The Asian Development Bank and a handful of financial institutions will take an ambitious proposal to end Southeast Asia’s coal addiction to the COP26 climate talks. They want to speed up the shift away from the dirtiest fossil fuel by buying out coal-fired power plants and closing them early, while fostering green alternatives. Good news, considering the ADB only formally stepped back from funding the black stuff this year and coal power plans in this region risk putting global climate targets out of reach.
As outlined today, though, it’s at best a fragmentary fix.
Indonesia, the Philippines and Vietnam — the three pilot countries — have young power plants, opaque long-term pricing agreements, and do not yet make carbon emissions sufficiently costly. Unlike other parts of the world where such early retirement plans have been tested, often with aging and inefficient plants, there may not be the incentives for enough operations to be sold. This isn’t one nation in crisis — like South Africa, also considering a coal exit plan — but countries with fragmented grids, differing markets and distinct domestic imperatives. What looks worthy on paper may have inadequate impact at a high cost, while distracting from more mundane but vital investments.
To be clear, the developing world needs support to accelerate the energy transition. It’s also true that financial ingenuity is vital to harness the power of capital markets. But as they lay out the plan’s detail, institutions supporting it, like British insurer Prudential Plc and HSBC Holdings Plc, must acknowledge the limits and pitfalls of theoretically neat financial solutions.
There’s no doubt about what’s at stake. Global coal use in electricity generation must fall by 80% below 2010 levels by 2030 to avert climate disaster. But while much of the world has shifted, Indonesia, Vietnam and neighbors have been growth hotspots. The overwhelming majority of new coal-fired generation is in developing Asia. Coal capacity doubled in Southeast Asia since 2010.
There are signs of change as funding dries up, but it’s too slow. The fuel is still perceived as inexpensive and reliable, despite renewable energy now being frequently cheaper. Even as Indonesia moves toward a very modest carbon tax and increases investment in green energy, domestically mined coal remains critical to employment and exports. Vietnam has backed wind and solar energy, but just recalibrated coal reduction targets in its latest power development plan, at the expense of wind. It’s a hard addiction to kick.
The ADB-backed plan — championed earlier by Prudential’s Don Kanak, a green finance enthusiast — makes a straightforward case. It envisages an investment fund that would buy and retire coal-fired power plants over 10 to 15 years, instead of the remaining three or four decades. Another portion of funds would support sustainable energy and related infrastructure.
It’s an appealing idea. But can it reach anything like the required scale?
The first problem is that coal-fired facilities have a lifespan of more than 30 years. The weighted average age of plants is seven years for Vietnam and 12 for Indonesia and the Philippines, according to the Institute for Energy Economics and Financial Analysis. If capacity is added as planned, the figures will all stand below 10 years in 2025. That adds to the impetus for a buyout solution, but makes it far more costly.
Worse, there are long-term power-purchase agreements, with opaque and complex guarantees that protect operators’ revenue and make it hard to establish buyout price and incentives. Those would have to be unpicked to get even close to a potential target of 50% of capacity, but at what price? Will operators end up being compensated for bad fossil fuel bets? And if only the remaining plants are targeted, are they the right plants to make a difference, and isn’t it better to push those out of business by aggressively supporting renewable energy and related infrastructure?
The next hiccup is the need for real support from the region’s governments, who ultimately set the rules of the game. They must commit to advancing toward phase-out targets, muscular independent regulators and carbon pricing, for the buyouts to have any chance of making a significant difference. Any plan will require complete transparency in markets used to the opposite. That’s not a given.
There are other major questions, such as how the fund will structure pricing, how it will choose the assets it buys and why 10 to 15 years is an adequate time frame to run down coal plants. That works for investors, but is it the right choice for the planet?
The proposal isn’t complete, nor is the ADB blind to the shortcomings. David Elzinga, senior energy specialist for the bank, told me it was never intended as a silver bullet, and would be used alongside other initiatives. A paper published in April candidly lays out the complexity of the region’s power systems and the barriers to scaling up renewables. But when the blueprint is presented at the summit in Glasgow, those limitations need to be made clear. There must be a subsequent effort to tackle moral hazard and consider the opportunity cost. Not every climate fix is a good one and time is running out. The risk with impracticable proposals is that they end up like the worst environmental, social and governance investing — very good at making investors feel great, but not so much at making a difference.
Southeast Asia unquestionably needs a push. But that shouldn’t come at the expense of recognizing a complex reality. Billions are needed for other building blocks, from grid investment for improved efficiency and enabling more renewables to plentiful financial support for green energy. Without those, there’s little hope of a swift transition, let alone a fair one.
Bloomberg
