A new life for old coal power?

We consider how sustainable repurposing coal-powered plants into alternative fuel plants really is.

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The Paris climate goals require rapid decarbonisation of the global economy. As part of our 2020 climate-related engagement, we will tackle coal as it is the most carbon-intensive fossil fuel. We have been calling on electric utility companies to phase out unabated coal-fired power generation by 2030 for developed countries, and 2050 for developing countries.1 

However, closure of coal-fired power comes with a social cost, as the Just Transition2 agenda reminds us. Whole communities may be reliant on their local coal power station for jobs. And financially, the potential retirement of coal plants before their scheduled date leaves companies with significant ‘stranded asset’ risk.

Faced with these issues, some companies are now looking to repurpose their coalfired power plants instead of closing them, by replacing coal with alternative fuels – particularly biomass from wood. Power companies in the UK and Denmark have already taken this step, with plans by companies in other countries including Germany, Japan and Finland now being developed.

In theory, the idea of biomass energy is appealing. Rather than the linear process of extracting and burning coal – a non-renewable resource – biomass holds out the promise of a circular process: trees absorb CO2 whilst growing and release it when burnt, leading to a carbon-neutral outcome. Biomass also has an advantage over intermittent renewables such as wind and solar in being able to provide a predictable power source.

But some experts have called this assumption into question, pointing to the whole range of side effects and unintended consequences that large-scale land use change can bring. And investors are cautious, given the memory of the biofuels boom and bust of the late 2000s.

We visited the UK’s largest power station, Drax, to gain a better understanding of the sustainability of biomass and the practical issues involved in converting power stations. In a joint investor visit, co-ordinated by the Friends Provident Foundation, we met with senior company staff including their Head of Climate Change, and toured the power station.

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The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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