to closure, repurposing and just transition. One mechanism that fits nicely under a policy-based model is a reverse auction to allocate funds, which can also help identify the ideal coal plants and fostering competition among plant owners to reduce closure costs.

And the attractiveness of the buy-out closure business model can be enhanced with a portfolio of retirements. Investing in a system-wide programme offers a chance for the new owners to lower their risk through diversification and improve risk-weighted financial returns. For example, exposure to multiple decommissioning projects can reduce the exposure to a cost overrun from one of them. Furthermore, administrative expenses required for disclosures and communication with constituencies (host governments, concessional financing sources and investors) can be spread across the portfolio.

As the scale of retirement ambition grows in a given country or region, it is more likely that a combination of business models – the hybrid model tailored for a system – is best. The model can combine developing policy for retirement of the older or less efficient portion of the coal fleet, repurposing some of these units, building renewable energy, swapping incumbent coal contracts with renewable energy where possible and rebalancing coal generation across the remainder of the coal fleet.

The exhibit below illustrates how this hybrid model can be applied to NTPC, India's single largest owner of coal plants.

Planning coal plant closures at scale is likely crucial for global decarbonization goals. Governments and concessional funding sources will need to broaden their appraisal capabilities and lending capacities to roll such programmes out, but the approach offers efficiencies and diversification benefits appealing to private investment.