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Opinion

'Unstranding' Fossil Fuel Infrastructure

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Talk of fossil fuel assets “stranded” by the energy transition often focuses on reserves left in the ground. But a vast network of associated infrastructure — refineries and processing facilities, power plants, terminals and storage facilities, pipelines, ships and distribution systems, and even retail outlets — also face accelerated retirement as decarbonization policies take effect. Regulation of the decommissioning process post-retirement is fractured and inconsistent, leaving some infrastructure literally stranded in limbo: no longer operational, nor fully decommissioned. How could targeted policies help repurpose aging or obsolete infrastructure in ways that align with an equitable green transition?

Many fossil fuel assets are simply old — coal power plants and oil refineries in North America and Europe being prime examples. But carbon regulation will also shorten the economic life of many existing assets (Brattle Group estimated unrecovered fossil fuel infrastructure investment costs at $900 billion in the US alone, for example). But whether retirement of an asset happens on its original schedule or an accelerated one, fully decommissioning infrastructure requires extensive technical planning and a financial outlay that often was not adequately budgeted.

Pricing the Afterlife

Putting a price tag on theoretically decommissioning the full universe of fossil-fuel infrastructure is a daunting task. Fossil-fuel fired power generation capacity alone reflects just fraction of the infrastructure that could face accelerated retirement under certain policy scenarios, and there are 8,800 gas-fired power generation units operating or in development globally and 7,500 coal-fired units. In North America and Europe, where climate regulation may be more aggressive, there are 3,700+ and 900+ gas and coal units respectively in operation or development. Notably, nearly 80% of the coal generation capacity remaining in North America and Europe is over 30 years old.

There is a wealth of literature on the costs of decommissioning nuclear plants (and, increasingly, the costs of decommissioning oil and gas wells), but data for other types of power plants, let alone other types of infrastructure such as pipelines or terminals, is more nascent. Daniel Raimi at Resources for the Future offers a comprehensive analysis of the scope, costs, and other challenges of decommissioning power plants. His 2017 paper found that the per megawatt cost of decommissioning coal-fired plants ranges from $21,000-$466,000 and averages $117,000. That means that for just the 30+ year old coal-fired capacity in North America and Europe, decommissioning costs could be $30 billion using the mean cost and as much as $121 billion. That dollar value doesn’t even scratch the surface on the full population of fossil-fuel fired power plants, let alone the 1.5 million kilometers of oil, gas and LPG pipeline in operation or development globally, for example, or the nearly 4,000 coal terminals.

Beware the Zombies

To defer decommissioning costs, assets are often operated at minimal utilizations, mothballed, or partially dismantled without being fully decommissioned. In other words, the assets cease operation but hardware is not fully deconstructed, environmental remediation is not completed, and the site is not repurposed for other uses. Sites that are shuttered but not remediated and repurposed are not ideal for surrounding communities for a variety of reasons but especially because of ongoing environmental contamination.

Petroleum-based retail service stations illustrate the problem at a smaller but tangible scale. When a service station shuts down — and in the US, about a quarter have since 1991 thanks to consolidation and challenging economics — it stops selling gasoline, diesel, and candy bars but the site itself is not always repurposed. Anecdotal accounts of the costs of reclaiming service station sites vary widely but are generally at least $250,000 and can exceed $1 million. That cost may be worthwhile in a high-value real estate area, but where it is not sites can languish in the absence of public intervention and funding. "Zombie" gas stations and outright abandonment are not uncommon.

Life After Death?

Value can be found in retired or obsolete fossil fuel assets by repurposing infrastructure in ways that align with an equitable green transition. Some North American and European coal power plants, for example, are being repurposed as renewable energy generation or battery storage sites, as logistics hubs, or as data or research centers. In addition to not requiring greenfield siting, these sites usually have the advantage of being located near transmission lines and/or other relevant infrastructure such as ports or rail lines. For the surrounding community, repurposing a coal power plant rather than leaving it in limbo preserves the local tax base and employment while eliminating a source of environmental contamination.

The process usually involves hefty upfront costs and a generous timeline but can be profitable. A redevelopment company that acquired a bankrupt oil refinery in Philadelphia not long ago is making a multi-billion dollar investment (in partnership with a major pension fund and supported by a private equity loan) to repurpose the site as a hub for “e-commerce, logistics and life sciences industries.” In emerging market countries fossil fuel infrastructure is much younger on average, but there is still an economic case to be made for repurposing some of these assets.

Recommendations

How can policymakers and investors actively encourage these types of strategic transitions?

  • Governments can use financial penalties and incentives to promote full decommissioning and remediation of retired assets, or even assets that have not been operational for a specified period of time.

  • Governments can make licensing of new infrastructure and relicensing of existing infrastructure contingent on a technical plan and funding strategy for decommissioning after retirement. This should apply to renewable energy infrastructure, too. Most fossil fuel assets were constructed without adequate end of life planning but there is an opportunity to rethink that oversight with renewables  particularly since many renewable installations have a shorter expected lifespan than traditional “brown” assets.

  • Insurance companies have a vested interest in promoting effective climate policy and innovation in end-of-life insurance policies for fossil assets is one way to do that. Insurance products (such as a bond or surety) can be a vehicle for reserving decommissioning funds, and insurance can of course protect companies from the complex short- and long-term environmental liabilities faced during and after decommissioning. These products do exist and are used most heavily and sometimes mandated in relation to offshore oil and gas wells and platforms. Requiring equivalent insurance for other energy infrastructure would protect governments from becoming the “decommissioner of last resort.”

  • More than 150 gigawatts of global coal-fired generation has been or is planned to be converted to gas-fired generation (nearly two-thirds of that in North America or Europe) which of course reduces but does not eliminate the carbon footprint of these installations. Governments could make licensing of fossil-to-fossil conversions contingent not only on articulating a decommissioning strategy for the converted asset, but also on alternative use analysis: Could the long-term economics of repurposing the asset in a way that is carbon neutral or carbon negative be as compelling as the fossil-to-fossil conversion? What are the barriers to those alternative uses?

  • As demonstrated by the example of the Philadelphia refinery conversion, even projects with a compelling long-term profitability outlook require a sizable upfront investment. Clearly some of these projects are already appealing to private equity and other investors, but this is also an opportunity to think creatively about the role of green bonds and public-private partnerships in providing necessary bridge financing.

  • Where public funding is required for decommissioning or remediation, it should be contingent on carbon negative repurposing that benefits communities that have been historically disadvantaged by discriminatory siting of fossil fuel infrastructure.

Katherine Spector is the founder of ProSpector Energy Advisors. A longtime energy market analyst, she spent 15 years producing thought-leading research on Wall Street on energy supply/demand fundamentals, price behavior, market structure and geopolitical risks. The views expressed in this article are those of the author.

Topic:
Low-Carbon Policy
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