Power generation: slow boil or red alert?

Research

01 Aug 2019
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Are we on track for 2050 climate targets? Could the trajectory change? We evaluate scenarios and sectors using UBS Evidence Lab data and cross-sector analysis.

2050 deadline: what is the trajectory and what are the implications?

To meet the Intergovernmental Panel on Climate Change’s (IPCC) global warming target all coal-fired power plants globally would need to be closed by 2050. This implies roughly a third (2.2TW) of global power capacity needs to be replaced. UBS Evidence Lab’s proprietary plant-by-plant analysis suggests that on the current ‘slow-boil’ trajectory the last coal-fired power plant would close only in 2079, with the last coal plant likely to be commissioned in Vietnam or Indonesia around 2035. Whether the ‘slow-boil’ continues or there is a ‘red alert on climate change’—prompting more radical measures—has profound implications for the power, renewables, equipment, financing and commodity value chains. Fourteen UBS analysts across five sectors have collaborated to assess the range of outcomes and their implications.

Two key drivers of the debate - top down and bottom up

We think two key uncertainties will impact the trajectory:

  1. the extent of public acceptance of coal power in Asia;
  2. geopolitical relations, which will impact governments' ability to adhere to global targets.

The macro-economic backdrop will affect dynamics in both. We think markets are broadly pricing in a continued ‘slow-boil’ trajectory with 479GW of coal-fired projects still in the pipeline.

What could one alternative scenario look like?

But what if governments reacted faster? If there is a ‘red alert on climate change’ and all pipeline coal-fired power plants were immediately stopped, we estimate it would reduce global coal power capacity 19% by 2025, and the last plant would close by 2058. This implies potential revenue losses of US$121bn for coal-fired operators and US$130bn for equipment makers.

Stock implications: 

Renewables are most preferred; coal survives but with risks Renewable equipment makers and operators could benefit from volume increase and grid parity. Miners of high-quality coal could survive longer but risks remain, low quality miners would be at risk in Indonesia. Coal power operators and equipment makers would be at risk of early closure or lower order books. The impact on banks would be limited as the debt concerned accounts for just 0.3% of the China loan book.

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