Coal transitions in Australia

Preparing for the looming domestic coal phase-out and falling export demand

2018

Coal plays a large role in Australia’s domestic energy system, and Australia is a large exporter of coal. Australian coal output is over 500 million tonnes per year. Almost all coking coal produced and around 70% of steam coal produced is exported. Australia supplies about a fifth of the global steam coal trade. The remainder is used mostly for electricity generation, where it accounts for around 60% of total power output.

Coal production in Australia is likely to be on a long term declining trajectory. Export demand is a function of economic, technological and policy developments in other countries, all of which point to the likelihood of falling coal use over time, especially for steam coal. There is a clear prospect of lower coal export demand. It is uncertain how international developments will affect Australia steam coal exports, and there is a clear risk of strong reductions in exports demand. But Australia has very large and readily accessible renewable energy resources which promises to be the country’s energy future.

The picture is clearer for domestic coal use. Australia’s coal fired power plant fleet is relatively old with about half the plants and about two thirds of overall generating capacity older than 30 years. At the same time, renewable power has become competitive, and Australia has practically unlimited opportunities for renewable energy installations. New coal fired power stations would not be commercially viable in competition with renewables, and existing coal plants are likely to come under increasing economic pressure as the amount of renewable electricity generation increases. This is likely to cause accelerated closure of coal fired power plants.

This report presents two scenarios for coal use in Australia. The “moderate” scenario has coal power plant capacity and coal use declining rapidly through the 2020s and 2030s. Coal use would be less than half the present level by 2030, and decline by over 90% by 2040. This scenario is based on average plan lifetimes gradually declining as renewables become still cheaper than they already are, and comprising a quickly rising share of power generation. This scenario is broadly compatible with the 2030 emissions target as per Australia’s NDC to the Paris Agreement. A “faster” scenario has plant lifetimes diminishing more quickly, with coal use reduced by around 30% compared to today by 2025, reduced by two thirds by 2030, and falling to very low levels during the 2030s. It illustrates a stronger 2030 target, in line with the global objective to ratchet up national contributions towards the global “two degrees or less” goal.

Market are expected to be the key in driving the transition away from coal, as renewable power is developing a cost advantage relative to the ageing coal fired power plant fleet. Suitable policy can help achieve coal transition more reliably and smoothly; conversely there is a risk that policy designed to protect existing industrial structures could unnecessarily delay the transition and keep high emitting installations for longer than necessary.

The report also describes and analyses the closure of the Hazelwood power station, Australia’s largest and the latest of ten closures of coal power stations in Australia so far. The relatively sudden closure has highlighted the issues faced by communities and worker. Various government funded adjustment programmes have been put in place, and the episode highlights both successful strategies and the limitations to forward-looking transition policy in Australia’s present political and institutional context. We also report econometric analysis on the effect of coal plant closures on regional unemployment, finding a relatively small but persistent increase in unemployment rates on average, after controlling for other variables.

Implications for policy include the following. For exports, Australian governments should refrain from providing subsidies or other preferential treatment for coal mines and coal transport infrastructure. Mindful of the growing risk that international coal demand may drop off as a result of alternatives becoming cheaper and more desirable and of climate change policy, policy should be supportive of economic diversification in regions where coal is economically important.

For domestic coal use, mostly in electricity, governments should strive to put in place stable policy frameworks to help guide and facilitate the transition. This would include putting in place a predictable policy treatment of carbon dioxide emissions that can link in with a possible future economy-wide emissions price signal; mechanisms to encourage predictable and orderly closure of coal fired power stations and socially acceptable transition for local communities; and helping to create suitable market and regulatory frameworks to facilitate the infrastructure investments necessary for an efficient and reliable energy system in the transition from coal to renewables.

Insitute

  • DDRI

  • Climate Strategies

Employer

Crawford School of Public Policy, Crawford School of Public Policy, Australian National University, Melbourne Sustainable Society Institute and Professorial Fellow, Melbourne School of Population and Global Health