Closing Coal Plants Proves a Hard Sell for Big Global Banks

For the world to avert disastrous planetary warming, middle-income economies like Indonesia need substantial support from wealthy nations to clean up power generation. 

(Bloomberg) — A midsized, 11-year-old coal power station in West Java is an unlikely bellwether for global climate finance. 

Cirebon-1 helps keep the lights on and factories whirring in the port city it’s named after, a few hours’ drive east of Jakarta. Like much of the coal fleet that generates some 60% of Indonesia’s electricity, it’s young, built with the help of Korean and Japanese capital during the coal boom of the 2000s and 2010s. Now it is set to close early, sparing the planet millions of tons of carbon dioxide — and becoming a beacon for the energy transition.

If, that is, a credible deal can be struck between the plant’s current investors and Asian Development Bank, which is spearheading the program, plus others including large private-sector lenders like HSBC Holdings Plc. whose participation would make the deal a model for others to follow. Months of negotiation have demonstrated how hard it is in practice to persuade financial heavyweights to back the early retirement of coal — despite optimistic corporate pronouncements.

An acceptable, transparent agreement to close Cirebon would mark significant progress in the global effort to cut emissions and avoid the worst-case scenarios for climate change. A repeatable model for closing coal plants in the region is critical: if Asia’s coal plants continue to operate as planned, they will consume two-thirds of a fast-shrinking carbon budget.

Cirebon is just the beginning. This week, an investment plan is due for a $20 billion climate finance package, the Just Energy Transition Partnership or JETP, signed by Indonesian President Joko Widodo and US President Joe Biden in Bali in November. That entire project hinges on the ability of deals like this one to “crowd in”, or encourage, private capital. So far, few details have been made public. Meanwhile, the world is moving fast towards missing crucial goals. According to BloombergNEF, annual green investments need to nearly triple to nearly $7 trillion by 2030 in order to hit net-zero emissions by mid-century.

Over recent years, the highest-profile efforts have focused on stopping new coal power development. The more pressing conundrum now is how to phase out a vast existing fleet, especially in resource-rich, growing economies like Indonesia. Asia’s coal plants account for a third of the region’s total emissions, and they are young. In Indonesia, around 75% of coal plants were built after 2005. Without phase-out deals like the one being negotiated for Cirebon, they could keep burning coal for decades.

And there’s another catch. Even when agreement is possible, the process is painfully slow. If all goes to plan, Cirebon would close by 2037. That saves at least five years of emissions, assuming a 30-year official lifespan, and likely far more, given power plants often operate for a decades beyond that. But that’s also 14 years and many millions of tons of carbon dioxide away.

There are many Cirebons to be worked through — in Indonesia alone nearly 90 plants were operating in August last year, including those owned by state utility PT Perusahaan Listrik Negara, independent producers and captive plants, which are owned by and serve industrial operations. More are in the pipeline.

“From a climate point of view, the ideal time frame would be tomorrow, or today if we could make it,”  said David Elzinga, a senior energy specialist at the ADB who has been working on Cirebon. “But we have to consider that capital has been invested.”

The idea behind early phase-outs in general and the Cirebon deal in particular is simple enough. Closing coal plants early requires money, as investors need to be compensated for the loss of future earnings. That’s not a cost that emerging economies can — or want to — shoulder alone. 

“While we are in the midst of discussions on funding the energy transition and shutting down coal plants, the costs of doing so is high,” Erick Thohir, Indonesia’s minister of state-owned enterprises, said in an interview last week. “At the end of the day, it’s how fast we want to do the transition. If the money comes today, transition will be faster. If the money comes later on, it will be slower. That’s a fact.”

The theory is that rich governments and multilateral lenders help by providing low-cost grants and loans, which are then blended with market-rate funds from large banks, lowering the overall financial burden. That either allows a coal asset to be refinanced, so investors can hit targets early and accept premature closure — as in the Cirebon case — or for it to be bought, and then wound down prematurely.

This is the same thinking that underpins the JETP, with which the Cirebon deal would overlap. Half of the money in that package will come from the Group of Seven countries plus Norway; the other half will come through large financial institutions like HSBC and Citigroup, under the Glasgow Financial Alliance for Net Zero — institutions that have often made their own pledges to cut emissions.

But wealthy governments, multilateral lenders and big banks have to play along.

Best-case scenario, said Alice Carr, executive director for public policy at GFANZ, the big banks open up lines of profitable investments that align with their net-zero goals, countries get access to a new firehose of money to accelerate the coal phase-out and the worst climate-change disaster is averted. Everyone wins.

“We all know it’s hard to get it right,” said Carr, who is not involved in the Cirebon transaction, though GFANZ is a party to the JETP. “But we need to learn by doing, because there’s a lot of coal overhang we have to deal with.”

In much of the world, coal is an ever-shrinking portion of the energy mix. But existing examples of coal phase-outs, as in the United States and Germany, were made easier by plants’ age, market structures and philanthropic capital. 

There have been other examples even in Asia, but without the complex, aspirational international structure on the table in West Java.

As a test case, Cirebon has plenty working in its favor. It’s privately owned, less exposed to the messy politics around state-owned assets. The ADB is engineering and supporting its refinancing and early retirement, as part of a wider Energy Transition Mechanism program, and has the financial clout required to carry the transition if others fail to materialize. The plant’s Japanese, Korean and Indonesian owners are on board. Importantly, even in a country where power demand is rising, its closure won’t leave a power shortfall —  there is excess capacity on the Java-Bali grid.

A Cirebon deal won’t break the bank, either. Early closure here could cost up to $300 million, according to the ADB, a fraction of the $1.1 trillion invested globally in the low-carbon transition last year, according to BNEF, and of the trillions Indonesia itself needs to get to net zero emissions. 

The first puzzle has been how to compensate Cirebon’s investors — a consortium that includes Japan’s Marubeni Corp., Korea’s ST International Corp., Korea Midland Power Co. and domestic outfit PT Indika Energy — for lost revenue, likely through a one-off dividend intended to cover the present value of that cash. While some owners of the 660-megawatt supercritical plant will sell out, not all would have to. Investors confirmed they were in talks but declined to give details.

The bigger problem is how to ensure that the ADB money acts as a catalyst for much greater investment from global financial institutions. 

There is underlying emerging market risk to contend with — banks demand higher returns for jurisdictions that are perceived to be economically or politically unpredictable, and that applies even to BBB-rated Indonesia. Investors still have a fiduciary duty to their shareholders.

“Indonesia is investment grade, so there are various financing solutions available,” says Colin Chen, head of ESG finance, Asia Pacific, for MUFG Bank. That comes with limits, he explained: Not everything will receive the funds required. “If we go down the normal pure commercial route, you can only capture the commercially bankable, financeable deals, and that leaves a lot of transactions to be addressed. This is what JETP and the related discussions would like to address, providing alternatives.”

Negotiators also have to grapple with institutional policies that bar financing of coal. Over the past few years, the number of banks willing to finance fossil fuel operations has dwindled under political and investor pressure. Investment in new coal mines has fallen — but so has appetite even for phase-outs. A few are more nuanced, allowing for coal financing that facilitates an early retirement. GFANZ has floated guidance for financial institutions.

“Simply removing yourself from financing these coal plants is not going to stop them,” said Ravi Menon, head of the Monetary Authority of Singapore and chairman of the APAC Network Advisory Board for GFANZ, at a gathering in Singapore in June. “We are embracing coal to strangle it.”

For a deal that is intended as a model to be scrutinized and copied, it isn’t yet clear how much of the details of Cirebon can or will be made public, a hint of far larger issues around transparency, in part given non-disclosure agreements. Indonesian coal has also been especially intertwined with political and financial power, making accountability vital, but also explaining just why the dirtiest fossil fuel has been so hard to dislodge. Even the expansive JETP deal allows for captive coal.

“There is a lack of clarity around the specifics of these deals. There are deliberations going on behind the scenes, but this information is not public yet, creating a bit of  information asymmetry,” said Aditya Lolla, Asia analyst at Ember. 

Cirebon’s talks are the start of a long process, a proof-of-concept deal. The larger, newer plant operating next door — Cirebon-2 — is a reminder of that.

“Unit-2 will extend what is supposed to be ending,” said Kris Herwandi, a 33-year-old son of sugar plantation workers living in a village a few kilometers along from the plant, now studying for a masters degree. “Don’t just think about investors’ margins but about the fate of the surrounding community.”

Without private capital, though, these efforts can’t scale nationally, never mind internationally. And the Cirebon deal has been able to sidestep Indonesia’s rules on the sale of state assets, a headache particularly around utility PLN that the JETP will inevitably have to address.

If the JETP investment plan demonstrates progress and clarifies the contribution of private capital, it could put Indonesia at the forefront of climate finance. An earlier JETP has run into into political turbulence in South Africa, where chronic power cuts have dampened enthusiasm for any kind of energy overhaul. 

“There is momentum around blended finance and the early retirement of coal,” said Ember’s Lolla. “Incremental progress matters.”

( Michael R. Bloomberg , founder of  Bloomberg News parent Bloomberg LP, is co-chair of GFANZ. He committed $500 million to Beyond Carbon, a campaign aimed at closing the remaining coal-fired power plants in the U.S. by 2030 and halting the development of new natural gas-fired plants. He also started a campaign to close a quarter of the world’s remaining coal plants and cancel all proposed coal plants by 2025.)


–With assistance from Clara Ferreira Marques, Harry Suhartono, Heesu Lee and Shoko Oda.

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