Stranded Assets and Thermal Coal in Japan: An Analysis ofEnvironment-related Risk Exposure
Ben Caldecott
Director, Sustainable Finance Programme
Smith School of Enterprise and the Environment
University of Oxford

Emailben.caldecott@smithschool.ox.ac.uk

Twitter@bencaldecott

STRANDED ASSETS AND ENVIRONMENT-RELATED RISK
Stranded Assets are ‘assets that have suffered from unanticipated or premature write-downs, devaluations orconversion to liabilities’.

Falling clean technology costs
Changing resource landscapes

Massive cost reductions in renewables andbattery technology. Impressive cost curves
and learning rates supported by small-scale
modular approaches

Shale gas abundance, water scarcity,
phosphate availability

Resource
landscapes

Evolving social norms

Cleantechnology
costs

SocialNorms

From fossil fuel divestment
through to consumer
preferences for provenancestandards, Fairtrade, andorganic

ASSET
Litigationand liability

Introduction and ratchet ofcarbon pricing, air pollution
regulation, product standards,
remediation requirements

Environmental Change

Regulation

Physical climate change,
drought, flooding, storm events,
biodiversity loss• SYSTEMIC/CORRELATIONS

Litigation and changing statutoryinterpretations
Causing harm, failing to manage risk,
and failing to disclose appropriately open
company directors and other fiduciaries
to legal challenges. Changes in law
exacerbate risk.

Government regulation

Environmental
Change• MISPRICED/IGNORED• INTERDISCIPLINARY,NONLINEAR,
LACK
TRACK
RECORD• CURRENT, NOT DISTANT

Ben CaldecottINVESTMENT IN POWER CAPACITY, 2008–15($BN)

Regulation

Litigationand liability

Ben Caldecott

Source: Bloomberg NEF (2016)

WIND AND SOLAR EXPERIENCE CURVES

Regulation

Litigationand liability

Ben Caldecott

Source: Bloomberg NEF (2016)

CONSENSUS ENERGY FORCASTS VS REALITY

Regulation

Litigationand liability

Ben Caldecott

Source: Trusted Sources UK Ltd (2016)

YEARS UNTIL TIPPING POINT‘The point at which renewables make up all of the increase in global energy supply and fossil fuel supply starts
to fall.’

Regulation

Litigationand liability

Ben Caldecott

Source: Trusted Sources UK Ltd (2016)

EXPOSURE AND WHY IT MATTERS
How is environmental risk and opportunity embedded throughout the investment chain and what are the datarequirements of different stakeholders?

ASSETSCOMPANIESEXPOSED TODIFFERENTENVIRONMENTALRISKS ANDOPPORTUNITIESOWNEXPOSEDASSETSBen Caldecott

ASSET
MANAGERSOWNCOMPANYDEBT AND
EQUITYASSET OWNERSPOLICYMAKERS
AND REGULATORSALLOCATECAPITAL TOASSETMANAGERSOR ACT AS
ASSETMANAGERSTHEMSELVESMANAGEMICROPRUDENTIAL
RISK, SYSTEMICRISK, ECONOMICGROWTH, AND
WANT TO
IMPLEMENT NDCs
SUCCESSFULLYCURRENT EFFORTS TO MEASURE EXPOSURE ARE DEEPLY FLAWEDCarbon foot printing is not a solution, but current efforts focus on incremental improvements to a questionableapproachPHYSICAL CLIMATE CHANGE
IMPACTSCARBON
INTENSITY DATAUSED AS A ‘TOP
DOWN’ PROXYINCREASING STRINGENCY OFENVIRONMENTAL REGULATIONCOMPETITION FROM CLEAN TECH

INCREASED REPUTATIONAL RISKBen Caldecott

COMPANYAUNREPORTEDDATACALCULATED BY
THIRD PARTIESUSING NONTRANSPARENTBLACK BOXESFAILS TOCONVINCE
MAINSTREAM

HYPOTHESES NEED TO BE DEFINED AND THEN MEASURED ‘BOTTOM UP’
How should exposure to environmental risk and opportunity be measured?

HEAT STRESS PROJECTIONSPHYSICAL CLIMATE CHANGEIMPACTSFLOODING PROJECTIONSPRECIPITATION PROJECTIONSASSETS PARTICULARLY EXPOSEDINCREASING STRINGENCY OFENVIRONMENTAL REGULATIONPRICING OF EXTERNALITIESCOMPETITION FROM CLEAN TECHCOMPANYAASSETS IN JURISDICTIONSPARTICULALRY AT RISKPACE OF DEPLOYMENT IN KEYMARKETSUTILISATION RATESPOLICY SUPPORTINCREASED REPUTATIONAL RISKASSETS IN PROXIMITY TO NATIONALPARKSSALIENCE OF AREAS AFFECTEDSOCIAL MEDIABen Caldecott

PROJECT: STRANDED ASSETS AND THERMAL COAL IN JAPAN• 55 coal-fired power utilities in Japan with 47.8GW of operating coal-fired generating capacity• 5 coal-fired power stations under construction with 1.9GW capacity• 49 coal-fired power stations in planning with 28GW capacity

TOP 10 COMPANIES
1 J-POWER
2 TOHOKU ELECTRIC POWER CO
3 CHUBU ELECTRIC POWER CO INC
4 TOKYO ELECTRIC POWER CO
5 CHUGOKU ELECTRIC POWER CO
6 HOKURIKU ELECTRIC POWER CO
7 KYUSHU ELECTRIC POWER CO
8 HOKKAIDO ELECTRIC POWER CO INC
9 KOBE STEEL LTD
10 SUMITOMO CORP

Ben Caldecott

COAL-FIRED CAPACITYCOAL GENERATION[GWh]
OPR [MW] CON [MW] PLN [MW]8,414
844,020
60,3524,901
600
36,2734,100
2,030
30,610
5,900
540
5,357
25,360
4,208
84
1,445
23,106
2,903
18,492
3,646
1,000
667
17,2312,500
15,868
1,475
1,300
8,753
1,395
7,994

CONTEXTSTRANDED ASSETS AND THERMAL COAL IN JAPAN• Tohoku earthquake and associated Fukushima Daiichi nuclear accident caused massive changes to energy policy
development, the shutdown of all nuclear power stations, and a re-carbonisation of Japan’s electricity grid
• Recarbonisation was accompanied by massive build-out of small-scale solar PV, leading to ‘death spiral’ conditions forJapan’s utilities• Restarting of Japan’s nuclear fleet is highly uncertain, with public opinion strongly opposed and stringent new safety
requirements
Figure 5: Change in Japan Generation Mix
Table 1: Replacement of Retiring Capacity by Fuel Type
[GW]
Coal
Gas

‘Retiring Capacity’
through 2026, estimate
10.3
37.1

Under Construction andPlanned Capacity, actual
30.0
37.1

Replacement
Ratio
291%
100%

2015

2012

2010
10%

2%

0%
9%

25%
29%
28%

12%
25%

48%

16%

Gas

Nuclear

30%
43%

15%

8%

Coal

Ben Caldecott

OilRenewables

ASSET-LEVEL DATABASESSTRANDED ASSETS AND THERMAL COAL IN JAPAN

Table 56: Data sources and completeness
Data

Data Source

Number of Coal-Fired Generating Assets (N = 154 coal-fired power stations)
Location CoalSwarm, Q4 2015; Enipedia; CARMA, v3.0 released Jul 2012; Platts’ WEPP, Q1 2016
Capacity [MW] CoalSwarm, WEPP, Enipedia, CARMA
Generation [MWh] Enipedia, CARMA, Oxford Smith School
Plant Age CoalSwarm, WEPP, Enipedia, CARMA, Oxford Smith School
CO2 Intensity CoalSwarm, WEPP, CARMA, Oxford Smith School
Market Analysis
General Information S&P CapitalIQ, Trucost
Capital Spending Trends
Bond Issuances
Ownership Trends

S&P CapitalIQ
S&P CapitalIQ
S&P CapitalIQ

Local Risk Hypotheses
PM2.5 Emissions 2012-2014 Average Atmospheric Composition Analysis Group, Dalhousie University
NO2 Emissions 2015 NASA GES DISC OMNO2Mercury Emissions 2010 AMAP/UNEP 2010
Water Stress 2015 WRI Aqueduct
CCS Geologic Suitability Geogreen
Heat Stress Change 2016-2035 IPCC AR5 WGII
Nuclear Restart Risk WEPPNational Risk Hypotheses
Renewables Outlook EY Renewable Energy Country Attractiveness Index
Renewables Policy REN21 Global Status Report
Water Regulatory Risk 2015 WRI Aqueduct
CCS Legal Environment Global CCS Institute Legal and Regulatory Indicator
Ben Caldecott

Completion %Notes

100%100%100%
100%100%

48% estimated
4% estimated
3% estimatedGlobalGlobalGlobalGlobalGlobalGlobalGlobalSee NRHs for details
See NRHs for details
See NRHs for details
See NRHs for details

RISK HYPOTHESES (LOCAL AND NATIONAL)STRANDED ASSETS AND THERMAL COAL IN JAPAN

Table 2: Local Risk Hypotheses (LRHs) and National Risk Hypotheses (NRHs)#NAME
Coal-Fired Power Utilities
LRH-1
Carbon Intensity
LRH-2
Plant AgeLRH-3
Local Air Pollution
LRH-4
Water Stress
LRH-5
CCS Retrofitability
LRH-6
Future Heat Stress
LRH-7
Nuclear Restart Risk
NRH-1
Future Electricity Demand
NRH-2
Renewables Resource
NRH-3
Renewables Policy Support
NRH-4
Decentralised Renewables and the ‘Utility Death Spiral’
NRH-5
Growth of Utility-Scale Renewables Generation
NRH-6
Growth of Gas-Fired Generation
NRH-7
Falling Utilisation Rates
NRH-8
Regulatory Water Stress
NRH-9
CCS Legal Environment
NRH-10
Nuclear Restarts

Ben Caldecott

SOURCECARMA/CoalSwarm/Oxford Smith School
CARMA/CoalSwarm/WEPPBoys et al. (2015)/NASA’s SEDAC
WRI’s Aqueduct
CARMA/CoalSwarm/WEPP/Geogreen
IPCC AR5CoalSwarm/WEPP
Oxford Smith School
Oxford Smith School
EY’s Renewables Attractiveness Index
Oxford Smith School
BP/REN21
IEA
Oxford Smith School
WRI’s Aqueduct
Global CCS Institute
Oxford Smith School

FINDINGS: NATIONAL RISK HYPOTHESESSTRANDED ASSETS AND THERMAL COAL IN JAPAN

Table 5: Summary of National Risk Hypotheses
United States

United Kingdom

South Africa

PolandIndia

Indonesia

Germany

ChinaAustralia

JapanNRH-1: Future Electricity Demand
NRH-2: Renewables Resource
NRH-3: Renewables Policy Support
NRH-4: Growth of Decentralised Renewables
NRH-5: Growth of Utility-Scale Renewables

N/A
N/A

NRH-6: Growth of Gas-Fired Power
NRH-7: Falling Utilisation Rates
NRH-8: Regulatory Water Stress
NRH-9: CCS Regulatory Env.
NRH-10: Nuclear Restarts

N/A
TOTAL*50% 60% 60% 50% 40% 45% 40% 55% 45% 60%*Total for Japan based on this publication; total for comparator countries based on Stranded Assets and Thermal Coal

Ben Caldecott

FINDINGS: LOCAL RISK HYPOTHESES, OPERATING PLANTSSTRANDED ASSETS AND THERMAL COAL IN JAPANLRH-1: CARBON INTENSITY
1 CHUBU ELECTRIC POWER CO INC
1 HOKURIKU ELECTRIC POWER CO
1 MIIKE THERMAL POWER CO
1 OKINAWA ELECTRIC POWER CO
1 TOSHIBA CORP
6 J-POWER
6 MAZDA
8 JFE STEEL CORP
9 TOKUYAMA CORP
10 TOKYO GASLRH-4: WATER STRESS
1 CHUETSU PULP INDUSTRY CO LTD
2 SHOWA DENKO KK
3 J-POWER
4 TAIHEIYO CEMENT CORP
5 MIIKE THERMAL POWER CO
5 TOSHIBA CORP
5 DAICEL CHEMICAL INDUSTRIES CO
8 ITOCHU ENEX CO LTD
9 OJI PAPER CO LTD
9 TOKYO ELECTRIC POWER CO
9 KYUSHU ELECTRIC POWER COLRH-5: CCS RETROFITABILITY
1 TOP 24 COMPANIES TIEDBen Caldecott

LRH-2: PLANT AGE
1 KASHIMA-KITA ELEC POWER CORP
1 CHUBU ELECTRIC POWER CO INC
1 TOSHIBA CORP
1 NIPPON MINING HOLDINGS CO LTD
1 CHUETSU PULP INDUSTRY CO LTD
6 OSAKA GAS CO LTD
6 TOHOKU ELECTRIC POWER CO
8 CHUGOKU ELECTRIC POWER CO
9 MIIKE THERMAL POWER CO
10 JFE STEEL CORPLRH-6: FUTURE HEAT STRESS
1 KANSAI ELECTRIC POWER CO
2 KOBE STEEL LTD
2 CHUBU ELECTRIC POWER CO INC
4 OSAKA GAS CO LTD
5 HOKUREN NOKYO RENGOKAI
6 ASAHI KASEI GROUP
7 HOKURIKU ELECTRIC POWER CO
8 TOSOH CORP
9 KYUSHU ELECTRIC POWER CO
9 OKINAWA ELECTRIC POWER CO
9 SHIKOKU ELECTRIC POWER CO
9 TAIHEIYO CEMENT CORPLRH-3: LOCAL AIR POLLUTION
1 KASHIMA-KITA ELEC POWER CORP
2 JFE STEEL CORP
3 MAZDA
4 NIPPON MINING HOLDINGS CO LTD
5 TOKAI KYODO ELEC POWER CO
6 KURARAY COMPANY LTD
7 J-POWER
8 CHUGOKU ELECTRIC POWER CO
9 SUMITOMO CORP
10 HOKURIKU ELECTRIC POWER COLRH-7: REGIONAL NUCLEAR RESTARTS
1 ASAHI KASEI GROUP
1 HOKURIKU ELECTRIC POWER CO
3 HOKUREN NOKYO RENGOKAI
4 OSAKA GAS CO LTD
5 TOSOH CORP
6 TOKYO GAS
7 NIPPON MINING HOLDINGS CO LTD
7 MAZDA
7 JFE STEEL CORP
7 KASHIMA-KITA ELEC POWER CORP
7 TOKAI KYODO ELEC POWER CO
7 TOKUYAMA CORP

FINDINGS: LOCAL RISK HYPOTHESES, PLANNED PLANTSSTRANDED ASSETS AND THERMAL COAL IN JAPANLRH-1: CARBON INTENSITY
1 SHIKOKU ELECTRIC POWER CO
2 ASAHI KASEI GROUP
3 KYUSHU ELECTRIC POWER CO
3 IDEMITSU KOSAN CO LTD
3 AIR WATER INC.
6 OSAKA GAS CO LTD
7 KOBE STEEL LTD
7 UBE INDUSTRIES
9 NIPPON PAPER INDUSTRIES CO LTD
10 TOKYO GASLRH-4: WATER STRESS
1 NIPPON PAPER INDUSTRIES CO LTD
2 SHOWA DENKO KK
3 KOBE STEEL LTD
4 CHUBU ELECTRIC POWER CO INC
5 J-POWER
6 TEIJIN LTD
7 TOHOKU ELECTRIC POWER CO
8 TOKYO ELECTRIC POWER CO
9 MAEDA CORPORATION
10 KANSAI ELECTRIC POWER COLRH-5: CCS RETROFITABILITY
1 TOP 15 COMPANIES TIEDBen CaldecottLRH-2: PLANT AGE
1 CHIBA PREFECTURE
2 CHUBU ELECTRIC POWER CO INC3 TONEN GENERAL SEKIYU
4 UBE INDUSTRIES
4 MARUBENI CORP
4 KANSAI ELECTRIC POWER CO
7 OSAKA GAS CO LTD
8 SHIKOKU ELECTRIC POWER CO
8 KOBE STEEL LTD
8 MAEDA CORPORATION
8 CHUGOKU ELECTRIC POWER CO
8 TOHOKU ELECTRIC POWER COLRH-6: FUTURE HEAT STRESS
1 IDI INFRASTRUCTURES F-POWER
2 TOHOKU ELECTRIC POWER CO
3 MAEDA CORPORATION
3 NIPPON PAPER INDUSTRIES CO LTD
5 SHOWA DENKO KK
6 ASAHI KASEI GROUP
7 TEIJIN LTD
7 ABL CO LTD.
7 SHIKOKU ELECTRIC POWER CO
10 KOBE STEEL LTDLRH-3: LOCAL AIR POLLUTION
1 ASAHI KASEI GROUP
1 TEIJIN LTD
1 SHOWA DENKO KK
4 SHIKOKU ELECTRIC POWER CO
4 KOBE STEEL LTD
4 TOHOKU ELECTRIC POWER CO
7 MAEDA CORPORATION
7 ORIX CORP
9 CHUBU ELECTRIC POWER CO INC
9 ABL CO LTD.
9 NIPPON PAPER INDUSTRIES CO LTDLRH-7: REGIONAL NUCLEAR RESTARTS
1 TOHOKU ELECTRIC POWER CO
1 MAEDA CORPORATION
1 ABL CO LTD.
1 JOBAN JOINT POWER CO
5 MARUBENI CORP
6 NIPPON PAPER INDUSTRIES CO LTD
7 MITSUBISHI CORP
8 ORIX CORP
9 TOKYO ELECTRIC POWER CO
10 CHUBU ELECTRIC POWER CO INC

POTENTIAL SCALE OF STRANDED ASSETSSTRANDED ASSETS AND THERMAL COAL IN JAPANMETHODOLOGY•

Calculated at the asset-level. Delineate into existing- and planned-capacity (WEPP, 2016)•We identify the year coal-fired capacity entered, or plans to enter, commercial operations:• Estimate total build cost at ~¥250,000,000/MW at inception (Rong and Victor, 2012)• Depreciate the asset over an expected 40 year useful life (Pfeiffer et al, 2016).

•We assume three pathways to removing coal-fired generation• 5 years, 10 years, and 15 years.

•Calculate potential unrecoverable costs in the case of mothballing or early decommissioning ineach of the three scenarios, across existing and new-build generation (Caldecott & McDaniels,2014). Unrecoverable costs = residual asset value after depreciation.

•Three periods selected to reflect different speeds and scales at which the risk factors identified
could realistically materialise. While highly illustrative, they highlight the potential impact of
stranded coal assets, particularly from coal-fired power plants that are planned, but not currently
under construction.

Ben Caldecott

POTENTIAL SCALE OF STRANDED ASSETSSTRANDED ASSETS AND THERMAL COAL IN JAPAN

Estimated Unrecoverable Cost(¥bn)

Figure 35: Potential stranded assets for existing and new build coal generators¥12,000¥10,000¥8,000B¥6,000DF¥4,000A¥2,000CE¥-2016

2021

2026

2031

2036

Existing Coal

2041

2046

2051

2056

2061

2066

2071

2076

Planned and Under Construction

Table 43: Estimates of unrecoverable costs across three scenarios (¥bn/US$bn)
Coal Offline in:

Existing Assets

2021 (5 years)
2026 (10 years)
2031 (15 years)[A] ¥4,005 ($35.99)[C] ¥2,700 ($24.26)[E] ¥1,550 ($13.93)

Ben Caldecott

Planned andUnder Construction[B] ¥4,447 ($39.96)[D] ¥6,223 ($55.92)[F] ¥5,307 ($47.69)

Total[A + B] ¥8,453 ($75.96)[C+ D] ¥8,924 ($80.19)[E + F] ¥6,857 ($61.62)

FINDINGS: POTENTIAL ASSET STRANDING
STRANDED ASSETS AND THERMAL COAL IN JAPAN

Table 8: Selected utility estimates of total potential asset stranding
Ratio Analysisi

Env.-Related Risksi

86%

KYUSHU
100% 62%EPCONDKANSAI
EPCO

ND

CHUBU
EPCO

PLN
OPR
PLN

OPR
PLN
OPR

96% 98%PLN

LRH-778% 87%

OPR

LRH-666%

LRH-591% 47%

LRH-4

TEPCO

PLN

LRH-394%

LRH-2

OPR
J-POWER 84% 56%

LRH-1(EBITDA –CAPEX) /INTERESTCURRENTRATIO

DEBT /EQUITYOPR /PLNiii

Stranded Assetsii

2021
20 26
2031
(5 year) (10 year) (15 year)¥586.2 ¥406.3 ¥237.5
40% 58% 88% 55% 32% 53% 53%
(23%)
(16%)
(9%)
¥608.2 ¥904.9 ¥773.3
44% 44% 68% 88% 41% 56% 6%
(24%)
(35%)
(30%)
¥730.1 ¥541.0 ¥351.9
32% 22% 22% 20% 100% 12% 95%
(5%)
(4%)
(3%)
¥1,309.3 ¥1,136.3 ¥963.3
47% 44% 68% 79% 53% 65% 76%
(9%)
(8%)
(7%)
¥384.6 ¥253.2 ¥121.7
42% 35% 60% 80% 15% 30% 65%
(7%)
(5%)
(2%)
¥114.1 ¥339.5 ¥290.4
26% 6% 76% 91% 38% 68% 74%
(2%)
(6%)
(5%)
¥248.2 ¥145.7¥83.6
35% 58% 88% 15% 30% 17% 85%
(5%)
(3%)
(2%)
¥406.0 ¥353.0 ¥299.2
94% 62% 35% 50% 29% 15% 44%
(9%)
(8%)
(6%)
¥288.5 ¥230.8 ¥173.1
20% 5% 30% 95% 15% 88% 12%(4%)
(3%)
(2%)
¥439.2 ¥661.3 ¥566.4
53% 18% 68% 74% 44% 59% 65%
(6%)
(9%)
(8%)

i) Ratio and environment-related risk presented as a percentile relative to Japan utility peer group, with a higher
percentage indicating higher risk: ND/E, NCurrent Ratio = 45; N(EBITDA-CAPEX)/INT = 35; NOPR = 40; NPLN = 34;ii) Stranded Assets expressed in bn¥ and as a fraction of total utility assetsiii) OPR: Operating plants; PLN: Planned and under construction plants;Ben CaldecottCONCLUSION• FUTURE FOR JAPAN’S UTILITIES IS HIGHLY UNCERTAIN, PARTICULARLY FOR HEAVILY POLLUTINGTHERMAL GENERATORS SUCH AS COAL.
• PLANNED AND UNDER CONSTRUCTION COAL CAPACITY GREATLY EXCEEDS THAT REQUIRED TO REPLACETHE RETIRING FLEET - BY 191%. THIS MAY RESULT IN OVERCAPACITY AND COMBINED WITH COMPETITIONFROM OTHER FORMS OF GENERATION CAPACITY WITH LOWER MARGINAL COSTS (E.G. NUCLEAR ANDRENEWABLES), LEAD TO SIGNIFICANT ASSET STRANDING OF COAL GENERATION ASSETS.

• STRANDED COAL ASSETS COULD BE ¥6,857BN - ¥8,924BN ($61.6BN - $80.2BN), EQUIVALENT TO 22.6% 29.4% OF THE CURRENT MARKET CAPITALIZATION, AND 4.5%-5.9% OF TOTAL ASSETS, OF JAPAN’S POWERUTILITIES. THIS HIGHLIGHTS THE RISKS OF CONTINUING TO PROCEED WITH THE PLANNING ANDDEVELOPMENT OF NEW COAL-FIRED POWER PLANTS IN JAPAN.
• STRANDED COAL ASSETS WOULD AFFECT UTILITY RETURNS FOR INVESTORS; IMPAIR THE ABILITY OFUTILITIES TO SERVICE OUTSTANDING DEBT OBLIGATIONS; AND CREATE STRANDED ASSETS THAT HAVETO BE ABSORBED BY TAXPAYERS AND RATEPAYERS.
• MOREOVER, NEW COAL-FIRED POWER STATIONS WILL GENERATE SIGNIFICANT NEGATIVE EXTERNALITIESFOR THE DURATION OF THEIR SHORTER THAN ANTICIPATED LIVES, PARTICULARLY IN TERMS OF CARBONEMISSIONS THAT CAUSE CLIMATE CHANGE, AS WELL AS AIR POLLUTION THAT HARMS HUMAN HEALTH.
Ben Caldecott