A global energy transition in the electricity sector, from fossil-fueled to low-carbon power plants, is currently driven by two complementary reasons: a) The Paris Agreement, which pursue domestic measures to reduce greenhouse emissions, in order to keep a global temperature rise below 2 degrees Celsius above pre-industrial levels,; b) lowest levelized cost of wind and solar power plants, relative to coal and gas. This could strand fossil-fueled power plants as they may become redundant or uneconomical to operate in the electricity system.
However, the real risk of a possible stranded asset depends on many variables:
a) The amount of greenhouse reduction targeted by each country in the electricity sector. Reductions may be evenly distributed in proportion to greenhouse emissions of each sector, or they may be assigned to specific sectors. Reductions doesn’t mean zero emissions, hence some existing fossil-fueled power plants and greenhouse emissions may be allowed (peak-load gas-diesel, combined-cycle natural gas power plants, for example).
b) The timeframe to achieve the reduction target. Some existing fossil-fueled power plants may have been functioning for many years, and their useful timeframe may come to an end within the timeframe of the reduction target. In this case, the value of those assets will not become stranded, but they require a coordinated schedule to dismantle and leave the system.
c) Risk of early closure to achieve the target. Other fossil-fueled power plants may achieve their useful timeframe some years after the deadline of the reduction target. In those cases, only the value of the asset that has not been recovered will become stranded, which may include the investments of pollution control in coal plants.
d) Risk of redundancy of coal and natural gas power plants in the system, because of renewable technologies. This risk depends heavily on the likelihood of having solar and wind-powered technologies, i.e., if the electricity system is geographically located in wind-producing regions and regions with enough solar radiation.
Redundancy also depends on the economic efficiency of renewable technologies, relative to coal and natural gas. In some countries and states, wind and solar technologies have a lower levelized cost than coal and natural gas power plants. For example, 29 new solar power plants with a mean energy cost of 35,46 USD/MWh and four wind-powered projects with a mean energy cost of 20,30 USD/MWh won the Brazilian wholesale energy auction in 2018. Similar patterns of technologies and low prices have also been observed in Mexico and Chile wholesale auctions (mean prices of 20,6 and 32,5 USD/MWh, respectively).
In the US, utilities of States with no renewable target are changing their generating portfolio, closing coal-powered plants and changing them by solar and wind power plants. For example, Northern Indiana Public Service decided to retire four coal units within the next five years, after soliciting bids from wholesale power providers in 2018. It received 90 proposals for a range of technologies, including wind and solar generation priced at roughly 27 to 40 USD per megawatt hour. By comparison, the company estimated that continuing to operate its coal fleet would cost between 57 and 82 USD/MWh. The economic efficiency of renewables relative to coal power plants in the US can be explained by the expected high prices of coal because of the decreasing productivity of coal mines.
In Chile, an early closure of eight coal power-plants were scheduled for the next five years, starting from the two older ones (with 36 and 34 years of operation). Therefore, the lowest levelized costs of solar and wind technologies are producing an early closure of some coal power plants in many countries.
In conclusion, global energy transition in the electricity sector, from fossil-fueled to low-carbon power plants, can transform the former in stranded assets. However, the real risk of a specific asset depends on many variables, like the age of the plant, the greenhouse reduction targeted by the country, the likelihood of having solar and wind-powered technologies in the system and the specific risk of redundancy due to renewable technologies.
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