A Cautionary Tale about Stranded Assets

Just in time for Christmas a cautionary tale of two power plants is warning investors to be wary of fossil fuels. As predicted by many the evidence is mounted to support the contention that dirty energy is destined to be stranded assets. The closure of coal powerplants all around the world corroborate this prediction. Here are two examples from opposite sides of the world that demonstrate how once dominant coal powered powerplants are being replaced by renewable sources of energy causing investors to lose billions of dollars. 

The imposing smoke stacks that towered 775 feet above Arizona’s Navajo Generating Station dominated the landscape, but on the morning of Friday December 18th these monuments to the Anthropocene came crashing down. The plant was the largest coal powered energy facility west of the Mississippi River. It was demolished as part of Arizona’s transition to renewable energy.  The Grand Canyon state is transitioning away from fossil fuels with the goal of net zero emissions by 2050. The state’s two largest utilities (Arizona Public Service and Tucson Electric Power) are abandoning all of their coal assets and working toward 100 percent carbon-free electricity by 2023. Arizona’s energy transition is timed to benefit from president-elect Joe Biden‘s Building Back Better recovery plan. 

Despite Trump’s promise to keep them openmore than 50 coal powered power plants have closed since 2016 and in 2020 power companies announced that they will be closing and additional 13 coal power plants. Perhaps the best example of the costs associated with stranded assets is in Australia. As illustrated by unprecedented wildfiresAussies have been hit hard by global warming. For years pundits have been warning of the dangers of stranded assets down under. Now it appears these predictions are coming true. 

Australia’s newest coal-fired power station has just been written off as worthless. In what has been described as a “classic example” of changing energy dynamics, the investors who own the Bluewaters power plant in Collie, south of Perth just lost $1.2 billion. As reported by Daniel Mercer in an ABC News story, the Japanese investors that own the Bluewaters plant have written down the value of the asset to zero. Japanese conglomerate Sumitomo purchased Bluewaters in a joint venture with Japanese firm Kansai. Both companies are believed to have written off their equity stakes. The reason cited for shuttering the station is competition from renewable energy led by solar.

Simon Nicholas, told ABC News, this as, “an absolutely classic example of what we’re likely to see going forward across Australia and around the world.”  Nicholas is an energy finance analyst at IEEFA, and citing the declining costs of renewables he said the decision highlights the changes we are seeing in the energy industry. He predicts that the “dramatic shift” toward renewable energy means that other coal-fired plants will follow suit. In many places in the world it is already cheaper to build and run renewable energy projects than it is to build and run coal fired power plants. “So, the long-term future for coal-fired power plants is looking fairly grim,” Nichols said. 

It is not only coal, the oil and gas industry will also face increasingly stiff competition from clean energy sources. The transition away from fossil fuels to renewables is already well underway. This energy transition is due in part to cities, academia and investors who are ditching fossil fuels as part of a growing divestment movement.  This is also corroborated by the spate of national decarbonization pledges made at the recent UN Ambition Summit. Once we factor the environmental costs of dirty energy, it is game over for oil and gas.  

The signing of the Paris Climate Agreement in 2015 signaled the end of fossil fuels and presaged the stranding of assets. Despite a brief reprieve for fossil fuels under the Trump administration, the low carbon economy is set to dominate the global agenda going forward. The writing is on the wall and investors have been warned

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