How long can Japan and Australia resist the Net Zero megatrend?

Last month, the International Energy Agency (IEA) published its landmark report: Net Zero by 2050: a Roadmap for the Global Energy Sector, the world’s first comprehensive study of how to transition to a Net Zero energy system by 2050 without compromising energy affordability, energy access and economic growth. The Net Zero narrative desperately needed clarity to avoid greenwashing, and the IEA did not disappoint regarding the implications of reaching the goal by 2050.

The response from Australia and Japan was far from complimentary. At the heart of these responses are its implications for coal use in Asia, which has long been considered the last bastion of demand.

In line with global calls like the IEA’s to reduce coal consumption, China – as the world’s largest coal consumer – has made a stance against the world’s dirtiest fossil fuel. At the US-led Leaders Summit on Climate, President Xi announced that China will curb coal consumption, with an aim to peak coal usage in China by 2025. While such climate ambitions should be lauded, these pledges currently clash with reality on the ground. In 2020, China accounted for more than three quarters of new coal-fired power plant capacity. It is also home to 74 GW of coal capacity that has been given planning approval – more than five times the 14 GW granted approval in the rest of the world combined.

The discrepancy between China’s climate ambitions and realities on coal plants boils down to decoupling economic growth from emissions. China has long been criticised for putting long-term climate ambitions on the back burner in favour of prioritising short-term economic objectives. Indeed, the need to help the economic recovery from the Covid-19 pandemic has been blamed for the approval of 38 GW of coal plants in 2020, more than the previous three years combined.

In 2020, China accounted for more than three quarters of new coal-fired power plant capacity. It is also home to 74 GW of coal capacity that has been given planning approval – more than five times the 14 GW granted approval in the rest of the world combined.

Independent of climate, air and water concerns, the vulnerability of coal power in China is becoming increasingly clear.

Using a ‘continuous emissions monitoring system’, TransitionZero was able to independently confirm long-standing suspicions that operations of many coal-fired power plants are no longer profitable in China. Combining satellite imagery with machine learning, plant-level production estimates for each coal plant in China was captured and fed into a risk index system, which captures financial, economic, regulatory and environmental variables. An asset-specific risk rating was then assigned to each plant, indicating the risk of closure due to the energy transition. Based on this analysis, the average capacity factor of coal plants in China was estimated at merely 49% in 2020, significantly lower than the 57% recorded in 2010, and well below the potential for baseload thermal plants. The shorter operational hours have a direct impact on the profitability of these existing coal plants, as well as planned new plants. In fact, independent of water, air and climate concerns, the vast majority of China’s coal fleet could be shut down and replaced at a saving of $1.6tn, equivalent to a net negative abatement cost of $20/tCO2.

China has already grasped the opportunity associated with clean energy. Between 2016 and 2020, it installed 282 GW of wind and 253 GW of solar, significantly outperforming its stated policy goals. In 2020, it connected 72 GW of wind (higher than the rest of the world combined) and 48 GW of solar to the grid (more than 37% of global capacity additions), which equates to more than three large wind turbines and five football fields of solar panels every hour.

And it’s not stopping. China has already committed itself to increasing its total installed capacity of solar and wind to 1,200 GW by 2030, more than double its current installed capacity. The meteoric rise of China as the leading investor, producer and consumer of renewable energy stems from its strong production capacity and large consumer base, which it leveraged to build economies of scale and drive down the once-exorbitant costs of these low-carbon sources. Continued investment and development of the renewable and clean energy sector will help enshrine the country’s status as a clean technology hub and potentially be key for its decoupling of economic growth from emissions.

Japan and Australia: from laggards to left behind

Leaders in both Australia and Japan have pushed back strongly against IEA’s Net Zero report, insisting that coupled with the “right” technology, coal and gas will remain central to their future power mix. This should come as no surprise: Australia’s mining sector is exposed to Asian energy trends and Japan’s national champions, such as Mitsubishi, IHI and Sumitomo are dependent on Asia for power plant boiler sales. This dynamic is reflected in Australia’s and Japan’s own Net Zero strategies, which rely on retrofitting existing conventional power technologies.

Stubbornly insisting on investments in new coal mines and gas fields will only serve to increase the exposure of the Australian economy to stranded asset risks as global demand evaporates

Japan’s reliance on fossil fuels seems to be grounded in a perceived lack of alternatives in its technological arsenal. Nuclear power faces strong public resistance in Japan, limiting its role in the energy transition. While renewable energy is considered expensive by the Ministry of Economy, Trade and Industry – a point contested by the IEA and others – Japan has turned its attention to retrofitting coal and gas plants. Japan has experimented with various technologies to ‘future-proof’ its coal and gas plants, including ammonia co-firing in coal plants, coal-to-gas plants (more commonly known as integrated gasification combined cycle or IGCC) and hydrogen co-firing in gas turbines. Despite these efforts, it is unlikely these technologies will be fit for a Net Zero future.

Ammonia/hydrogen blending and IGCC applications do little to reduce emissions. Given current technological limitations of 20%-30% co-firing, ammonia/hydrogen blending offers only incremental and insufficient emissions reduction potential. Without carbon capture and storage (CCS), IGCCs emit about 0.73 kgCO2/kWh – almost double that of a LNG-fired plant. Moreover, multiple technical hurdles have to be addressed before these technologies can be successfully commercialised, including NOx control for the direct combustion of hydrogen. The high cost of both ammonia and hydrogen co-firing, and IGCC applications, also means that the planned use as base load plants makes poor financial sense.

Australia seems to be locking itself into a coal and gas dominated future, due its large endowments of fossil fuel resources. Last year, it was second only to Indonesia and Qatar as an exporter of coal and LNG. With the fossil fuel export business contributing some A$80bn ($62bn) to its economy every year, Australia has repeatedly defended the role of fossil fuels in the future global energy mix. Its insistence on being one of the few remaining supporters of fossil fuels only serves to entrench its economy into an increasingly tenuous position. For example, IEA’s vision of a Net Zero future sees coal demand at 600 Mt by 2050, equivalent to merely a tenth of today’s figures. Perhaps more alarmingly, about half of global coal demand will be wiped out within the next decade, if IEA’s outlook plays out. At this rate, stubbornly insisting on investments in new coal mines and gas fields will only serve to increase the exposure of the Australian economy to stranded asset risks as global demand evaporates.

Conclusion

IEA’s Net-Zero-by-2050 scenario marks the end of an era for fossil fuels investments and use. This has revealed an inconvenient truth for the fossil fuel industry and the countries which rely heavily on them: in spite of emission reduction technologies, fossil fuels remain marginal in the future energy mix. TransitionZero’s analysis, which demonstrates that choosing to act now and retire old fossil plants is not only possible, but makes sense both financially and for the climate, aligns with IEA’s outlook. To us, the message is clear: it no longer makes sense to cling on to fossil fuels as the de facto energy source. Japan and Australia must embrace the Net Zero megatrend or risk being left behind.

Jacqueline Tao is an Analyst at climate analytics provider TransitionZero