How about a global auction – Global Issues

There are over 8,500 coal-fired power plants worldwide with a capacity of over 2,100 GW. These plants generate about 10 gigatonnes of CO2 emissions per year, almost 30% of the world’s total emissions. Credit: BigstockOpinion by Philippe Benoit, Chandra Shekhar Sinha (Washington dc)Wednesday 02 November 2022Inter Press Service

WASHINGTON DC, Nov. 02 (IPS) – Report after report highlights that we can only achieve the greenhouse gas (GHG) emission reductions required by the Paris Agreement climate goals if much of the existing coal-fired power generation capacity is phased out ahead of schedule. A concept that deserves more attention to this end is the implementation of a global coal plant early closure auction: a global coal closure auction. This article lays out the broad outlines of how this global auction might work.

The International Energy Agency (IEA) estimates that there are over 8,500 coal-fired power plants worldwide with a capacity of over 2,100 GW. Although these power plants are concentrated in a limited number of countries (notably China, followed by India and the US), there are coal power plants in over 100 countries with over 2,000 owners.

These plants generate about 10 gigatonnes of CO2 emissions per year, almost 30% of the world’s total emissions. This level of emissions from coal is not consistent with either the “well below 2°C” or the more ambitious “1.5°C” temperature targets set in the Paris Agreement.

Accordingly, climate/development organizations such as the Asian Development Bank (ADB), the World Bank, the IEA and RMI are examining programs for the early closure of these coal-fired power plants.

But the closure of these facilities brings with it two important challenges. First, the decommissioning of these power plants eliminates the production of electricity that many countries depend on for their economic development…production that would need to be replaced by preferably low-carbon sources. Second, owners are typically reluctant to close income-generating assets and want financial compensation for the income they would lose if their assets were to be closed early. This article addresses this second limitation.

There are various regulatory mechanisms that can be used to encourage early retirement such as: B. ordering the closure of plants or the imposition of a CO2 tax or other costs that make the operation of the plant uneconomical.

A very different approach is to lure closures by paying owners to do so. This is, for example, the premise of the innovative Energy Transition Mechanism of the ADB.

But what is a fair price? But maybe that’s not the right question. But at what price are owners willing to close their facilities? Given that there are more than 8,500 coal-fired power plants in operation with different technical and financial characteristics, and over 2,000 power plant owners in different financial situations with different corporate strategies (including numerous state-owned companies), the answer will be different.

One technique that has been used in this type of multi-actor context is an “auction”. While in the traditional context a seller tries to get the highest price from several possible buyers through an auction, in this case we have a buyer who is interested in paying the lowest price to various asset owners (i.e. the sellers) for the decommissioning their coal-fired power plants.

This is known as a “reverse auction”. This instrument has been used to acquire new generation of electricity, including renewables, at low prices and, particularly in the climate context, to attract low-cost investments that reduce methane emissions.

The reverse auction mechanism could be used to solicit suggestions from coal plant owners as to what price they would be willing to close their plant at. Conceptually, this could be done on the basis of MW of installed power generation capacity. Under the auction, an interested coal plant owner would offer to sell their MW of plant capacity at a specified time and at a proposed price — more specifically, to Shutter.

Importantly, the climate benefit sought by the auction does not come from the decommissioning of MW capacity itself, but rather from the greenhouse gas emissions that would be avoided by decommissioning that capacity. Accordingly, for each coal decommissioning tender, it will be necessary to estimate the level of avoided emissions.

This determination is based on several factors, including the efficiency of the particular plant, the remaining service life and other technical characteristics, the type of coal used, and the amount of power generation that is likely to be eliminated by early closure based on the expected power demand of the power system from that plant.

The offers should contain sufficient information to be able to assess these points and thereby also the level of avoided emissions and the associated climate benefits to be achieved from the proposed decommissioning. This in turn determines how much the auction buyer should be willing to pay for the bid.

Furthermore, since it would be largely counterproductive from a climate perspective to pay to shut down existing coal-fired power plants to see the money go directly (or indirectly) to building new fossil-fuelled power plants, the tender would need to be accompanied by the plant owner, an obligation, not reinvest in new fossil fuel production.

As already explained several times, CO2 emissions have a global impact that is essentially independent of the geographic location of the emitting installation. Given this global nature of the emissions, the auction would also be conducted on a world scale as a global auction. From India to Indonesia, from South Africa to South Korea, from Poland to Australia, any plant anywhere would be eligible to participate in the global auction.

Given this scale, an international organization such as the United Nations or a multilateral development bank would be well placed to provide the platform for this auction. One could envision a system where the auction process would determine the selection criteria for projects, the methodology for estimating GHG emission reductions and other key bidding parameters.

Significantly, while the bidding process would be managed on an integrated basis, the funding and selection of winners need not be. Rather, a system could be used that would allow interested buyers of coal retirements to be matched with individual power plant owners.

For example, buyers and their financing could be mobilized from asset to asset based on information provided by the asset owner as part of the auction process. In fact, many potential financiers have focuses that could make them attracted to decommissioned coal plants only in certain countries (e.g., financiers interested in a particular group of developing countries). The proposed auction structure could take these preferences into account. In addition, the global auction could also work in conjunction with country-specific approaches.

A potential source of funding for coal retirements being auctioned is the potentially large amounts of capital that can be leveraged through enhanced carbon credit mechanisms under development. In order to use these mechanisms, it may be necessary to establish defined project eligibility criteria, frameworks for calculating GHG emission reductions and associated monitoring and verification systems in order to make payments for emission reductions at the time of decommissioning based on a price for emission reductions (“Carbon”) credits.

It is also important to remember the first caveat mentioned earlier, which is that countries, and especially developing countries, will need more electricity to drive further economic and social development. Accordingly, any global coal-fired plant decommissioning auction must be coupled with a program to finance new renewable power generation.

Climate change is a global challenge impacted by greenhouse gas emissions from everywhere. We need to reduce emissions from coal power generation and that requires a program to encourage and entice owners to close their plants. A global auction conducted by the United Nations or a similar international organization would help identify opportunities where willing asset owners and interested financiers can strike a deal.

Philippe Benoit has worked on international energy, finance and development issues for over 20 years, including senior positions at the World Bank and the International Energy Agency. He is currently Research Director at Global Infrastructure Analytics and Sustainability 2050.

Chandra Shekhar Sinha is an advisor in the World Bank’s Climate Change Group, working on climate and carbon finance. He previously worked at JPMorgan, TERI-India, UNDP and the Kennedy School of Government at Harvard University.

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