Change is being driven by the combination of technology innovation, a global policy shift and the financial market’s increasing acceptance that stranded asset risk is significantly underestimated – and growing. Moves by the government of the Australian state of Victoria this week provide a perfect illustration of how policy change is inevitable, if unpredictable in when and where it occurs.

One likely outcome of this is capital flight, driven by market realization that stranded-asset risks have been dramatically underestimated, even in markets like Germany, where the evidence has been building for more than a decade. Like many new technology innovations, renewable energy and energy efficiency measures are deflationary and highly disruptive to incumbent industries. Additionally, the global pressure for a price on carbon is likewise building, with World Bank Group President Jim Yong Kim making this statement recently:

“In order to deliver on the promises of the historic Paris climate agreement, a price on carbon pollution will be essential to help cut emissions and drive investments into innovation and cleaner technologies. Prices for producing renewable energy are falling fast, and putting a price on carbon has the potential to make them even cheaper than fuels that pollute our planet.”

Take Swedish energy giant Vattenfall AB as an example. The owner of five German lignite coal mines and four associated mine-mouth coal-fired power plants with a total workforce of 7,500 has agreed to pay less discerning Czech entities €1.7 billion in cash to take this “business” (liabilities is probably the more correct term) off their hands. A writedown of some US$3bn is to be recorded in Vattenfall’s June 2016 quarter results, showing that previous write-downs have been underestimated despite the progressive collapse in the German wholesale electricity price by two-thirds to just €20 per megawatt hour over the past decade. This is evidence that the rise of German Energiewende has delivered massive and ongoing net benefits to the German economy.

The Victorian government, in the meantime, made two announcements this past week that will shake already damaged confidence in the historically dominant Australian fossil fuel industry. As it stands, Victoria operates the third largest lignite (or brown) coal-mining industry in the world (behind Germany and Poland). Victoria also operates the most polluting fleet of antiquated subcritical coal-fired power plants in the world – with an emissions intensity worse than that of developing nations like India.

The Victorian government under the leadership of Premier Daniel Andrews has decided that lignite mine operators will have to provide rehabilitation bonds equivalent to the estimates of the expected costs. Historically, these firms operate with bonds for only 10-20 per cent of the low end of the estimated cost of rehabilitation. Should any or all of the mine owners go bankrupt, the Victorian taxpayer was exposed for the entirely predictable decades-long environmental cleanup program required. Given the 2014 Latrobe Valley fire at the Hazelwood mine, the government has belatedly moved to partly rectify this massive subsidy for the coal industry.

Total bonds to be held as assurance by the Victorian government for the three lignite mines will rise fivefold from A$44m to A$254m by the start of 2017. This is an enormous step in the right direction. Australia likes to view its economy as a free market, yet the coal industry has for decades survived on a string of subsidies (beyond rehabilitation bonds, other subsidies include diesel fuel rebates, zero charge for pollution emissions and subsidized government funding for water, rail and port infrastructure). One could argue that estimates of rehabilitation costs are still flawed, and an independent expert review would be a good place to start an honest assessment. Rehabilitation and cleanup costs for the obsolete coal-fired power plants should also be re-evaluated.

The second, equally impressive announcement by the Victoria government, from Treasurer Tim Pallas, is the tripling of lignite coal royalties paid by coal-mining companies. The will increase the royalty rate charged per gigajoule of energy to 22.8 cents from from 7.6 cents, bringing Victoria broadly in line with New South Wales, which charges 25.2 cents, and Queensland, which charges 21.5 cents. This increase further reduce subsidies to the coal industry and will provide an additional A$70 million annually to the Victorian government to help pay for health and environmental costs that are externalized by this industry onto the community.

The Andrews government is also looking to enhance the stalled Victorian Energy Efficiency Target (VEET) scheme. Public consultation in recent months should see an updated and more ambitious program by mid-2016.

The Australia Government has been playing lip-service to the COP21 climate agreement reached in Paris in December 2015 and signed last week in New York. At the same time, it has been using every policy technique possible to protect and further subsidize the coal-export industry and impede the inevitable rise of a lower-emissions economy. By comparison, the Victorian Government is showing leadership that other Australian states would do well to emulate.

Tim Buckley is IEEFA’s director of Energy Finance Studies, Autralasia. This article was originally published by the Institute for Energy Economics and Financial Analysis

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The increase, to Rs400 per metric ton (US$6/t) is the third time the coal tax—introduced in 2010—has been doubled, and it applies to all domestic and imported coal. Given that domestic Indian coal sells for an average US$20/t, this coal tax has just become very material—equal to 30 per cent of the wholesale price, before transportation costs are penciled in.

One of the excellent features of Energy Minister Piyush Goyal’s electricity transformation push has been the government’s ability to rapidly scale up deployment of renewable energy and energy efficiency. It has done so by focusing on leveling the energy market playing field without relying on new subsidies, either for thermal or renewable energy. Further, the Indian government has made major progress in its phase-out of fossil-fuel subsidies, of which the most important step has been a reduction of subsidies for imported oil, a shift that has accompanied the international collapse of oil prices. India’s energy strategy is entirely consistent with the analysis of the International Energy Agency, which has long stressed that one of the key prerequisites for a successful transition to a less carbon-intensive economy is the elimination of fossil-fuel subsidies. With the double of the coal tax, solar, wind and hydro electricity are all already now immediately competitive in the Indian electricity market against unsubsidized new imported coal-fired power generation.

Given all the external costs of coal mining and coal-fired power generation in terms of water, coal ash, air and particulate pollution, this tax increase— which affects all thermal and lignite coal used in India—will help further level that playing field for non-polluting renewables.

This increase highlights yet again how the COP21 Paris Agreement continues to have far-reaching global ramifications. Accelerating research and development of renewable energy and energy efficiency, phasing out fossil-fuel subsidies and progressively putting an explicit price on carbon pollution were all key objectives agreed upon at the conference.

AS GLOBAL FINANCIAL MARKETS INCREASINGLY FACTOR IN THESE POLICY AIMS, IT’S NOW A QUESTION OF WHEN NOT IF, the risk profile of fossil-fuel energy investments will continue to increase.

Conversely, the deflationary cost of renewable energy grows more and more evident, and the crossover point is now within sight in an increasing number of global markets (India, China, Chile, Brazil, the U.S.). Capital flight from stranded assets across the fossil fuel sector is accelerating (Shares of Peabody Energy, the largest private-sector coal miner in the world, are now down 99.7 per cent over the .past five years), and will underpin the further technology-driven transformation of energy markets.

Indeed, the headwinds for fossil fuels are increasingly evident. They include those increasing coal taxes in India (and Korea, where the levy increased to US$21/t in 2015 from US$15/t in 2014); moves being made to a national emissions-trading scheme like those being undertaken in China and Korea’ tightening emissions requirements on coal-fired power generation in the U.S. and India; greater regulation of mine waste disposal ponds in Brazil and the U.S ; and greater scrutiny of coal mine rehabilitation subsidies and coal company leasing schemes in the U.S.

This is an era of increasing global fiscal budget constraints, and the trend toward greater industry internalization of fossil-fuel pollution costs and the reduction in fossil fuel subsidies is gaining unstoppable momentum.

IEEFA sees the global electricity sector transformation gathering speed. One result: the deep structural decline in seaborne thermal coal markets. The 11.6 per cent year-over-year decline in Chinese coal imports in January, the 28.6 per cent year-over year- decline in January 2016 coal imports into India and the 13.2 per cent year-over-year decline in coal imports into Japan in January all suggests acceleration of this trend.

Not to be overlooked: The 31 per cent year-over-year decline in U.S. coal production in January, which suggests that the second largest coal market in the world is likewise transforming faster than almost any forecast.

Tim Buckley is IEEFA’s director of Energy Finance Studies, Autralasia. This article was originally published by the Institute for Energy Economics and Financial Analysis

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Public statements, company reports and press coverage all point to a shift from coal-fired electricity generation to renewables at Reliance. It’s a change worth paying attention to because of the sheer size of Reliance, one of the biggest three Indian power conglomerates in the world’s second most populous country.

Reliance in the past five years has received approval to build five of the world’s largest thermal power projects. Only one of these proposals has been commissioned, however, and that one has been problematic. Groundbreaking has not occurred on the other four.

Reliance has realized evidently, and wisely, that its former strategy was out of step with the policy direction of the Indian government, which began last year in earnest to transform the country’s electricity sector.

Reliance at some level is clearly embarrassed by its track record over the past few years. The recently-leaked draft of a report branded by the International Energy Agency and written by its Coal Industry Advisory Board cited Reliance’s coal-fired Sasan project as a poster child for coal-fired generation. What it didn’t mention is that Reliance has been trying to unload that troubled project onto the Indian government.

Sasan, one of only two 3,960-megawatt plants built under the prior Indian government’s failed Ultra Mega Power Project program, has already sought a second tariff bailout since it was commissioned in March. Bullish forecasts for global thermal coal demand erroneously assume most of more than a dozen other proposed Indian Ultra Mega Power Projects will be built. As Sasan shows, the future is not in what these forecasters predict.

Reliance Power, listed on the Bombay stock exchange and 75 percent owned by Anil Ambani, one of the wealthiest people in India, is a bellwether if only for its size. It is one of the few private Indian power-generation firms that has consistently remained profitable in recent years, having delivered earnings growth before interest, tax and depreciation over the last four years as projects have been progressively brought online.

This performance hasn’t delivered for shareholders, however. Reliance Power was listed in 2007-08 at Rs450/share, and currently trades at Rs49/share. The company has delivered a three-year return on equity averaging five percent annually, less than half its target rate. Its current market capitalization of US$2.1 billion is down by more than 30 percent over the last year, underperforming the Indian equity market by 35 per cent. Over the past five years, Reliance Power has underperformed the Indian stock market by 75 per cent.

At its recent 2015 annual shareholders meeting, Reliance stressed that its growth plan entails 6 gigawatts of solar and 5.2 gigawatts of hydro project development in India.

And the company in its marketing materials has moved unquestionably toward renewables, coming out with a new slogan: “Reliance: Committed to becoming India’s largest integrated power generation and coal mining company with emphasis on clean and green power.”

Its latest annual report trumpets its “quest to become one of India’s largest renewable energy companies.”

News broke just this month that Reliance had appointed a new CEO, Shri N Venugopala Rao, and that Reliance was effectively ceasing most of its Indian thermal electricity-capacity expansions to pursue its renewable-energy expansion strategy.

The direction is clear. The question that remains is how fast a company like Reliance can pivot, and whether it is too late to recover from acting blindly like energy markets in the years ahead will resemble those of the past.

This article was originally published by the Institute for Energy Economics and Financial Analysis

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