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The five factors that determine when coal power stations close

An analysis of the coal power stations that are most likely to shut.

With the closure of Australia’s dirtiest coal power station recently brought forward to 2028, now seems a good time to publish a post I began writing late last year but never finished, which analyses five of the most important factors that influence when coal power stations close.

A quick overview of Australia’s coal fleet

There are 19 operational coal power stations in Australia located across four states: eight in Queensland (Gladstone, Tarong, Tarong North, Millmerran, Kogan Creek, Stanwell, Callide B, Callide C), five in New South Wales (Liddell, Eraring, Vales Point, Bayswater, Mt Piper) and three each in Victoria (Yallourn, Loy Yang A, Loy Yang B) and Western Australia (Muja CD, Collie, Bluewaters). In the three eastern states, they supply between 70 and 80% of each state’s electricity. In Western Australia they supply about 40% of the power in the state’s main electricity grid.

They range in size from the 340MW Collie power station to the gigantic 2,880MW Eraring power station. In age they range from 12-year-old Bluewaters to 50-year-old Liddell.

Don’t we already know when coal power stations will close?

In theory, yes. The Australian Energy Market Operator (AEMO) requires all power station owners on the east coast to publish their planned closure dates here. The owners must provide at least five years notice of any closure, and risk penalties if they don’t. If we take this at face value, just four coal power stations are expected to close by 2030: Liddell and Vales Point in NSW, Yallourn in Victoria and Callide B in Queensland.

But it would be unwise to take this at face value. If a company is bleeding money on a coal power station and they see no hope of things changing, they are not going to let themselves go bankrupt – they’ll close it down. Even substantial fines are unlikely to deter this. Coal power stations can cost hundreds of millions of dollars every year to maintain and keep safe as they get older. I expect most companies would rather pay a substantial fine to shut a power station early than pump more money into assets that are unprofitable.

So take the official closure dates with a grain of salt. Instead, consider the following five factors.

Age

Age is the most obvious factor influencing coal closure. As coal power stations age, they become increasingly expensive to maintain and increasingly prone to faults as machinery reaches the end of its technical life. Australia’s coal power stations are generally pretty old. Just five have been built since the year 2000 and the four oldest were built back in the 1970s (Liddell, Yallourn, Vales Point, Gladstone). Age also has an impact on the following factor: flexibility.

Flexibility

Coal power stations are often described as providing ‘baseload’ power. This means they are designed to operate at close to full capacity 24 hours a day, 365 days a year. That makes them poorly fitted to the modern electricity grid, with wind and solar providing a varying supply of electricity at different times of the day, forcing other power stations to also vary their supply in response. Electricity demand is also becoming increasingly varied over the course of the day, with demand falling significantly in the middle of the day and then quickly rising in the evenings.

It is true to say coal power stations are not designed to ramp their supply up and down but this doesn’t mean they cannot. All coal power stations have to ramp to some extent these days. But it takes its toll on the machinery. Generally speaking, the older the power station, the more difficult it is to ramp up and down, the higher the maintenance costs and the more likely the faults.

For example, the near-50 year old Yallourn power station in Victoria has real difficulties ramping up and down, so it avoids doing this as much as possible. In contrast, the Mt Piper power station in NSW, which was built in the 1990s and is a lot younger than Yallourn (although it is still almost 30 years old) is much more versatile and often ramps and down.

The more flexible a power station, the better its chances of hanging on into the future.

Cost competitiveness and electricity prices

Part of the reason coal power stations provide so much of Australia’s electricity is that they are relatively cheap to run – before wind and solar came along, coal power stations were the cheapest source of electricity in Australia, providing power at a far lower cost than gas and hydro.

But that is no longer the case. Wind and solar can provide power with virtually no running costs. As more and more wind and solar farms have been built across the country, the wholesale price of electricity has fallen and the most expensive coal power stations have been put under a lot of financial pressure.

According to an excellent recent analysis from IEEFA, the cost of running Australia’s coal power stations (know as the short run marginal cost) varies from $12/MWh to $42/MWh (unfortunately this analysis didn’t include WA). The three cheapest coal power stations are all in Victoria (Loy Yang A, Loy Yang B, Yallourn). The three most expensive power stations are all in NSW (Eraring, Mt Piper, Vales Point).

Cost competitiveness is not just important on a national level; within-state competitiveness is crucially important. For example, the Yallourn power station is the third cheapest coal power station on the east coast, but it is the most expensive in Victoria, so it loses out to its most direct competitors Loy Yang A and Loy Yang B.  Conversely, the Vales Point power station is the third most expensive on the east coast but two other power stations in NSW, Eraring and Mt Piper, are more expensive than it is. So Vales Point is less at risk than they are.

Why is NSW home to the most expensive coal power stations and Victoria to the cheapest? The biggest factor determining running costs is the cost of coal supply. All of Victoria’s coal power stations (and about half of Queensland’s) get coal from mines co-located with the power station and owned by the same company. All of NSW’s coal power stations (and half of Queensland’s) must get their coal from other companies who own coal mines.

The price of coal from these coal mines is heavily influenced by the international market price. If the seaborne coal price goes up, then so does the price of coal for domestic coal power stations. (This does not apply to Victoria because we are not connected to the international market – our coal is so dirty and has such a low energy content, no one would pay to import it). 

Owner incentives

Coal power stations have a range of different owners with varying incentives when it comes to closures.

Most of Queensland’s and WA’s coal power stations are owned by their respective state government. This insulates them to an extent from profitability concerns. WA’s coal power stations in particular are very unprofitable – if they were to be privatised, I would expect a significant amount of capacity to close very quickly.

Private companies also have different incentives. The Vales Point power station is the primary income stream for Delta Electricity – closing it would kill off much of their profit. But equally, if Vales Point becomes unprofitable, Delta is far more likely to suddenly close it than one of the big energy companies because they cannot absorb the losses. For the big gentailers, AGL, EnergyAustralia and Origin, who between them own six of the eight coal power stations in Victoria and NSW, their coal power stations are just one income stream of many (albeit a large one). 

There are also a couple of niche cases. The Gladstone coal power station, the oldest and largest in Queensland, is owned by Rio Tinto and primarily exists to supply power to Rio’s Boyne Island aluminium smelter.  The wholesale price of electricity is therefore not very important. As long as the smelter remains open, Gladstone is also likely to remain open as long as it physically can. And the reverse is true: the closure of Boyne Island will almost certainly lead to Gladstone’s closure.

Supply-demand dynamics

There are also varying supply-demand dynamics in the different states. Over the last decade, there has been a rapid increase in renewable energy generation in most states. This has been accompanied by a fall in electricity demand in NSW and Victoria. This has placed a lot of pressure on the coal power stations in both states and lead to a number of closures, with renewables outcompeting coal and eating into its market share.

In contrast, Queensland and Western Australia have seen growing demand for electricity over the last decade. This has meant that even though renewables have been growing in both states, coal power stations have not lost much of their market share. This is particularly the case in Queensland, which has seen only a very small reduction in coal capacity to date.

So, which power stations are in the firing line?

Weighing up all these factors, a few power stations stand out as being particularly vulnerable.

Victoria: Yallourn is clearly the most vulnerable. It is the most expensive in the state, the oldest and most polluting and will increasingly be unable to compete with the flood of new renewables. Owners EnergyAustralia recently announced that they would bring forward the closure date from 2032 to 2028 but that still seems wildly optimistic. I expect units at Yallourn to begin dropping off within the next four to five years, and I definitely wouldn’t rule out a full closure by 2025/26.

New South Wales: We already know that the Liddell coal power station will begin closing in April next year and fully close by April 2023. This will leave four coal power stations left standing in the state. The owners of these four power stations will likely wait to see if electricity prices go up again in the wake of Liddell’s closure before announcing any closures. If prices don’t rise or if any rise is short-lived, expect another coal closure announcement in 2024.

Eraring is clearly the most vulnerable – it is the most expensive coal power station on the east coast and Origin already seems to be managing expectations for an early closure. Eraring is so gigantic that you shouldn’t expect the whole thing to close at once – Origin will likely close one unit at a time. But depending on exactly how much pressure Eraring is under, I wouldn’t be surprised if an announcement for a partial closure is made even before Liddell closes – perhaps even within the next 12 months.

Vales Point is a bit of wild card – it is marginally cheaper to run than Eraring but a bit older. And its owners (Delta) are less able to absorb big losses. If things get bad at Vales Point and Origin hold out on an early closure announcement for Eraring, don’t be surprised if Vales Point goes very suddenly.

Mt Piper is the country’s second most expensive coal power station, but it is the youngest and most flexible in NSW. Expect the owners (EnergyAustralia) to endure the current low prices in the hope that Eraring or Vales Point close first, especially as they are likely to have their hands full with an early Yallourn closure in Victoria.

Queensland: I continue to think an early coal closure in Queensland is underrated. The state has seen a surge in solar generation in the middle of the day that is continuing to grow and the state’s coal fleet simply cannot continue to absorb it. With six coal power stations owned by the Queensland Government, expect them to announce the mothballing or closure of at least one in the next couple of years. Perhaps Callide B or a unit at Tarong/Tarong North? Gladstone also looms as a wild card: if Rio Tinto shuts the Boyne Island smelter or enacts a plan to transition it to a clean supply of electricity, Gladstone will likely close.

Western Australia: The WA Government has announced the closure of the two ‘C’ units of the Muja CD power station by 2024. It would not be surprising if this were to be brought forward and a closure date also announced for the two ‘D’ units in the next couple of years. Muja CD is the state’s oldest coal power station by a long distance and, like in Queensland, it is struggling to absorb the rapid growth in rooftop solar in the middle of the day. 

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