Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

The end of the road for coal?

The use of coal in the UK is now at its lowest level in over a century, but other countries are not so lucky. How can we accelerate the rate of change?

In China, coal pollution is reportedly responsible for over 600,000 premature deaths per year. Furthermore, the UN body IPCC recently released a new report on the pathway to limiting the rise in global temperatures to 1.5°C.

The report paints a stark picture: 2°C, previously thought of as the ‘safe’ limit for an increase in global temperatures, would cause a dangerous rise in sea levels and associated mass migration, as well as threats to food security.

By keeping temperature rise to no more than 1.5°C, we can avoid the most devastating consequences. However, reaching this target requires urgent action: Global net human-caused greenhouse gas emissions would need to fall by about 45% from 2010 levels by 2030, reaching ‘net zero’ around 2050.

Without beginning an immediate phase out of coal (a fossil fuel about twice as emissions-intensive as natural gas) the world has no hope of staying within the 1.5°C limit.

The bottom line

Not only does coal have a significant climate impact – we also believe that it’s a poor investment. In the US and Europe in particular, the economics of coal power generation do not stack up.

The US today produces enough gas to largely meet domestic demand. Commodity prices, together with the significant environmental and health impact, means there is little incentive for investors to fund new coal capacity in this market.

Similarly, Europe benefits from reasonably cheap and readily available gas from the North Sea and Russian pipelines. In combination with recent policy intervention in the form of carbon prices, which are seemingly on a steep upward trajectory, investments in new coal generation on the continent makes little financial sense in our view.

Additionally, the cost of wind and solar power has fallen to the point where in many parts of the world, they can compete on price against coal plants at auction. This further erodes coal’s bottom line, as the expanding global fleet of coal plants is running fewer hours than before, following a generation peak in 2014. In India, coal plants already represent 15% of stressed assets on banks’ balance sheets.

Power politics

While we believe that the economic case is clear-cut, the political rationale is less so. In the name of job protection and creation, policymakers across developed and developing markets continue to prop up investment in coal.

In the US, President Donald Trump has famously made reviving the industry a campaign pledge, and the trend extends to Western Europe. Last year, the Spanish government issued a ‘royal decree’ in an attempt to stop utility company Iberdrola from closing down its last remaining coal assets in the country, before being rejected by the national market and competition regulator. In Poland, the planned Ostrołęka C coal plant is on track to lose investors €1.7bn, unless the government wins concessions on EU state aid rules.

In Asia, the picture is unfortunately more complicated. Coal is abundant in China and India, while gas is scarce and imports are expensive. Policymakers in the region have yet to introduce meaningful carbon prices. This means that coal remains the cheapest source of electricity generation in these markets.

As a result, satellite analysis of coal power station developments in China has revealed that the country is expanding existing capacity by the equivalent of a further 25%. In India, too, coal-fired capacity well beyond the rate of replacement is under construction or planned.

Putting current economic arguments aside for a moment, it is worth reiterating that this continuation of business-as-usual sets the planet on course to overshoot the 1.5°C target around 2040.

Ending the age of coal

At LGIM, as part of our Climate Impact Pledge, we are engaging directly with the largest global mining and electric utilities companies, calling on them to phase out coal from their portfolios. We have also joined forces with other investors to engage with Chinese electric power companies and discuss the viability of their coal assets.       

In addition, we engage directly with policy makers, driving home the message that the economic case for the private sector on coal is simply not there, and that protecting the wider economy from the risks posed by climate change may mean walking away from assets that are still operational.

But we are running out of time fast.

So what can individuals do? Clearly there is no silver bullet. But we can all use our position as both voters and energy consumers to voice concern. For instance you can speak to your insurer and your bank about their coal policy.

Individuals – and companies – can also make a difference by changing how they invest for their futures.

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