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Economic Impact of the Early Retirement of Fossil Power Plants

Economic Impact of the Early Retirement of Fossil Power Plants
4 March 2024
ASEAN, Energy
Ichiro Kutani, Yoichi Namba, Han Phoumin
Energy, Economic impact, Fossil Power Plants, ASEAN

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Addressing climate change necessitates a prompt reduction in fossil fuel consumption; however, this imperative may conflict with investment considerations. For example, project owners or financiers may incur losses if existing fossil power plants cease operation before their investments are recovered. ASEAN Member States have witnessed the construction of numerous young fossil power plants to meet escalating electricity demand. The premature retirement of such recent investments could result in economic losses, impacting a country’s overall economy.

The analysis indicates that the early retirement of existing fossil power plants carries substantial economic implications. Under the assumed conditions, a reduction in the operational period by 15 years could lead to losses equivalent to a significant percentage of the GDP. Theoretically, these losses could be offset by higher carbon prices. In such a scenario, the carbon price should be approximately US$50–US$60 per tonne of CO2 for coal-fired power and about US$100 per tonne of CO2 for gas-fired power. Based on these analyses, the study proposes three policy recommendations:

1. Careful Consideration of Early Retirement Policies:
Implementing policies for the early retirement of existing fossil power plants should be approached with careful consideration, given the potential economic consequences. Decision-makers must balance environmental goals with the economic impact on investments and overall national economies.

2. Carbon Pricing as Compensation Mechanism:
Carbon pricing can serve as a mechanism to compensate for the anticipated economic losses stemming from the early retirement of fossil power plants. Setting appropriate carbon prices, such as $50–   $60 per tonne of CO2 for coal-fired power and $100 per tonne of CO2 for gas-fired power, could help offset financial impacts.

3. Preservation of Energy System Resilience:
Measures should be taken to prevent a reduction in the energy system’s resilience due to the potential loss of diversity resulting from early retirements. Balancing the transition to cleaner energy sources with the need to maintain a diverse and resilient energy system is crucial for long-term sustainability.

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