Financial risks andeconomic viability ofcoal power in Japan

Matt Gray, Head of Power & Utilities
Magali Joseph, Energy Analyst
October 7, 2019

Presentation outline
1

Report background2

Modelling methodology

34

Key findings

Recommendations and next steps| 2

Who we are
Carbon Tracker is an independent non-for-profit financial think tank funded by EU and US
foundations interested in climate.

VisionTo enable a climate secure global energy market by aligning
the capital markets with climate science.

Mission

Mapping the transition for the fossil fuel industry
to stay within a two degree budget.

Strategy

Identity

Empower investors
to identify andswitch off capital tothe highest cost,highest carbon
projects.

Engage withcompanies tore-assess both theviability of suchprojects and of theirbusiness model.

Educate mainstream
financial markets andpolicy-makers
over the riskof a disorderlytransition.

Work withfinancial regulators tobring transparency on
carbon and stranded
asset risk and the fossil
fuel risk premium.

3

REPORT BACKGROUND| 4

Report background: policy and investment
contradiction?
"The Government will work to reduce CO2 emissions from thermalpower generation to realize a decarbonized society and consistent
with the long-term goals set out in the Paris Agreement.”
Long-term Strategy for Decarbonization, submitted to UNFCCC in June 2019• 11 GW of coal capacity planned and under-construction in Japan• Coal build-out inconsistent with other countries:• EU28 and the US rapidly closing coal due to poor economics• Korea to temporarily suspend half of its fleet due to air pollution• India stalled construction due to solar and wind costs|5

MODELLING METHODOLOGY| 6

Methodology: three models
1. Project finance model
2. Relative economics model
3. Stranded assets model|7

Illustrative example of how a declining
capacity factor could impact the project IRR

Modelling methodology:
Project finance model

IRR (%)

16%
14%• Forecasted the IRR and NPV of
every planned or underconstruction coal unit

12%

IRR (%)

10%• Breakeven scenarios tounderstand project sensitivity to
key variables
 Capacity factor
 Fuel price Electricity price Carbon price

WACC (%)

Same sensitivity analysis
conducted to measure
impact of coal price,electricity price and CO2
price.

8%
6%

4%
2%0%
85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35%
Capacity factor (%)|8Modelling methodology:
Relative economics model

Three inflections points which will fundamentallychange power generation economics
Least-cost power
Implication ofsystem

18

inflection point 3.

Low carbon and least-cost

16
14
12

Dispatchable new renewables and gas outcompetes operating existing coal
Inflection
point 3.

System value analysis i.e. When will coal not be the leastcost option after grid balancing?

Implication of inflection
point 2.

108New renewables and gas outcompetes operating existing coal

6

Levelised cost vs marginal cost analysis i.e. When will it becheaper to build renewables or gas than run coal?

Inflection
point 2.

New renewables and gas outcompetes new coal

4
2

Inflection
point 1.

Levelised cost analysis i.e. What is thecheapest form of new generation?

Policymaker: Implemented
a coal phase out
Investor: No revenues
from coal power

Policymakers: Design a coalphase out
Investor: Prepare for norevenues from coal

Implication of inflection
point 1.
Policymaker: Stopincentivising new coalInvestor: Stop building newcoal

01Time|9Modelling methodology:
Stranded asset model• Forecasting stranded asset risk if
temperature goal of the Paris
Agreement is met• The amount of wasted capitaland lost revenues frompremature closure of coal
• Where will the losses occur?
 Shareholder value destroyed?
 Higher energy prices?
 Depleted fiscal resources?

|10

Methodology: key assumptions
 Coal Fuel price of US$105/t (Carbon Tracker estimates) Electricity price of US$87/MWh (Japanese Electric Power exchange) Carbon price of US$2.68/tCO2 (Ministry of the Environment) Capacity factor of 73% (OCCTO Supply Plan) Capex: US$/kW 2,100 for subcritical, US$/kW 2,400 for supercritical, US$/kW
2,600 for ultra-super and US$/kW 2,900 for IGCC (IEA)
 Renewables
 Learning curves: solar PV – 60%, offshore wind – 25% and offshore wind – 20%(IRENA Power Costs 2017)
 WACC of 3.5% (Carbon Tracker)
 Capacity additions by 2040: solar PV – 282GW, offshore wind – 20GW andoffshore wind – 30GW (IRENA REMAP)|11

FINDINGS| 12Findings: planned and under-construction coal
units sensitive to changing market conditions

Nakoso IGCC
shows thehighest
capacity factor
required toachieve an IRR
greater than
WACC

Project(outstandingexamples chosenfor thepresentation)

Forecasted Net
Present Value(NPV) (million
US$)

Highest fuel price
Lowest capacity
to achieve an IRR
factor to achieve an
greater thanIRR greater than
WACC = 2.5%
WACC = 2.5% (%)(US$/t)Lowest tariff toachieve an IRR
greater than
WACC = 2.5%
(US$/MWh)

Highest carbon
price in 2040 toachieve an IRRgreater than
WACC = 2.5%(US$/tCO2)

Nakoso IGCC

$575

62%

$95/t

$75/MWh$21/t

Yokosuka 1&2

$5

47%

$76/t

$82/MWh$4/t

Average all units

n/a

48%

$104/t$72/MWh$25/t

Average in 2018

n/a

73%

$105/t$87/MWh$2.68/tYokosuka 1&2
show the lowest
breakevenvalues of fueland CO2 costs
and highest oftariff to achieve
an IRR greaterthan WACC.

|

13

Findings: New offshore wind cheaper than newcoal by 2022|

14

Findings: New offshore wind cheaper than runningcoal by 2025|15

Findings: Without policy reform $71bn in stranded
coal assets, resulting in high energy costs|16

RECOMMENDATIONS AND NEXT STEPS| 17

High-level policy recommendations for theJapanese government
1. Immediately reconsider new build to avoid stranded assets$29bn could be avoided if the development of planned and under construction
capacity is cancelled
Sends a clear investment signal to financial community
Improves Japan’s international reputation on climate

2. Develop a retirement schedule for the existing fleet that is consistent withthe Paris Agreement
High efficiency boiler technologies without CCS are inconsistent with the Paris
Agreement

3. Accelerate renewable energy through non-discriminatory regulations toavoid missing economic opportunity associated with the renewable energy
megatrend|18

We’re here to help!
Coal power economics portal

Paris-alignment of power utilities

https://www.carbontracker.org/reports/coal-portal/

https://companyprofiles.carbontracker.org/|19

Thanks for listening
For more information please visit:www.carbontracker.org@CarbonBubble
If you are interested in knowing more,
please get in touch:
mgray@carbontracker.org

Disclaimer
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ADDITIONAL SLIDES| 22